10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission file number 000-26887

Silicon Image, Inc.
(Exact name of registrant as specified in its charter)

Delaware	77-0396307
(State of incorporation)	(IRS employer identification number)

1060 East Arques Avenue
Sunnyvale, CA 94085
(Address of principal executive offices and zip code)

(Registrant’s telephone number, including area code)
(408) 616-4000

Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $683,741,554 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of common stock held by each officer and director and by each person who owned 5% or more of the outstanding Common Stock (based upon Schedule 13G filings made prior to such date) have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the Registrant’s common stock outstanding as of February 28, 2006 was 81,145,950.

Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on May 23, 2006, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I
Item 1	Business		4
Item 1A	Risk Factors		20
Item 1B	Unresolved Staff Comments		38
Item 2	Properties		38
Item 3	Legal Proceedings		38
Item 4	Submission of Matters to a Vote of Securities Holders		39
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		39
Item 6	Selected Financial Data		41
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		55
Item 8	Financial Statements and Supplementary Data		56
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		56
Item 9A	Controls and Procedures		56
Item 9B	Other Information		60
PART III
Item 10	Directors and Executive Officers of the Registrant		60
Item 11	Executive Compensation		60
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		60
Item 13	Certain Relationships and Related Transactions		60
Item 14	Principal Accountant Fees and Services		60
PART IV
Item 15	Exhibits and Financial Statement Schedules		60
Signatures			91
Index to Exhibits Filed Together with this Annual Report			92
EXHIBIT 10.03
EXHIBIT 10.04
EXHIBIT 10.35
EXHIBIT 21.01
EXHIBIT 23.01
EXHIBIT 23.02
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Annual Report on Form 10-K entitled “Factors Affecting Future Results,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Annual Report on Form 10-K are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will”, “can”, “should”, “could”, “estimate”, based on”, “intended”, “would”, “projected”, “forecasted” and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any updates or revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the Securities and Exchange Commission (SEC). Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

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PART I

Item 1.   Business

Our mission is to be the market leader in the secure storage, distribution and presentation of high definition content in the consumer environment. To ensure that rich digital content is available across devices, whether consumer electronics (CE), personal computers and displays (PC) or storage devices, they must be architected for content compatibility and interoperability.

Our strategy entails establishing industry-standard, high-speed digital, secure interfaces and building market momentum and leadership through our first-to-market, standards-based semiconductor products. Further leveraging our IP portfolio, we broaden market adoption of the Digital Visual Interface (DVI), High-Definition Multimedia Interface^tm (HDMI^tm) and Serial ATA (SATA) interfaces by licensing our proven IP cores to companies interested in promoting products complementary to our own. Licensing, in addition to creating revenue and return on engineering investment in market segments we choose not to address, creates products complementary to our own that expand the markets for our products and help to improve industry wide interoperability.

We are a leader in the global PC and digital display arena with our innovative PanelLink branded digital interconnect technology, which enables an all-digital connection between PC host systems, such as PC motherboards, graphics add-in boards and notebook PCs and digital displays such as LCD monitors, plasma displays and projectors. Our PanelLink solutions are the most popular DVI implementations in their market, with more than 75 million units shipped to date.

Our CE products offer a secure interface for transmission of digital video and audio to consumer devices, such as digital TVs, HDTVs, A/V receivers, set-top boxes (STBs) and DVD players. Leveraging our core technology and standards-setting expertise, we are a leading force in advancing the adoption of HDMI, the digital audio and video interface standard for the CE market. Introduced in 2003 by founders Hitachi Ltd. (Hitachi), Matsushita Electric Industrial Co. (MEI or Panasonic), Philips Consumer Electronics International B.V. (Philips), Silicon Image, Sony Corporation (Sony), Thomson Multimedia, S.A. (Thomson or Thomson RCA) and Toshiba Corporation (Toshiba), HDMI enables the distribution of uncompressed, high-definition video and multi-channel audio in a single, all-digital interface that dramatically improves quality and simplifies cabling. Based on the same core technology used by the DVI standard, our HDMI technology is also marketed under the PanelLink brand and includes High-bandwidth Digital Content Protection (HDCP), which is supported by some Hollywood studios as the technology of choice for the secure distribution of premium content over uncompressed digital connections. We shipped the first HDMI-compliant silicon to the market and currently remain the market leader for HDMI functionality, with more than 35 million units shipped to date.

In the storage market, we have assumed a leadership role in SATA, the high-bandwidth, point-to-point interface that is replacing parallel ATA in desktop storage and making inroads in the enterprise arena due to its improved price/performance ratio. We are a leading supplier of discrete SATA devices with multiple motherboard and add-in-card design wins. Our SATALink^tm branded solutions are fully SATA-compliant and offer advanced features and capabilities such as 3Gb/s support Native Command Queuing, port multiplier capability and ATAPI support. We continue to supply high-performance, low-power Fibre Channel Serializer/Deserializer (SerDes) to leading switch manufacturers. In 2004, we shipped our first products based on the SteelVine^tm storage architecture that is expected to serve the storage needs of the home consumer and consumer electronics markets with a system- on-a-chip implementation that includes a high-speed switch, a custom designed dual instruction RISC (reduced instruction set computer) micro-processor, firmware and the SATA interface, among other features.

In 2004, we launched PanelLink Cinema Partners^tm, LLC, a wholly-owned subsidiary of ours which was formally changed to Simplay Labs, LLC (Simplay) in December 2005. Simplay operates and markets the Simplay HD^tm Testing Program. This testing program is primarily designed for consumer electronics (CE) manufacturers, CE retailers and technology providers. Current members of the program include Hitachi, LG, Mitsubishi, Samsung, Sony, TTE, Tweeter and others. The Simplay HD Testing Program is open to all manufacturers of consumer electronics devices implementing HDMI/HDCP including HDTV’s, DTV’s, Set-Top Boxes (STB’s), DVD players, A/V receivers and cables. The program also maintains broad industry support from a variety of leading digital content providers including The Walt Disney Company, Fox, Universal and Warner Bros.

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The Simplay HD^tm Testing Program is designed to help consumers know that the digital entertainment devices that they purchase have been tested according to specifications aimed at maximizing the delivery of HD content. The program consists of testing, branding and awareness initiatives directed at retailers as well as consumers. At its core, the program is based on the Simplay HD Compatibility Test Specification (CTS) for device manufacturers. Testing encompasses HDCP functionality in conjunction with HDMI, as well as compatibility (“plug-testing”), between devices from different manufacturers. Products that pass have been verified to meet the Simplay HD^tm Testing Program requirements and are licensed to use the Simplay HD logo, enabling consumers to purchase digital entertainment devices with the confidence that they will be able to receive and play the latest digital content with state of the art technology. Leveraging this branding component, the Simplay HD^tm Testing Program will be providing education to retailers on the importance of Simplay HD verification.

Markets and Customers

We focus our sales and marketing efforts on achieving design wins with leading original equipment manufacturers (OEMs) of CE, PC, and storage products. In many cases, these OEMs outsource manufacturing functions to third parties. In these cases, once our product is designed into an OEM’s product, we typically work with the OEM’s third-party manufacturer to facilitate the design for production. After the design is complete, we sell our products to these third-party manufacturers either directly or indirectly through distributors.

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. Our top five customers, including distributors, generated 54%, 47%, and 41%, of our revenue in 2005, 2004 and 2003, respectively. The increase in 2005 from 2004 and 2003 levels can be attributed to the increased level of purchasing activities with these distributors. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEMs rely upon third-party manufacturers or distributors to provide purchasing and inventory management functions. Our revenue, generated through distributors, was 52%, 45% and 42% of our total revenue in 2005, 2004 and 2003, respectively. World Peace Inc., comprised 17.2%, 15.0% and 13.6% of our revenue in 2005, 2004 and 2003 respectively. Microtek comprised 10.6%, 12.0% and 11.2% of our revenue in 2005, 2004 and 2003 respectively. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases, we would expect a decrease in the percentage of our revenue generated through distributors. A substantial portion of our business is conducted outside the United States; therefore, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Asia and for the years ended December 31, 2005, 2004, and 2003, 74%, 72%, and 74% of our revenue, respectively, was generated from customers and distributors located outside the United States, primarily in Asia.

Products

Our mission is to be the market leader in the secure storage, distribution and presentation of high definition content in the consumer environment. To ensure that rich digital content is available across devices, consumer electronics, PC and storage devices must be architected for content compatibility and interoperability. Our industry and the markets we serve are characterized by rapid technological advancement. We constantly strive for innovation in our product offerings. We introduce products to address markets or applications that we have not previously addressed, and to replace our existing products with products that are based on more advanced technology that incorporate new or enhanced features. We market products to the CE, PC/display, and storage markets. We expect to continue integrating more functionality into our existing products in order to enhance their performance and capabilities.

When we introduce replacement products, we notify our customers in advance, work with our customers to qualify and migrate to our newer products and accept final orders for replaced products, thereby enabling us to eventually discontinue production and support for older, less advanced products. We may decide to phase out products for reasons other than new product introductions. Such reasons could include failure of products to achieve market acceptance, changing market conditions and changes in business strategy.

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Consumer Electronics

Developed by Sony, Hitachi, Thomson (RCA), Philips, Matsushita (Panasonic), Toshiba and Silicon Image as the digital interface standard for the consumer electronics market, the HDMI specification combines uncompressed high-definition video and multi-channel audio in a single digital interface to provide digital quality over a single cable.

Our Transition Minimized Differential Signaling TMDS^® technology serves as the basis for HDMI, as well as for the Digital Visual Interface (DVI) standard designed for PC applications.

Fully backward-compatible with products incorporating DVI (also pioneered by Silicon Image), HDMI offers additional consumer enhancements such as automatic format adjustment to match content to its preferred viewing format, and the ability to build in intelligence so one remote click can configure an entire HDMI-enabled system. HDMI has the support of major Hollywood studios and offers significant advantages over analog A/V interfaces, including the ability to transmit uncompressed, high-definition digital video and multi-channel digital audio over a single cable.

Silicon Image’s HDMI products are branded under the PanelLink product family and have been selected by many of the world’s leading CE companies.

PanelLink HDMI Transmitters.  Our PanelLink HDMI transmitter products reside on host systems, such as DVD players, DVD recorders, A/V receivers, STBs, PVRs and D-VHS players. PanelLink HDMI transmitters encrypt digital video and audio from a source device, combine it in a single, HDMI-compliant stream and transmit the secure content to a HDMI receiver in a display. Our PanelLink HDMI transmitter products include:

PanelLink HDMI Transmitters

	HDMI		Maximum	Maximum
Product	Outputs		Resolution	Bandwidth	Target Applications
SiI 9030		1	1080p	5 Gbps	DVD players, DVD recorders, A/V receivers, set-top boxes, PVRs, D-VHS players
SiI 9190		1	720p/1080i	2.58 Gbps	HDTV digital set-top boxes, DVD and D-VHS players, A/V receivers

PanelLink HDMI Receivers.  Our PanelLink HDMI receiver products reside in display systems, such as DTVs, HDTVs, plasma TVs, LCD TVs, rear-projection TVs and front projectors, as well as A/V receivers. PanelLink HDMI receivers decode and decrypt an incoming HDMI/HDCP stream and deliver YPbPr or analog RGB video along with digital audio. Our PanelLink HDMI receiver products include:

PanelLink HDMI Receivers

	HDMI		Maximum	Maximum
Product	Inputs		Resolution	Bandwidth	Target Applications
SiI 9011		1	1080p	5 Gbps	DTVs, plasma TVs, LCD TVs, projectors
SiI 9021		2	1080p	5 Gbps	DTVs, plasma TVs, LCD TVs, projectors
SiI 9023		2	1080p	5 Gbps	DTVs, plasma TVs, LCD TVs, projectors
SiI 9031		2	1080p	5 Gbps	A/V receivers, plasma TVs, LCD TVs, DTVs
SiI 9033		2	1080p	5 Gbps	A/V receivers, plasma TVs, LCD TVs, DTVs
SiI 9993		1	720p/1080i	2.58 Gbps	DTVs, plasma displays, LCD TVs, projectors

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Digital Video Processors.  Our digital video processor products are high-quality, digital video format converters that convert any standard-definition interlaced video signal to a non-interlaced signal, resulting in higher-definition images. These products are suitable for DTVs, HD-ready TVs or monitors, LCD TV, LCD, or digital light processing projection DTVs, projectors, or progressive scan DVD players. We have recently introduced dual mode DVI/HDMI transmitters to the market to facilitate PC connections to advanced TV displays with HDMI connections. Our digital video processor products include:

Digital Video Processors

Product	Key Features	Target Applications
SiI 504	Horizontal scaler, 3-D motion adaptive deinterlacer, 2:2 & 3:2 inverse pull-down	Progressive scan DVD players, DTVs, LCD TVs, projectors

PCs and Displays

Pioneered by Silicon Image and introduced by the Digital Display Working Group (DDWG), DVI is the digital standard for connecting PCs to digital displays. DVI defines a robust, high-speed serial communication link between host systems and displays — enabling sharper, crystal-clear images and lower cost designs. Accommodating bandwidth in excess of 165 MHz, DVI provides UXGA support with a single-link interface.

Silicon Image’s DVI products are branded under the PanelLink product family with well over 75 million DVI-based units shipped into PC and digital display applications.

PanelLink DVI Transmitters.  Our PanelLink DVI transmitter products reside on host systems, such as PC motherboards, graphics add-in boards and notebook PCs. Transmitters take a stream of digital data from a graphics source, convert it to DVI-compliant digital output and transmit that output to a receiver in a display. Our PanelLink DVI and DVI/HDMI transmitter products include:

PanelLink DVI Transmitters

		Maximum
Product	Maximum Resolution	Bandwidth	Target Applications
SiI 1362	UXGA (1600 × 1200 pixels)	5 Gbps	PC motherboards, notebook PCs
SiI 1364	UXGA (1600 × 1200 pixels)	5 Gbps	Intel SDVO ADD2 cards
SiI 1160	UXGA (1600 × 1200 pixels)	5 Gbps	Internal display interfaces, embedded/specialty applications
SiI 1172	QXGA (2048 × 1536 pixels)	6.8 Gbps	Desktop PC motherboards and add-inboards, notebook PCs
SiI 1162	UXGA (1600 × 1200 pixels)	5 Gbps	Desktop PC motherboards and add-in boards, notebook PCs
SiI 178	QXGA (dual link) (2048 × 1536 pixels)	10 Gbps	Desktop PC motherboards and add-in boards that support Dual-Link DVI
SiI 164	UXGA (1600 × 1200 pixels)	5 Gbps	Desktop PC motherboards and add-in boards, notebook PCs
SiI 1178	QXGA (dual link) (2048 × 1536 pixels)	10 Gbps	Desktop PC motherboards and add-in boards that support Dual-Link DVI
SiI 1390	UXGA (1600 × 1200 pixels)	5 Gbps	Desktop PC motherboards & notebook PCs that support HDMI and DVI using SDVO chipset
SiI 1930	UXGA (1600 × 1200 pixels)	5 Gbps	Desktop PC add-boards & notebook PCs that support HDMI and DVI using discrete GPU

PanelLink DVI Receivers.  Our PanelLink receiver products reside in display systems, such as flat panel displays and projectors. Receivers receive DVI-compliant digital input and restore the video data format. Our

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receivers also contain functionality that simplifies the design of digital displays. Our PanelLink DVI receiver products include:

PanelLink DVI Receivers

	Maximum	Maximum
Product	Resolution	Bandwidth	Target Applications
SiI 1169	UXGA (1600 × 1200 pixels)	5 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 1171	QXGA (2048 × 1536 pixels)	6.8 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 1161	UXGA (1600 × 1200 pixels)	5 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 1151	SXGA (1280 × 1024 pixels)	3.36 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 163B	QXGA (2048 × 1536 pixels)	10 Gbps	Desktop monitors that support Dual-Link DVI
SiI 141B	High-refresh XGA(1024 × 768 pixels)	2.58 Gbps	Flat panel displays, projectors, embedded/specialty/retail and industrial, LCD panels

PanelLink DVI Controllers.  Our PanelLink controller products are suitable for display systems such as flat panel displays and digital televisions. Our PanelLink controller products include:

PanelLink DVI Controllers

	Maximum	Maximum
Product	Resolution	Bandwidth	Key Features	Target Applications
SiI 863	SXGA+(1400 × 1050 pixels)	3.36 Gbps	LVDS Tx, scaling, on-screen display, power management, gamma correction, dithering	Flat panel displays, plasmas, projectors, embedded/ specialty/retail and industrial
SiI 861	SXGA+(1400 × 1050 pixels)	3.36 Gbps	HDCP, LVDS Tx, scaling on-screen display, power management, gamma correction, dithering	LCD and flat panel displays
SiI 859	SXGA+(1400 × 1050 pixels)	3.36 Gbps	HDCP, scaling, on- screen display, power management, gamma correction, dithering	LCD micro displays

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Intelligent Panel Controllers.  Our Intelligent Panel Controller (IPC) products are programmable controllers with integrated timing controllers that reside on the LCD display module. These products receive digital input, restore the video data format and directly interface with the LCD module electronics. Our IPC products include:

Intelligent Panel Controllers

	Maximum	Maximum
Product	Resolution	Bandwidth	Key Features	Target Applications
SiI 1257	WUXGA	165 MHz	PanelLink receiver TTL LCD timing controller	LCDs for flat panel displays
SiI 263	UXGA	140 MHz	PanelLink receiver RSDSLCD timing controller	LCDs for flat panel displays
SiI 253	SXGA	140 MHz	PanelLink receiver TTL LCD timing controller	LCDs for flat panel displays
SiI 215A	WXGA (1280 × 768 pixels)	85 MHz	1 channel LVDS input interface, RSDS output	LCDs for notebook PCs and flat panel displays

Storage

Silicon Image sells a variety of storage products that facilitate today’s demanding storage applications. One of these products is our SteelVine product line, which is designed to integrate functionality typically associated with a redundant array of independent disks (RAID) into a single chip and significantly lower the cost of highly reliable storage solutions for the home consumer and for newly emerging CE applications like DVR and Media PC’s.

Silicon Image continues to introduce higher levels of SATA integration, driving higher SATA performance and functionality, and delivering a family of SATA system-on-a-chip solutions and systems for the consumer electronics environment.

Serial ATA offers a number of benefits over parallel ATA interfaces, including higher bandwidth, scalability, lower voltage and narrower cabling. As a result, SATA is expected to become the standard drive interface for desktop and notebook PCs and is expected to establish a significant presence in both enterprise storage and CE applications through external SATA (e-SATA) connections.

Silicon Image’s new SteelVine storage architecture enables a new class of storage systems solutions available to the home consumer and consumer electronics markets. SteelVine-based systems deliver enterprise-class features such as virtualization, RAID, hot-plug and hot spare, in appliance-like solutions that are simple, reliable, affordable and scalable. The first system implementation of the SteelVine architecture, the SV2000^tm, is a reference design that leverages a standard SATA interface to provide a sophisticated RAID solution that does not require special OS drivers or RAID software to load or configure.

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SteelVine Storage Reference Systems.  The products in our SteelVine storage reference systems family include a 5-drive SATA-II array as well as a 2-drive SATA-II array and a two and four external port host bus adapter that maximize the performance of the SV2000 and SV1000. Customers have the option of going to production directly with Silicon Image reference designs to achieve time to market objectives or have the option of purchasing SteelVine ICs. Our storage reference systems products and IC products include:

SteelVine Storage Reference Systems

	Key Features	Target Applications
SV2000	5-drive external SATA-II array with SteelVine processor with flexible storage virtualization capabilities	Video editing, consumer electronics and digital media storage in the home
SV1000	2-drive external SATA-II array with SteelVine processor with flexible storage virtualization capabilities	Home data storage, media data storage, SMB applications, video editing
SV-HBA-3124-2(4)	2 & 4-external port PCI-X-to-SATA-II host bus adapter	Video editing, consumer electronics and digital media storage in the home

SteelVine Storage ICs

	Key Features	Target Applications
Sil 4723	2-drive SteelVine IC with 3Gb/s Serial ATA host link and support for up to 2 SATA devices	Consumer storage applications for PC and CE markets.
Sil 4726	5-drive Steelvine IC with 3Gb/s Serial ATA host link and support for up to 5 SATA devices	Consumer storage applications for PC and CE markets.

Silicon Image’s proven multi-layer approach to providing robust, cost-effective, multi-gigabit semiconductor solutions on a single chip for high-bandwidth applications, lends itself well to SATA storage market applications.

Silicon Image has assumed a leadership role in driving SATA adoption across desktop and enterprise platforms. Silicon Image’s SATA semiconductor products are branded under the SATALink product family.

SATALink Serial ATA Host Controllers and Device Bridges.

The products in our SATALink family include six host controllers, and two bridge ICs that enable customers to begin to incorporate SATA while they transition from parallel ATA. Our SATA controller, and device bridge products are based on the SATA specifications published by the Serial ATA International Organization (SATA-IO) and include:

SATALink Serial ATA Controllers and Device Bridges

	Number of
Product	Ports		Key Features	Target Applications
SiI 3132		2	Single chip, dual-channel, PCI-Express-to-3Gb/s SATA-II host controller, SATARAIDtm software, 1st Party DMA, hot plug, ATAPI, port multiplier with FIS-based switching, variable output strengths for backplane support, Supports up to 3Gb/s per channel.	PC motherboards, server motherboards, add-in-cards, embedded applications

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	Number of
Product	Ports		Key Features	Target Applications
SiI 3124-2		4	Single chip, quad-channel, PCI-X-to-3Gb/s SATA-II host controller, SATARAIDtm software, 1st Party DMA, hot plug, ATAPI support, port multiplier support with FIS-based switching, variable output strengths for backplane support, Supports up to 3Gb/s per channel.	Server motherboards, server add-in-cards, host bus adapters, RAID subsystems, embedded applications
SiI 3124-1		4	Single-chip, quad-channel, PCI-X-to-1.5Gb/s SATA-I host controller, SATARAIDtm software, 1st Party DMA, hot plug, ATAPI support, port multiplier support with FIS-based switching, variable output strengths for backplane support, Supports up to 1.5Gb/s per channel.	Server motherboards, server add-in-cards, host bus adapters, RAID subsystems, embedded applications
SiI 3114		4	Single-chip, quad-channel, PCI-to-1.5Gb/s SATA-I host controller, SATARAIDtm software, hot plug, ATAPI support, variable output strengths for backplane support	PC motherboards, PC add-in-cards, server motherboards, host bus adapters, RAID subsystems, embedded applications
SiI 3512E		2	Single-chip, dual-channel, low pin-count PCI-to-1.5Gb/s SATA-I host controller, SATARAIDtm software, hot plug	PC motherboards, PC add-in-cards, server motherboards, host bus adapters, RAID subsystems, embedded applications
SiI 3112		2	Single chip, dual-channel, PCI-to-1.5Gb/s SATA-I host controller, SATARAIDtm software, hot plug, ATAPI support	PC motherboards, RAID or non-RAID disk controller add-in cards, storage and embedded systems
SiI 3811		1	1.5Gb/s Serial ATA-to-Parallel ATA device bridge, ATAPI support	Notebook and PC motherboards, ATAPI devices
SiI 3611		1	1.5Gb/s Serial ATA-to-Parallel ATA device bridge, ATAPI support	Optical and hard disk drives, storage systems, add-in cards, ATAPI devices

Parallel ATA Controller.  Our parallel ATA controller serves products incorporating the parallel ATA interface such as motherboards, add-in cards and embedded systems. Our parallel ATA controller product is:

Parallel ATA Controllers

Product	Key Feature	Target Applications
SiI 0680	Ultra ATA/133 PCI-to-ATA host Controller	PC Motherboards, PC add-in-cards, server motherboards, host bus adapters, embedded applications

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Fibre Channel SerDes.  Our Fibre Channel Serializer/Deserializer (SerDes) products are low-power, high-quality (low-jitter), cost-effective solutions for applications such as host bus adapters (HBAs) and switches that connect PCs and servers to large storage banks. Our Fibre Channel products include:

Fibre Channel SerDes

	Number of
Product	Ports		Key Features	Target Applications
SiI 2024		4	2.125G Quad channel, Fibre Channel SerDes, 1.8V core	HBAs, switches, routers
SiI 2022		2	2.125G Single channel, Fibre Channel SerDes, 3.3V core	HBAs, switches, routers
SiI 2020A		1	2.125G Single channel, Fibre Channel SerDes, 2.5V core	HBAs, switches, routers

Promotion of Industry Standards

A key element of our business strategy is the development and promotion of industry standards in our target markets. Current standards efforts include:

High-Definition Multimedia Interface (HDMI)

We, together with Sony, Matsushita (Panasonic), Philips, Thomson (RCA), Hitachi and Toshiba, entered into a Founder’s Agreement and formed a working group to develop a specification for a next-generation digital interface for consumer electronics. In December 2002, the final specification for High-Definition Multimedia Interface (HDMI^tm) 1.0 was released. In May 2004, the HDMI specification was modified (HDMI 1.1) to include DVD audio-related capabilities. In August 2005, the HDMI specification was modified (HDMI 1.2) to include SACD audio-related capabilities, and to improve support for PC monitor resolutions.

The HDMI 1.2 specification is based on our TMDS^® technology, the underlying technology for DVI 1.0, and has received strong support from Fox and Universal Studios (now NBC Universal), DirecTV and Echostar. Because of the number of devices and the dynamic nature of the consumer electronics market it is expected that the HDMI standard will evolve further over time. As an HDMI Founder, we have actively participated in the evolution of the HDMI specification. Additionally, the HDMI standard has been approved as a digital connection by the Federal Communications Commission (FCC) and DVD Forum for use in TVs and STBs and for use in DVD players. This is discussed in more detail below. In December 2005, the HDMI specification was modified (HDMI 1.2a) to include the full specification of CEC features and compliance tests as well as additional cable and connector testing requirements.

As of December 31, 2005, there were 313 companies that had signed HDMI Adopters Agreements, and are granted a standard license to the HDMI specification and necessary patents. We expect HDMI to proliferate and become the standard digital interface for consumer electronics products that carry digital audio and video signals.

As a requirement under the HDMI specification, manufacturers are required to test their first product in each of four product categories at an independent HDMI Authorized Testing Center (ATC). We operate several HDMI ATCs that tests manufacturer products for conformance to the HDMI specification. Our first HDMI ATC opened in August of 2003. We charge a per product fee for testing in the following categories: (i) source devices, such as DVD players, (ii) sink devices, such as televisions, (iii) repeater devices, such as AV receivers, and (iv) HDMI cables.

In the United States, the FCC issued its Plug and Play order in October 2003. In November 2003 and March 2004, these rules, known as the Plug & Play Final Rules (Plug & Play Rules), became effective. The Plug and Play Rules are relevant to DVI and HDMI with respect to high definition set-top boxes and the labeling of digital cable ready televisions.

Regarding high-definition set-top boxes, the FCC stated that, as of July 1, 2005, all high definition set-top boxes acquired by cable operators for distribution to subscribers would need to include either a Digital Visual Interface (DVI) or High-Definition Multimedia Interface (HDMI) with HDCP.

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Regarding digital cable ready televisions, the FCC stated that a unidirectional digital cable television may not be labeled or marketed as digital cable ready unless it includes the following interfaces according to the following schedule:

(i) For 480p grade unidirectional digital cable televisions, either a DVI/HDCP, HDMI/HDCP, or 480p Y,Pb,Pr (analog) interface:

(A) Models with screen sizes 36 inches and above: 50% of a manufacturer’s or importer’s models manufactured or imported after July 1, 2004; 100% of such models manufactured; or

(B) Models with screen sizes 32 to 35 inches: 50% of a manufacturer’s or importer’s models manufactured or imported after July 1, 2005; 100% of such models manufactured or imported after July 1, 2006.

(ii) For 720p/1080i grade unidirectional digital cable televisions, either a DVI/HDCP or HDMI/HDCP interface:

(A) Models with screen sizes 36 inches and above: 50% of a manufacturer’s or importer’s models manufactured or imported after July 1, 2004; 100% of such models manufactured or imported after July  1, 2005;

(B) Models with screen sizes 25 to 35 inches: 50% of a manufacturer’s or importer’s models manufactured or imported after July 1, 2005; 100% of such models manufactured or imported after July 1, 2006; or

(C) Models with screen sizes 13 to 24 inches: 100% of a manufacturer’s or importer’s models manufactured or imported after July 1, 2007.

In the past, the FCC has made modifications to its rules and timetable for the digital television transition and it may do so in the future.

In January 2005, the European Industry Association for Information Systems, Communication Technologies and Consumer Electronics (EICTA) issued its “Conditions for High Definition Labeling of Display Devices” which requires all HDTVs using the “HD Ready” logo to have either an HDMI or DVI input with HDCP. In August 2005, EICTA issued its “Minimum Requirements for HD Television Receivers” which requires HD Receivers without an integrated display (e.g. HD STBs) utilizing the “HDTV” logo and intended for use with HD sources (e.g. television broadcasts), some of which require content protection in order to permit HD quality output, to have either a DVI or HDMI output with HDCP.

In August 2005, the Cable and Satellite Broadcasting Association of Asia (CASBAA) issued a series of recommendations in its “CASBAA Principles for Content Protection in the Asia-Pacific Pay-TV Industry” for handling digital output from future generations of set-top boxes for VOD, PPV, Pay-TV and other encrypted digital programming applications. These recommendations include the use of one or more HDMI with HDCP or DVI with HDCP digital outputs for set-top boxes capable of outputting uncompressed high-definition content.

High-bandwidth Digital Content Protection (HDCP)

In 2000, the High-bandwidth Digital Content Protection (HDCP) specification HDCP 1.0 was published by Intel, with contributions by Silicon Image, acknowledged in the specification. The specification was developed to provide a content-protected link from host devices, such as PCs, set-top boxes and DVD and D-VHS players, to displays such as computer monitors, HDTVs and digital TVs. This technology has support from certain members of the Motion Picture Industry Association and aims to prevent high-definition movie content from being copied when transmitted over a digital link. In 2003, the HDCP specification was modified and made available for use over HDMI interfaces.

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DVD Copy Control Association

In addition, the DVD Copy Control Association, responsible for licensing CSS (Content Scramble System) to manufacturers of DVD hardware, discs and related products, has approved HDMI for use in DVD players as an authorized digital output of CSS protected content.

Digital Visual Interface (DVI)

In 1998, we, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu, announced the formation of the Digital Display Working Group (DDWG). Subsequently, these parties entered into a Promoter’s Agreement in which they agreed to:

•  define, establish and support the DVI specification, an industry specification for sending video data between a computer and a digital display;

•  encourage broad industry adoption of the DVI specification, in part by creating an implementer’s forum that others may join in order to receive information and by providing support for the DVI specification;

•  invite third parties to enter into a Participant’s Agreement in order to consult on the content, feasibility and other aspects of the DVI specification.

In 1999, the DDWG published the DVI 1.0 specification, which defines a high-speed serial data communication link between computers and digital displays. Today, over 100 companies, including systems manufacturers, graphics semiconductor companies and monitor manufacturers have participated in DDWG activities, and many are developing hardware and software products designed to be compliant with the DVI specification. The DVI 1.0 standard remains in effect and has not changed from its release in 1999.

As noted above, the FCC in the Plug & Play Rules included DVI/HDCP and HDMI/HDCP requirements for high-definition STBs acquired by cable operators for distribution to cable subscribers and for use of the “digital cable ready” label for televisions. In the past, the FCC has made modifications to its rules and timetables for digital television transition and may continue to do so in the future.

Serial ATA Working Group

During 2000, we acquired Zillion Technologies, a developer of high-speed transmission technology for data storage applications. Zillion contributed in drafting the preliminary SATA 1.0, published in 2001 which was being promoted as a successor to parallel bus technology. We were a contributor to the SATA working group, which includes, Dell, Intel, Maxtor, Seagate, and Vitesse among its promoters. In February 2002, we joined the SATA II Working Group, the successor to SATA working group, as a contributor. The SATA II working group released “Extensions to Serial ATA 1.0 Specifications” in October 2002 and “Extensions to Serial ATA 1.0a rev. 1.1” in November of 2003, to enhance the existing SATA 1.0 specification for the server and network storage markets. The SATA II working group has also released specifications for SATA port multipliers and SATA port selectors.

In 2004, the SATA II working group released specifications for the next-generation SATA speed of 3 Gb/s and external cabling for SATA.

In July 2004, a new organization, the Serial ATA International Organization, (SATA-IO), was formed as the successor to the SATA II working group. This organization provides the industry with guidance and support for implementing the SATA specification. We are a member of the SATA-IO, which has a current membership of over 100 companies including its current board members, Dell, Intel, Maxtor, Seagate and Vitesse. Under the SATA-IO committee, a revised 2.5 specification has been released. Silicon Image continues to be an active member in the Serial-IO group.

Incits T-13 Committee

In 2003, Silicon Image joined the Incits T-13 technical committee (T-13 Committee) as a contributor. The T-13 Committee is responsible for publishing the ATA specification and is currently working to make improvements to the ATA specification, including the incorporation of the Serial ATA 1.0a specification into their next revision of the

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ATA specification, ATA-7. Members of the T-13 Committee include Hitachi, Intel, Seagate, Phoenix Technologies, Maxtor, Microsoft, Fujitsu and nVidia among others.

UDI Working Group

In May 2005, we entered into the Unified Display Interface Specification Promoters Agreement (UDI Promoters Agreement) with Intel and National Semiconductor, since joined by Apple Computer, LG Electronics, and Samsung Electronics, to develop and promote the Unified Display Interface specification that is intended to serve as the next-generation digital display interface standard for PCs and provide compatibility with Consumer Electronics devices. UDI is targeted to become the new display interface for desktop PCs, workstations, notebook PCs and PC monitors, replacing the aging VGA analog standard and providing guidelines to ensure backward compatibility with today’s DVI standard. Further, the UDI specification is planned to be fully compatible with HDMI and advanced CE displays. It is also intended that UDI will be able to use High-bandwidth Digital Content Protection (HDCP) technology

We intend to continue to be involved and actively participate in other standard setting initiatives.

Silicon Image Technology

Multi-Layer Systems Approach to Solving High-Speed Interconnect Problems

We invented technology upon which the DVI and HDMI specifications are based and have substantial experience in the design, manufacture and deployment of semiconductor products incorporating this high-speed data communications technology. The advanced nature of our high-speed digital design allows us to integrate significant functionality with multiple high-speed communication channels using industry-standard, low-cost complementary metal oxide semiconductor (CMOS) manufacturing processes. At the core of our innovation is a multi-layered approach to providing multi-gigabit semiconductor solutions.

The three layers of our Multi-layer Serial Link (MSL) architecture include the physical, coding and protocol layers. Serial link technology is the basis for the physical layer, which performs electrical signaling in several data communication protocols, including DVI 1.0, HDMI 1.2, Serial ATA and Fibre Channel. This technology converts parallel data into a serial stream that is transmitted sequentially at a constant rate and then reconstituted into its original form. Our high-speed serial link technology includes a number of proprietary elements designed to address the significant challenge of ensuring that data sent to a display or a storage device can be accurately recovered after it has been separated and transmitted in serial streams over multiple channels. In order to enable a display or a storage device to recognize data at the proper time and rate, our digital serial link technology uses a digital phase-locked loop combined with a unique phase detecting and tracking method to monitor the timing of the data.

At the coding layer, we have developed substantial intellectual property in data coding technology for high-speed serial communication. Our TMDS^® coding technology simplifies the protocol for high-speed serial communication and allows tradeoffs to be made in physical implementation of the link, which in turn reduces the cost of bandwidth and simplifies the overall system design. In addition, we have ensured direct current balanced transmission and the ability to use TMDS^® to keep electromagnetic emissions low and to enable connection to fiber optic interconnects without use of additional components.

PanelLink HDMI

Our PanelLink HDMI technology sends protected high-fidelity digital audio and high-definition video across the HDMI link for use in the consumer electronics market. Combining digital video and multi-channel digital audio transmissions in a single interconnect system simplifies and reduces the cost of the connection between consumer electronics devices, while maintaining high quality and content protection. PanelLink HDMI technology is fully compliant with the HDMI 1.2 specification.

We have assembled a team of engineers and technologists with extensive experience in the areas of high-speed interconnect architecture, circuit design, digital video/audio processor architecture, storage architecture, logic design/verification, firmware/software, flat panel displays, digital video/audio systems, and storage systems. Our

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engineering team includes a group of consultants in Asia that focuses primarily on advanced technology development.

From our inception until 1998, our internal research and development efforts focused primarily on the development of our core PanelLink technology, our initial transmitter and receiver products, and our first intelligent panel controller product. In 1999, we improved our PanelLink technology and developed new transmitter and receiver products, focusing on providing both higher speeds and improved ease of use. We also began development of our PanelLink architecture for digital displays. In 2000, we focused our internal research and development efforts on integrating our PanelLink receiver technology with additional functionality, such as digital audio and HDCP, for flat panel displays, digital CRTs and the consumer electronics industry. In 2001, we diversified our research and development efforts by increasing our investment in storage semiconductor development and by adding storage system architecture and software development expertise through our acquisition of CMD Technology. In 2002 and 2003, our research and development efforts focused primarily on technology and applications for the consumer electronics and storage markets, including the development of HDMI and SATA technologies.

Research and Development

Our research and development efforts continue to focus on developing higher bandwidth links and links with higher levels of integrated features and functions for use in various CE, PC, and storage applications. By utilizing our patented data coding technology and different clocking methodologies, we believe our high-speed link can scale with advances in semiconductor manufacturing process technology, simplify system design, and be combined with other functionality to provide new innovative solutions for our customers.

We have invested, and expect that we will continue to invest, significant funds for research and development activities. Our research and development expenses (including stock compensation expense of $3.9 million, $16.6 million, and $6.9 million for 2005, 2004 and 2003, respectively) were approximately $44.9 million, $61.5 million, and $43.4 million in 2005, 2004 and 2003, respectively.

Sales and Marketing

We sell our products to distributors and OEMs throughout the world using a direct sales force with field offices located in North America, Taiwan, Europe, Japan and Korea, and indirectly through a network of distributors and manufacturer’s representatives located throughout North America, Asia and Europe.

Our sales strategy for all products is to achieve design wins with key industry leaders in order to grow the markets in which we participate and to promote and accelerate the adoption rate for industry standards (such as DVI, HDMI and SATA) that we support or are developing. Our sales personnel and applications engineers provide a high-level of technical support to our customers. Our marketing efforts focus primarily on promoting adoption of the DVI, HDMI and SATA standards, participating in industry trade shows and forums, entering into branding relationships such as PanelLink for DVI, HDMI and SATALink for SATA to build awareness of our brands, and bringing new solutions to market.

Manufacturing

Wafer Fabrication

Our semiconductor products are fabricated using standard CMOS processes, which permit us to engage independent wafer foundries to fabricate our semiconductors. By outsourcing our manufacturing requirements, we are able to avoid the high-cost of owning and operating a semiconductor wafer fabrication facility, take advantage of these suppliers’ high-volume economies of scale and it also gives us direct and timely access to advancing process technology. This allows us to focus our resources on the innovation or design and quality of our products. Our devices are currently fabricated using 0.35 micron, 0.25 micron and 0.18 micron processes. We have conducted research and development projects for our licensees that have involved 0.13 micron and 0.90 nm designs. We continuously evaluate the benefits, primarily improved performance and costs, and feasibility of migrating our products to smaller geometry process technologies. We rely almost entirely on Taiwan Semiconductor Manufacturing Company (TSMC), an outside foundry, to produce all of our CE, PC, SATA and Fibre Channel products. We

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also rely on other outside foundries, such as Kawasaki and Atmel, to produce our parallel ATA products. We do not have long-term supply agreements with Kawasaki or Atmel and therefore cannot be assured of sufficient capacity availability or future prices. Because of the cyclical nature of the semiconductor industry, capacity availability can change quickly and significantly. We attempt to optimize wafer availability by continuing to use less advanced wafer geometries, such as 0.5 micron, 0.35 micron, 0.25 micron and 0.18 micron, for which foundries generally have more available capacity.

Assembly and Test

After wafer fabrication, die (semiconductor devices) are assembled into packages and the finished products are tested. Our products are designed to use low-cost standard packages and to be tested with widely available semiconductor test equipment. We outsource all of our packaging and the majority of our test requirements to Amkor Technology in Korea, Advanced Semiconductor Engineering in Taiwan, Malaysia and the United States, and Fujitsu and Kawasaki in Japan. This enables us to take advantage of these subcontractors’ high-volume economies of scale and supply flexibility, and gives us direct and timely access to advancing packaging and test technologies. We test a small portion of our products in-house.

The high-speed nature of our products makes it difficult to test our products in a cost-effective manner prior to assembly. Since the fabrication yields of our products have historically been high and the costs of our packaging have historically been low, we test our products after they are assembled. Our operations personnel closely review the process, control and monitor information provided to us by our foundries. To ensure quality, we have established firm guidelines for rejecting wafers that we consider unacceptable. To date, not testing our products prior to assembly has not caused us to experience unacceptable failures or yields. However, lack of testing prior to assembly could have adverse effects if there are significant problems with wafer processing. Additionally, for newer products and products for which yield rates have not stabilized, we may conduct bench testing using our personnel and equipment, which is more expensive than fully automated testing.

Quality Assurance

We focus on product quality through all stages of the design and manufacturing process. Our designs are subjected to in-depth circuit simulation at temperature, voltage and processing extremes before being fabricated. We pre-qualify each of our subcontractors through an audit and analysis of the subcontractor’s quality system and manufacturing capability. We also participate in quality and reliability monitoring through each stage of the production cycle by reviewing data from our wafer foundries and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yields. Our independent foundries, assembly and test subcontractors have achieved International Standards Organization (ISO) 9001 certification.

Intellectual Property

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements, licenses, and methods, to protect our proprietary technologies. As of December 31, 2005, we have been issued over 70 United States patents and have in excess of 55 United States patent applications pending. Our issued patents expire in 2014 or later, subject to our payment of periodic maintenance fees. We cannot assure you that any valid patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology, or that any patent will be upheld in the event of a dispute. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. We also generally control access to and distribution of our documentation and other proprietary information. Despite our precautions, it may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive, and the outcome often is not predictable, and the relief available may not compensate for the harm caused.

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Our participation in the DDWG requires that we grant others the right to use specific elements of our intellectual property in implementing the DVI specification in their products, at no cost, in exchange for an identical right to use specific elements of their intellectual property for this purpose. We agreed to grant rights to the DDWG members and other adopters of the DVI specification in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the adopters of the DVI specification from using certain specific elements of our intellectual property for certain purposes for free. This reciprocal free license covers the connection between a computer and a digital display. It does not, however, extend to the internal methods by which such performance is created. Although the DVI specification is an open industry standard, we have developed proprietary methods of implementing the DVI specification. The intellectual property that we have agreed to license defines the logical structure of the interface, such as the number of signal wires, the signaling types, and the data encoding method for serial communication. Our implementation of this logical structure in integrated circuits remains proprietary, and includes our techniques to convert data to and from a serial stream, our signal recovery algorithms and our circuits to reduce electromagnetic interference (EMI). Third parties may develop proprietary intellectual property relating to DVI implementations that would prevent us from developing or enhancing our DVI implementation in conflict with those rights. Third parties may also develop equivalent or superior implementations of the DVI specification and we cannot guarantee that we will succeed in protecting our intellectual property rights in our proprietary implementation. Third parties may have infringed or be infringing our intellectual property rights, or may do so in the future, and we may not discover that fact in a timely or cost-effective manner. Moreover, the cost of pursuing an intellectual property infringement may be greater than any benefit we would realize.

Our participation as a founder of the HDMI specification requires that we grant others the right to use specific elements of our intellectual property in implementing the HDMI specification in their products, in exchange for a license. This license bears an annual fee and royalties that are payable to HDMI Licensing, LLC, a wholly-owned subsidiary of ours. There can be no assurance that such license fees and royalties will adequately compensate us for having to license our intellectual property. The license, with restrictions, generally covers the patent claims necessary to implement the specification of an interface for CE devices, and does not extend to the internal methods by which such performance is created. Although the HDMI specification is a proposed industry standard, we have developed proprietary methods of implementing the HDMI specification. The intellectual property that we have agreed to license defines the logical structure of the interface, such as the number of signal wires, the signaling types, and the data encoding method for serial communication. Our implementation of this logical structure in integrated circuits remains proprietary, and includes our techniques to convert data to and from a serial stream, our signal recovery algorithms, our implementation of audio and visual data processing, and our circuits to reduce EMI. Third parties may also develop intellectual property relating to HDMI implementations that would prevent us from developing or enhancing our HDMI specification in conflict with those rights. Third parties may also develop equivalent or superior implementations of the HDMI specification and we cannot guarantee that we will succeed in protecting our intellectual property rights in our proprietary implementation. Third parties may have infringed or be infringing our intellectual property rights, or may do so in the future, and we may not discover that fact in a timely or cost-effective manner. Moreover, the cost of pursuing an intellectual property infringement may be greater than any benefit we would realize. In addition, third parties may not pay the prescribed license fees and royalties, in which case we may become involved in infringement or collection actions, or we may determine that the cost of pursuing such matters may be greater than any benefit we would realize. We agreed to grant rights to the founders and adopters of the HDMI specification in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the founders and adopters of the HDMI specification from using certain specific elements of our intellectual property for certain purposes in exchange for a portion of the specified royalties.

We entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use certain of the grantor’s existing and future patents, including certain future patents, with specific exclusions related to the grantor’s current and anticipated future products and network devices. Products excluded include our digital receivers, discrete digital transmitters and discrete display controllers, and Intel’s processors, chipsets, graphics controllers and flash memory products. This cross-license does not require delivery of any masks, designs, software or any other item evidencing or embodying such patent rights, thus making “cloned” products no easier to create. The cross-license agreement expires when the last licensed patent expires, anticipated to be no earlier than

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2016, subject to the right of either party to terminate the agreement earlier upon material breach by the other party, or a bankruptcy, insolvency or change of control of the other party. We have forfeited, however, our ability to rely on intellectual property law to prevent Intel from using our patents within the scope of this license. To date, we are not aware of any use by Intel of our patent rights that negatively impacts our business.

Pursuant to the UDI Promoters Agreement, we agreed, subject to conditions stipulated in such agreement, to license certain specific elements of our TMDS and panel interface logic intellectual property to adopters of the UDI specification on a reciprocal, royalty-free basis. We agreed to grant rights to the UDI Promoters and future adopters of the UDI specification in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the adopters of the UDI specification from using certain specific elements of our intellectual property for certain purposes for free.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which can result in significant, protracted litigation. We have brought a patent infringement suit against Genesis Microchip, which is described in further detail below in the section entitled “Legal Proceedings.”

Competition

The markets in which we compete are intensely competitive and are characterized by rapid technological change, evolving standards, short product life cycles and decreasing prices. We believe that some of the key factors affecting competition in our markets are levels of product integration, compliance with industry standards, time-to-market, cost, product capabilities, system design costs, intellectual property, customer support, quality and reputation.

In the PC market, our products face competition from a number of sources including analog solutions, DVI-compliant solutions, dual-interface solutions and other digital interface solutions.

•  Analog Solutions.  Display systems still predominantly employ an analog interface. Improvements to analog interface display solutions may slow the adoption of all-digital display systems. We compete with analog solution vendors such as Analog Devices, Genesis Microchip, MRT and a number of Taiwan-based companies.

•  DVI-Compliant Solutions.  We believe that over time, the DVI specification will become widely adopted in the digital display industry and attract additional market entrants. We believe the following companies have developed or announced intentions to develop DVI-compliant solutions: Analog Devices, ATI Technologies, Broadcom, Chrontel, Conexant, Genesis Microchip, MRT, National Semiconductor, nVidia, Pixelworks, SIS, Smart ASIC, ST Microelectronics, Texas Instruments and Thine.

•  Dual-Interface Solutions.  The following companies have developed, or announced intentions to develop, products that connect to both analog and digital host systems, also known as a dual-interface solution: Genesis Microchip, Macronix, MRT, Philips Semiconductor, Pixelworks and a number of Taiwan-based companies.

•  Other Digital Interface Solutions.  Texas Instruments, Thine, and National Semiconductor offer proprietary digital interface solutions based on LVDS, or low voltage differential signaling technology. LVDS technology has gained broad market acceptance in notebook PCs, and has gained some adoption with PC and display manufacturers for use outside of the notebook PC market.

The market for our intelligent panel controller products is also very competitive. Some of our intelligent panel controller products are designed to be functionally interchangeable with similar products sold by National Semiconductor, Texas Instruments, Samsung Semiconductor, Novatek and Thine.

In the consumer electronics market, our digital interface products are used to connect new cable set-top boxes, satellite set-top boxes and DVD players to digital televisions. These products incorporate DVI and HDCP, or HDMI with HDCP support. Companies that have announced or are shipping competing DVI-HDCP solutions include Analog Devices, Texas Instruments, Thine, Broadcom, Conexant, Mstar, and Genesis Microchip. In addition, our video processor products face competition from products sold by AV Science, Broadcom, Focus Enhancements, Genesis Microchip, Mediamatics, Micronas Semiconductor, Oplus, Philips Semiconductor, Pixelworks, ATI, and

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Trident. We also compete in some instances against in-house processing solutions designed by large consumer electronics OEMs. While we have experienced only modest competition for HDMI products in 2004 and 2005, we expect increased competition for HDMI products beginning in 2006, from the other HDMI founders and adopters, including Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba as well as several other companies.

In the storage market, our Fibre Channel products face competition from companies selling similar discrete products, including Agilent Technologies, Mindspeed Technologies, PMC-Sierra, Serverworks and Vitesse, from other Fibre Channel SerDes providers who license their core technology, such as LSI Logic, and from companies that sell HBA controllers with integrated SerDes, such as QLogic and Agilent.

Our serial ATA products compete with similar products from Marvell Technology, VIA Technologies, Silicon Integrated Systems, J-Micron, Atmel and Promise Technology. In addition, other companies, such as APT, Intel, LSI Logic, ServerWorks and Vitesse, have developed or announced intentions to develop SATA products. We also are likely to compete against Intel, nVidia, VIA Technologies, Silicon Integrated Systems, ATI Technologies and other motherboard chip-set makers that have or have announced intentions to integrate SATA functionality into their chipsets.

Many of our competitors have longer operating histories and greater presence in key markets, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements, or devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, Intel, National Semiconductor and Texas Instruments, and consumer electronics manufacturers, such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba, may compete against us in the future. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not seriously harm our business.

Employees

As of December 31, 2005, we had a total of 384 employees, including 37 located outside of the United States. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppages. We consider our relations with our employees to be good. We depend on the continued service of our key technical, sales and senior management personnel, and our ability to attract and retain additional qualified personnel. If we are unable to hire and retain qualified personnel, our business will be seriously harmed.

Available Information

Our Internet website address is www.siliconimage.com. We make available free of charge through our Internet website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Item 1A.  Risk Factors

You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our common stock. These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

We operate in rapidly evolving markets, which makes it difficult to evaluate our future prospects.

The revenue and income potential of our business and the markets we serve are early in their lifecycle and are difficult to predict. The Digital Visual Interface (DVI) specification, which is based on technology developed by us

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and used in many of our products, was first published in April 1999. We completed our first generation of consumer electronics and storage IC products in mid-to-late 2001. The preliminary serial ATA specification was first published in August 2001. The High Definition Multimedia Interface (HDMI) specification was first released in December 2002. Our SteelVine^tm storage architecture was first released in September 2004. Accordingly, we face risks and difficulties frequently encountered by companies in new and rapidly evolving markets. If we do not successfully address these risks and difficulties, our results of operations could be negatively affected.

We have a history of losses and may not sustain profitability.

For the year ended December 31, 2005, we generated net income of $49.5 million. However, prior to 2005, we incurred net losses in each fiscal year since our inception, including net losses of $0.3 million and $12.8 million for the years ended December 31, 2004 and 2003, respectively. Accordingly, we may not sustain profitability.

Our annual and quarterly operating results may fluctuate significantly and are difficult to predict.

Our annual and quarterly operating results are likely to vary significantly in the future based on a number of factors over which we have little or no control. These factors include, but are not limited to:

•  the growth, evolution and rate of adoption of industry standards for our key markets, including digital-ready PCs and displays, consumer electronics and storage devices and systems;

•  the fact that our licensing revenue is heavily dependent on a few key licensing transactions being completed for any given period, the timing of which is not always predictable and is especially susceptible to delay beyond the period in which completion is expected, and our concentrated dependence on a few licensees in any period for substantial portions of our expected licensing revenue and profits;

•  the fact that our licensing revenue has been uneven and unpredictable over time, and is expected to continue to be uneven and unpredictable for the foreseeable future, resulting in considerable fluctuation in the amount of revenue recognized in a particular quarter;

•  competitive pressures, such as the ability of competitors to successfully introduce products that are more cost-effective or that offer greater functionality than our products, including integration into their products of functionality offered by our products, the prices set by competitors for their products, and the potential for alliances, combinations, mergers and acquisitions among our competitors;

•  average selling prices of our products, which are influenced by competition and technological advancements, among other factors;

•  government regulations regarding the timing and extent to which digital content must be made available to consumers;

•  the availability of other semiconductors or other key components that are required to produce a complete solution for the customer; usually, we supply one of many necessary components;

•  the cost of components for our products and prices charged by the third parties who manufacture, assemble and test our products;

•  fluctuations in the price of our common stock, which drive a substantial portion of our non-cash stock compensation expense; and

•  the nature and extent of litigation activities, particularly relating to our patent infringement suit against Genesis Microchip and any subsequent legal proceedings related to the matters raised in that suit, and a class action lawsuit against us that was initiated in early 2005.

Because we have little or no control over these factors and/or their magnitude, our operating results are difficult to predict. Any substantial adverse change in any of these factors could negatively affect our business and results of operations.

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Our future annual and quarterly operating results are highly dependent upon how well we manage our business.

Our annual and quarterly operating results may fluctuate based on how well we manage our business. Some of these factors include the following:

•  our ability to manage product introductions and transitions, develop necessary sales and marketing channels, and manage other matters necessary to enter new market segments;

•  our ability to successfully manage our business in multiple markets such as PC, storage and CE, which may involve additional research and development, marketing or other costs and expenses;

•  our ability to close licensing deals when expected and make timely deliverables and milestones on which recognition of revenue often depends;

•  our ability to engineer customer solutions that adhere to industry standards in a timely and cost-effective manner;

•  our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;

•  our ability to manage joint ventures and projects, design services, and our supply chain partners;

•  our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;

•  our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;

•  the success of the distribution and partner channels through which we choose to sell our products; and

•  our ability to manage expenses and inventory levels.

If we fail to effectively manage our business, this could adversely affect our results of operations.

The licensing component of our business strategy increases business risk and volatility.

Part of our business strategy is to license certain of our technology to companies that address markets in which we do not want to directly participate. We signed our first license contract in December 2001 and have limited experience marketing and selling our technology on a licensing basis. There can be no assurance that additional companies will be interested in licensing our technology on commercially favorable terms or at all. We also cannot ensure that companies who license our technology will introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances. Many of these factors require significant judgments. Licensing revenue could fluctuate significantly from period to period because it is heavily dependent on a few key deals being completed in a particular period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin content, licensing revenue can have a disproportionate impact on gross profit and profitability. Also, generating revenue from licensing arrangements is a lengthy and complex process that may last beyond the period in which efforts begin, and once an agreement is in place, the timing of revenue recognition may be dependent on customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology, and other factors. Licensing that occurs in connection with actual or contemplated litigation is subject to risk that the adversarial nature of the transaction will induce non-compliance or non-payment. The accounting rules associated with recognizing revenue from licensing transactions are increasingly complex and subject to interpretation. Due to these factors, the amount of license revenue recognized in any period may differ significantly from our expectations.

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We face intense competition in our markets, which may lead to reduced revenue from sales of our products and increased losses.

The CE, PC and storage markets in which we operate are intensely competitive. These markets are characterized by rapid technological change, evolving standards, short product life cycles and declining selling prices. We expect competition for many of our products to increase, as industry standards become widely adopted and as new competitors enter our markets.

Our products face competition from companies selling similar discrete products, and from companies selling products such as chipsets with integrated functionality. Our competitors include semiconductor companies that focus on the display, CE or storage markets, as well as major diversified semiconductor companies, and we expect that new competitors will enter our markets. Current or potential customers, including our own licensees, may also develop solutions that could compete with us, including solutions that integrate the functionality of our products into their solutions. In addition, potential OEM customers may have internal semiconductor capabilities, and may develop their own solutions for use in their products rather than purchasing them from companies such as us. Some of our competitors have already established supplier or joint development relationships with current or potential customers and may be able to leverage their existing relationships to discourage these customers from purchasing products from us or persuade them to replace our products with theirs. Many of our competitors have longer operating histories, greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements, or devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, Intel, National Semiconductor and Texas Instruments, and consumer electronics manufacturers, such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba, may compete against us in the future. Some of our competitors could merge, which may enhance their market presence. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has resulted in, and is likely to continue to result in price reductions and loss of market share in certain markets. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and gross margins.

Our success depends in part on demand for our new SteelVine storage products.

Our growth depends in part on market acceptance of our new product offerings based on our SteelVine architecture. These products may not achieve the desired level of market acceptance in the anticipated timeframes. We anticipate that the products based upon our SteelVine architecture will be sold into markets where we have limited experience. Furthermore, there is no established market for these products. There can be no assurance that we will be able to successfully market and sell the products based upon the SteelVine architecture and failure to do so would adversely affect our business.

Our success depends in part on the success of our new integrated HDMI DTV products.

Our future growth depends in part on the success of our highly integrated Digital TV System On a Chip solutions currently sampling in the market and which may or may not contribute significantly to our overall CE revenue. These products are subject to significant competition from established companies that have been selling these kinds of products for longer periods of time than Silicon Image.

Demand for our consumer electronics products is dependent on the adoption and widespread use of the HDMI specification.

Our success in the consumer electronics market is largely dependent upon the rapid and widespread adoption of the HDMI specification, which combines high-definition video and multi-channel audio in one digital interface and uses our patented underlying transition minimized differential signaling (TMDS^®) technology, and optionally Intel’s HDCP technology, as the basis for the interface. Version 1.0 of the specification was published for adoption in December 2002, Version 1.1 of the specification was published for adoption in May 2004, and Versions 1.2 and

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1.2a were published for adoption in August and December 2005, respectively. We cannot predict the rate at which manufacturers will adopt the HDMI specification. Adoption of the HDMI specification may be affected by the availability of consumer products, such as DVD players and televisions, and of computer components that implement this new interface. Other competing specifications may also emerge that could adversely affect the acceptance of the HDMI specification. Delays in the widespread adoption of the HDMI specification could reduce acceptance of our products, limit or reduce our revenue growth and increase our losses.

We believe that the adoption of our CE products may be affected in part by U.S. and international regulations relating to digital television, cable, satellite and over-the-air digital transmissions, specifically regulations relating to the transition from analog to digital television. The FCC has adopted rules governing the transition from analog to digital television, which include rules governing the requirements for television sets sold in the United States designed to speed the transition to digital television. The FCC has delayed such requirements and timetables for phasing in digital television in the past. We cannot predict whether the FCC will further delay its rules relating to the digital television requirements and timetables. In the event that additional regulatory activities, either in the United States or internationally, delay or postpone the transition to digital television beyond the anticipated time frame, that could reduce the demand for our CE products.

In addition, we believe that the rate of HDMI adoption may be accelerated by FCC rules and EICTA (Europe) and CASBAA (Asia) recommendations discussed in the “Promotion of Industry Standards” section above. However, in the case of the FCC, we cannot predict whether these rules will be amended prior to completion of the phase-in dates or that such phase-in dates will not be delayed. In addition, we cannot guarantee that the FCC will not in the future reverse these rules or adopt rules requiring or supporting different interface technologies, either of which would adversely affect our business. In the case of the EICTA and CASBAA recommendations, we cannot predict the rate at which manufacturers will implement the HDMI-related recommendations in their products.

Transmission of audio and video from source devices (such as a DVD player or STB) to sink devices (such as an HDTV) over HDMI with HDCP represents a combination of new technologies working in concert. Cable and satellite system operators are just beginning to require transmissions of digital video with HDCP between source and sink devices in consumer homes, and DVD players incorporating this technology have only recently come to market. Complexities with these technologies and the variability in implementations between manufacturers may cause some of these products to work incorrectly, or for the transmissions to not occur correctly, or for certain products not to be interoperable. Also, the user experience associated with audiovisual transmissions over HDMI with HDCP is unproven, and users may reject products incorporating these technologies or they may require more customer support than expected. Delays or difficulties in integration of these technologies into products or failure of products incorporating this technology to achieve market acceptance could have an adverse effect on our business.

Our success depends in part on strategic relationships.

We have entered into strategic partnerships with third parties. For example, we have entered into a relationship with Sunplus which includes licensing and development agreements. Under these agreements, Sunplus licenses our technology and we and Sunplus jointly develop products.

While these strategic partnerships are designed to drive revenue growth and adoption of our technologies and industry standards promulgated by us and also reduce our research and development expenses, there is no guarantee that these strategic partnerships will be successful. Negotiating and performing under these strategic partnerships involves significant time and expense; we may not realize anticipated increases in revenue, standards adoption or cost savings; and these strategic partnerships may make it easier for the third parties to compete with us; any of which may have a negative effect our business and results of operations.

We do not have long-term commitments from our customers and we allocate resources based on our estimates of customer demand.

Substantially all of our sales are made on the basis of purchase orders, rather than long-term agreements. In addition, our customers may unilaterally cancel or reschedule purchase orders. We purchase inventory components and build our products according to our estimates of customer demand. This process requires us to make multiple assumptions, including volume and timing of customer demand for each product, manufacturing yields and product

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quality. If we overestimate customer demand or product quality or under estimate manufacturing yields, we may build products that we may not be able to sell at an acceptable price, when we expect or at all. As a result, we would have excess inventory, which would increase our losses. As an example, we may be expected to purchase inventory components and contract for services for a unique product design for a customer that may not ever be put into production by that potential customer or may be put into production later or in smaller quantities than we anticipate. Additionally, if we underestimate customer demand or if sufficient manufacturing capacity is unavailable, we could forego revenue opportunities or incur significant costs for rapid increases in production, lose market share and damage our customer relationships.

Our lengthy sales cycle can result in a delay between incurring expenses and generating revenue, which could harm our operating results.

Because our products are based on new technology and standards, a lengthy sales process, typically requiring several months or more, is often required before potential customers begin the technical evaluation of our products. This technical evaluation can exceed nine months before the potential customer informs us whether we have achieved a design win, which is not a binding commitment to purchase our products. After achieving a design win, it can then be an additional nine months before a customer commences volume shipments of systems incorporating our products, if at all. Given our lengthy sales cycle, we may experience a delay between the time we incur expenditures and the time we generate revenue, if any. As a result, our operating results could be seriously harmed if a significant customer reduces or delays orders, or chooses not to release products incorporating our products.

We depend on a few key customers and the loss of any of them could significantly reduce our revenue.

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For the year ended December 31, 2005, shipments to World Peace International, an Asian distributor, generated 17.2% of our revenue and shipments to Microtek, a distributor, generated 10.6% of our revenue. For the year ended December 31, 2004, shipments to World Peace International generated 15% of our revenue, and shipments to Microtek generated 12% of our revenue. In addition, an end-customer may buy through multiple distributors, contract manufacturers, and/or directly, which could create an even greater concentration. We cannot be certain that customers and key distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products and generate revenue. As a result of this concentration of our customers, our results of operations could be negatively affected if any of the following occurs:

•  one or more of our customers, including distributors, becomes insolvent or goes out of business;

•  one or more of our key customers or distributors significantly reduces, delays or cancels orders; or

•  one or more significant customers selects products manufactured by one of our competitors for inclusion in their future product generations.

Due to our participation in multiple markets, our customer base has broadened significantly and we therefore anticipate being less dependent on a relatively small number of customers to generate revenue. However, as product mix fluctuates from quarter to quarter, we may become more dependent on a small number of customers or a single customer for a significant portion of our revenue in a particular quarter, the loss of which could adversely affect our operating results.

We sell our products through distributors, which limits our direct interaction with our customers, therefore reducing our ability to forecast sales and increasing the complexity of our business.

Many original equipment manufacturers rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors generated 52% of our revenue for the year ended December 31, 2005, 45% of our revenue for the year ended December 31, 2004, and 42% of our revenue for the year ended December 31, 2003. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

•  manage a more complex supply chain;

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•  monitor and manage the level of inventory of our products at each distributor;

•  estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and

•  monitor the financial condition and credit-worthiness of our distributors, many of which are located outside of the United States, and the majority of which are not publicly traded.

Since we have limited ability to forecast inventory levels at our end customers, it is possible that there may be significant build-up of inventories in the retail channel, with the OEM or the OEM’s contract manufacturer. Such a buildup could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. This could adversely impact our revenues and profits.

Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.

Our success depends on the development and introduction of new products, which we may not be able to do in a timely manner because the process of developing high-speed semiconductor products is complex and costly.

The development of new products is highly complex, and we have experienced delays, some of which exceeded one year, in the development and introduction of new products on several occasions in the past. We have recently introduced new storage products for the consumer and small to medium business markets and we expect to introduce new consumer electronics, storage and PC products in the future. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design, manufacture and debug. Successful product development and introduction depends on a number of factors, including, but not limited to:

•  accurate prediction of market requirements and evolving standards, including enhancements or modifications to existing standards such as DVI, HDCP, SATA I and SATA II, and HDMI;

•  identification of customer needs where we can apply our innovation and skills to create new standards or areas for product differentiation that improve our overall competitiveness either in an existing market or in a new market;

•  development of advanced technologies and capabilities, and new products that satisfy customer requirements;

•  competitors’ and customers’ integration of the functionality of our products into their products, which puts pressure on us to continue to develop and introduce new products with new functionality;

•  timely completion and introduction of new product designs;

•  management of product life cycles;

•  use of leading-edge foundry processes and achievement of high manufacturing yields and low cost testing;

•  market acceptance of new products; and

•  market acceptance of new architectures like SteelVine.

Accomplishing all of this is extremely challenging, time-consuming and expensive and there is no assurance that we will succeed. Product development delays may result from unanticipated engineering complexities, changing market or competitive product requirements or specifications, difficulties in overcoming resource limitations, the inability to license third-party technology or other factors. Competitors and customers may integrate the functionality of our products into their products that would reduce demand for our products. If we are not able to develop and introduce our products successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would adversely affect our operating results. In addition, it is possible that we may experience delays in generating revenue from these products or that we may never generate revenue from these products. We must work with a semiconductor foundry and with potential customers to complete new product development and to validate manufacturing methods and processes to support volume production and potential re-work. Each of these steps may involve unanticipated difficulties, which could delay product introduction and reduce

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market acceptance of the product. In addition, these difficulties and the increasing complexity of our products may result in the introduction of products that contain defects or that do not perform as expected, which would harm our relationships with customers and our ability to achieve market acceptance of our new products. There can be no assurance that we will be able to achieve design wins for our planned new products, that we will be able to complete development of these products when anticipated, or that these products can be manufactured in commercial volumes at acceptable yields, or that any design wins will produce any revenue. Failure to develop and introduce new products, successfully and in a timely manner, may adversely affect our results of operations.

We have made acquisitions in the past and may make acquisitions in the future, if advisable, and these acquisitions involve numerous risks.

Our growth depends upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. One of the ways we develop new products and enter new markets is through acquisitions. In 2001, we completed the acquisitions of CMD and SCL. In April 2003, we acquired Transwarp Networks, Inc. (TWN). We may acquire additional companies or technologies. Acquisitions involve numerous risks, including, but not limited to, the following:

•  difficulty and increased costs in assimilating employees, including our possible inability to keep and retain key employees of the acquired business;

•  disruption of our ongoing business;

•  discovery of undisclosed liabilities of the acquired companies and legal disputes with founders or shareholders of acquired companies;

•  inability to successfully incorporate acquired technology and operations into our business and maintain uniform standards, controls, policies and procedures;

•  inability to commercialize acquired technology; and

•  the need to take impairment charges or write-downs with respect to acquired assets.

No assurance can be given that our prior acquisitions or our future acquisitions, if any, will be successful or provide the anticipated benefits, or that they will not adversely affect our business, operating results or financial condition. Failure to manage growth effectively and to successfully integrate acquisitions made by us could materially harm our business and operating results.

The cyclical nature of the semiconductor industry may create constrictions in our foundry, test and assembly capacity.

The semiconductor industry is characterized by significant downturns and wide fluctuations in supply and demand. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third-party suppliers. Production capacity for fabricated semiconductors is subject to allocation, whereby not all of our production requirements would be met. This may impact our ability to meet demand and could also increase our production costs. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide conditions.

We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our products, which reduce our control over the production process.

We do not own or operate a semiconductor fabrication facility. We rely on third party semiconductor manufacturing companies overseas to produce the vast majority all of our semiconductor products. We also rely on outside assembly and test services to test all of our semiconductor products. Our reliance on independent foundries, assembly and test facilities involves a number of significant risks, including, but not limited to:

•  reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;

•  lack of guaranteed production capacity or product supply;

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•  lack of availability of, or delayed access to, next-generation or key process technologies; and

•  limitations on our ability to transition to alternate sources if services are unavailable from primary suppliers.

In addition, our semiconductor products are assembled and tested by several independent subcontractors. We do not have a long-term supply agreement with all of our subcontractors, and instead obtain production services on a purchase order basis. Our outside sub-contractors have no obligation to supply products to us for any specific period of time, in any specific quantity or at any specific price, except as set forth in a particular purchase order. Our requirements represent a small portion of the total production capacity of our outside foundries, assembly and test facilities and our sub-contractors may reallocate capacity to other customers even during periods of high demand for our products. These foundries may allocate or move production of our products to different foundries under their control, even in different locations, which may be time consuming, costly, and difficult, have an adverse affect on quality, yields, and costs, and require us and/or our customers to re-qualify the products, which could open up design wins to competition and result in the loss of design wins and design-ins. If our subcontractors are unable or unwilling to continue manufacturing our products in the required volumes, at acceptable quality, yields and costs, and in a timely manner, our business will be substantially harmed. As a result, we would have to identify and qualify substitute contractors, which would be time-consuming, costly and difficult. This qualification process may also require significant effort by our customers, and may lead to re-qualification of parts, opening up design wins to competition, and loss of design wins and design-ins. Any of these circumstances could substantially harm our business. In addition, if competition for foundry, assembly and test capacity increases, our product costs may increase and we may be required to pay significant amounts or make significant purchase commitments to secure access to production services.

The complex nature of our production process, which can reduce yields and prevent identification of problems until well into the production cycle or, in some cases, after the product has been shipped.

The manufacture of semiconductors is a complex process, and it is often difficult for semiconductor foundries to achieve acceptable product yields. Product yields depend on both our product design and the manufacturing process technology unique to the semiconductor foundry. Since low yields may result from either design or process difficulties, identifying problems can often only occur well into the production cycle, when an actual product exists that can be analyzed and tested.

Further, we only test our products after they are assembled, as their high-speed nature makes earlier testing difficult and expensive. As a result, defects often are not discovered until after assembly. This could result in a substantial number of defective products being assembled and tested or shipped, thus lowering our yields and increasing our costs. These risks could result in product shortages or increased costs of assembling, testing or even replacing our products.

Although we test our products before shipment, they are complex and may contain defects and errors. In the past we have encountered defects and errors in our products. Because our products are sometimes integrated with products from other vendors, it can be difficult to identify the source of any particular problem. Delivery of products with defects or reliability, quality or compatibility problems, may damage our reputation and our ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, warranty and product liability claims against us that may not be fully covered by insurance. Any of these circumstances could substantially harm our business.

We face foreign business, political and economic risks because a majority of our products and our customers’ products are manufactured and sold outside of the United States.

A substantial portion of our business is conducted outside of the United States. As a result, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Taiwan or elsewhere in Asia, and for the years ended December 31, 2005, 2004 and 2003, 74%, 72%, and 74% of our revenue respectively was generated from customers and distributors located outside of the United States, primarily in Asia.

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We anticipate that sales outside of the United States will continue to account for a substantial portion of our revenue in future periods. Accordingly, we are subject to international risks, including, but not limited to:

•  difficulties in managing from afar;

•  political and economic instability, including international tension in Iraq, Korea and the China Strait and lack of normal diplomatic relationships between the United States and Taiwan;

•  less developed infrastructures in newly industrializing countries;

•  susceptibility of foreign areas to terrorist attacks;

•  susceptibility to interruptions of travel, including those due to international tensions (including the war in and occupation of Iraq), medical issues such as the SARS and Avian Flu epidemics (particularly affecting the Asian markets we serve), and the financial instability and bankruptcy of major air carriers;

•  bias against foreign, especially American, companies;

•  difficulties in collecting accounts receivable;

•  expense and difficulties in protecting our intellectual property in foreign jurisdictions;

•  difficulties in complying with multiple, conflicting and changing laws and regulations, including export requirements, tariffs, import duties, visa restrictions, environmental laws and other barriers;

•  exposure to possible litigation or claims in foreign jurisdictions; and

•  competition from foreign-based suppliers and the existence of protectionist laws and business practices that favor these suppliers, such as withholding taxes on payments made to us.

These risks could adversely affect our business and our results of operations. In addition, original equipment manufacturers that design our semiconductors into their products sell them outside of the United States. This exposes us indirectly to foreign risks. Because sales of our products are denominated exclusively in United States dollars, relative increases in the value of the United States dollar will increase the foreign currency price equivalent of our products, which could lead to a change in the competitive nature of these products in the marketplace. This in turn could lead to a reduction in sales and profits.

The success of our business depends upon our ability to adequately protect our intellectual property.

We rely on a combination of patent, copyright, trademark, mask work and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We have been issued patents and have a number of pending patent applications. However, we cannot assure you that any patents will be issued as a result of any applications or, if issued, that any claims allowed will protect our technology. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. It may be possible for a third-party, including our licensees, to misappropriate our copyrighted material or trademarks. It is possible that existing or future patents may be challenged, invalidated or circumvented and effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. It may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive, and the outcome often is not predictable. As a result, despite our efforts and expenses, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business. In addition, practicality also limits our assertion of intellectual property rights. Patent litigation is expensive and its results are often unpredictable. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers, and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.

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Our participation in the Digital Display Working Group requires us to license some of our intellectual property for free, which may make it easier for others to compete with us in the DVI PC market.

We are a promoter of the DDWG, which published and promotes the DVI specification. Our strategy includes establishing the DVI specification as the industry standard, promoting and enhancing this specification and developing and marketing products based on this specification and future enhancements. As a result:

•  we must license for free specific elements of our intellectual property to others for use in implementing the DVI specification; and

•  we may license additional intellectual property for free as the DDWG promotes enhancements to the DVI specification.

Accordingly, companies that implement the DVI specification in their products can use specific elements of our intellectual property for free to compete with us.

Our participation as a founder in the working group developing HDMI requires us to license some of our intellectual property, which may make it easier for others to compete with us in the market.

In April 2002, together with Sony, Philips, Thomson, Toshiba, Matsushita and Hitachi, we announced the formation of a working group to define the next-generation digital interface specification for consumer electronics products. Version 1.0 of the specification was published for adoption on December 9, 2002. The HDMI specification combines high-definition video and multi-channel audio in one digital interface and uses Silicon Image’s patented underlying TMDS^® technology, optionally, along with Intel’s HDCP as the basis for the interface. The founders of the working group have signed a founder’s agreement in which each commits to license certain intellectual property to each other, and to adopters of the specification.

Our strategy includes establishing the HDMI specification as the industry standard, promoting and enhancing this specification and developing and marketing products based on this specification and future enhancements. As a result:

•  we must license specific elements of our intellectual property to others for use in implementing the HDMI specification; and

•  we may license additional intellectual property as the HDMI founders group promotes enhancements to the HDMI specification.

Accordingly, companies that implement the HDMI specification in their products can use specific elements of our intellectual property to compete with us. Although there will be license fees and royalties associated with the adopters agreements, there can be no assurance that such license fees and royalties will adequately compensate us for having to license our intellectual property. Fees and royalties received during the early years of adoption will be used to cover costs we incur to promote the HDMI standard and to develop and perform interoperability tests; in addition, after an initial period, the HDMI founders may reallocate the license fees and royalties amongst themselves to reflect each founder’s relative contribution of intellectual property to the HDMI specification.

Our success depends on managing our relationship with Intel.

Intel has a dominant role in many of the markets in which we compete, such as PCs and storage, and is a growing presence in the CE market. We have a multi-faceted relationship with Intel that is complex and requires significant management attention, including:

•  Intel and we have been parties to business cooperation agreements;

•  Intel and we are parties to a patent cross-license;

•  Intel and we worked together to develop HDCP;

•  an Intel subsidiary has the exclusive right to license HDCP, of which we are a licensee;

•  Intel and we were two of the promoters of the Digital Display Working Group (DDWG);

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•  Intel and we are two of the promoters of the Unified Display Interface Working Group;

•  Intel is a promoter of the serial ATA working group, of which we are a contributor;

•  Intel is a supplier to us and a customer for our products;

•  we believe that Intel has the market presence to drive adoption of serial ATA by making them widely available in its chipsets and motherboards, which could affect demand for our products;

•  we believe that Intel has the market presence to affect adoption of HDMI by either endorsing complementary technology or promulgating a competing standard, which could affect demand for our products;

•  Intel may potentially integrate the functionality of our products, including Fibre Channel, serial ATA, DVI, or HDMI into its own chips and chipsets, thereby displacing demand for some of our products;

•  Intel may design new technologies that would require us to re-design our products for compatibility, thus increasing our R&D expense and reducing our revenue;

•  Intel’s technology, including its 845G chipset, may lower barriers to entry for other parties who may enter the market and compete with us; and

•  Intel may enter into or continue relationships with our competitors that can put us at a relative disadvantage.

Our cooperation and competition with Intel can lead to positive benefits, if managed effectively. If our relationship with Intel is not managed effectively, it could seriously harm our business, negatively affect our revenue, and increase our operating expenses.

We have granted Intel rights with respect to our intellectual property, which could allow Intel to develop products that compete with ours or otherwise reduce the value of our intellectual property.

We entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the patents filed by the grantor prior to a specified date, except for identified types of products. We believe that the scope of our license to Intel excludes our current products and anticipated future products. Intel could, however, exercise its rights under this agreement to use our patents to develop and market other products that compete with ours, without payment to us. Additionally, Intel’s rights to our patents could reduce the value of our patents to any third-party who otherwise might be interested in acquiring rights to use our patents in such products. Finally, Intel could endorse competing products, including a competing digital interface, or develop its own proprietary digital interface. Any of these actions could substantially harm our business and results of operations.

We have been and may continue to become the target of securities class action suits and derivative suits which could result in substantial costs and divert management attention and resources.

Securities class action suits and derivative suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management. We and certain of our officers and directors, together with certain investment banks, have been named as defendants in a securities class action suit filed against us on behalf of purchasers of our securities between October 5, 1999 and December 6, 2000. It is alleged that the prospectus related to our initial public offering was misleading because it failed to disclose that the underwriters of our initial public offering had solicited and received excessive commissions from certain investors in exchange for agreements by investors to buy our shares in the aftermarket for predetermined prices. Due to inherent uncertainties in litigation, we cannot accurately predict the outcome of this litigation; however, a proposed settlement has been negotiated and has received preliminary approval by the Court. This settlement will not require Silicon Image to pay any settlement amounts nor issue any securities. In the event that the settlement is not granted final approval, we believe that these claims are without merit and we intend to defend vigorously against them.

We and certain of our officers were named as defendants in a securities class action captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus,” commenced on January 31, 2005. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24,

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2005. The lawsuit alleged that we and certain of our officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiff and approving the selection of lead counsel. On July 27, 2005, plaintiffs filed a consolidated amended complaint (“CAC”). The CAC no longer named Mr. Gargus as an individual defendant, but added Dr. David Lee as an individual defendant. The CAC also expanded the class period from June 25, 2004 to April 22, 2005. Defendants filed a motion to dismiss the CAC on September 26, 2005. Plaintiffs subsequently received leave to file, and did file, a second consolidated amended complaint (“Second CAC”) on December 8, 2005. The Second CAC extends the end of the class period from April 22, 2005 to October 13, 2005 and adds additional factual allegations under the same causes of action against us, Mr. Tirado and Dr. Lee. The complaint also adds a new plaintiff, James D. Smallwood. Defendants filed a motion to dismiss the Second CAC on February 9, 2006 and that motion is currently scheduled to be heard on June 9, 2006.

We are currently engaged in intellectual property litigation that is time-consuming and expensive to prosecute. We may become engaged in additional intellectual property litigation that could be time-consuming, may be expensive to prosecute or defend, and could adversely affect our ability to sell our product.

In recent years, there has been significant litigation in the United States and in other jurisdictions involving patents and other intellectual property rights. This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring infringement claims. In addition, in recent years, there has been an increase in the filing of so-called “nuisance suits,” alleging infringement of intellectual property rights. These claims may be asserted as counterclaims in response to claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits, regardless of merit. In addition, as is common in the semiconductor industry, from time to time we have been notified that we may be infringing certain patents or other intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, result in costly litigation, divert management’s attention and resources and cause us to incur significant expenses. As each claim is evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that settlements will occur or that licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products, or a successful claim of infringement against us requiring us to pay damages or royalties to a third-party, and we fail to develop or license a substitute technology, our business, results of operations or financial condition could be materially adversely affected.

In 2001, we filed a suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis Microchip, Inc. (collectively, “Genesis”) for infringement of our U.S. patent number 5,905,769 (Case No.: CA-01-266-R). In 2002, we added a claim for infringement of our U.S. patent number 5,974,464. In December 2002, the parties entered into an agreement that apparently settled the case. The agreement was reflected in a Memorandum of Understanding (MOU), which contemplated, among other things, the execution of a more detailed “definitive agreement” by December 31, 2002. Disputes arose, however, regarding the interpretation of certain terms of the MOU, and the parties were unable to conclude a definitive agreement. The parties’ disputes were brought before the court, and on July 15, 2003, the court held that the MOU constituted a binding settlement agreement, and that our interpretation of the MOU was correct. Thereafter, the court ordered Genesis to make certain payments described in the MOU to the Court’s escrow account, and on December 19, 2003, the court entered judgment based on its July 15, 2003 ruling.

Genesis appealed the judgment to the U.S. Court of Appeals for the Federal Circuit on January 16, 2004. On January 28, 2005, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction, holding that the judgment below was not final and appealable. Specifically, the Court of Appeals found that the parties’ agreement to settle the case, as embodied in the MOU, required that Genesis pay us, rather than the district court’s escrow account, certain of the payments described in the MOU.

The case was remanded to the district court, where the parties subsequently agreed to a stipulated order whereby the funds held by the district court were transferred to Silicon Image, under restrictions, until appeals are exhausted. On July 22, 2005, based on the stipulated order, the court dismissed the case with prejudice. Genesis filed

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a renewed appeal to the Federal Circuit, asserting among other things that the district court erred in its interpretation of the MOU, that the MOU (as interpreted by the court) constitutes patent misuse, and that the district court erred in construing certain claim terms in the asserted patents. A hearing on that appeal is scheduled for April 5, 2006, and a ruling is expected within two to three months thereafter.

Any potential intellectual property litigation against us could also force us to do one or more of the following:

•  stop selling products or using technology that contains the allegedly infringing intellectual property;

•  attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; and

•  attempt to redesign products that contain the allegedly infringing intellectual property.

If we take any of these actions, we may be unable to manufacture and sell our products. We may be exposed to liability for monetary damages, the extent of which would be very difficult to accurately predict. In addition, we may be exposed to customer claims, for potential indemnity obligations, and to customer dissatisfaction and a discontinuance of purchases of our products while the litigation is pending. Any of these consequences could substantially harm our business and results of operations.

We have entered into, and may again be required to enter into, patent or other intellectual property cross-licenses.

Many companies have significant patent portfolios or key specific patents, or other intellectual property in areas in which we compete. Many of these companies appear to have policies of imposing cross-licenses on other participants in their markets, which may include areas in which we compete. As a result, we have been required, either under pressure of litigation or by significant vendors or customers, to enter into cross licenses or non-assertion agreements relating to patents or other intellectual property. This permits the cross-licensee, or beneficiary of a non-assertion agreement, to use certain or all of our patents and/or certain other intellectual property for free to compete with us.

We must attract and retain qualified personnel to be successful, and competition for qualified personnel is increasing in our market.

Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. Although we have entered into a limited number of employment contracts with certain executive officers, we generally do not have employment contracts with our key employees. We do not have key person life insurance for any of our key personnel. Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our location. This makes it difficult to retain our key personnel and to recruit highly qualified personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees. Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing.

The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business. In addition, regulations adopted by The NASDAQ National Market requiring shareholder approval for all stock option plans, as well as regulations adopted by the New York Stock Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. In addition, SFAS No. 123R, Share Based Payments, which comes into effect on January 1, 2006, will require us to record compensation expense for options granted to employees. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash

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compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.

We use contractors to provide services to us, which often involves contractual complexity, tax and employment law compliance, and being subject to audits and other governmental actions. We have been audited for our contracting policies in the past, and may be in the future. Burdening our ability to freely use contractors to provide services to us may increase the expense of obtaining such services, and/or require us to discontinue using contractors and attempt to find, interview, and hire employees to provide similar services. Such potential employees may not be available in a reasonable time, or at all, or may not be hired without undue cost.

We have experienced transitions in our management team, our board of directors and our independent registered public accounting firm in the past and may continue to do so in the future.

We have experienced a number of transitions with respect to our board of directors, executive officers, and our independent registered public accounting firm in recent quarters, including the following:

•  In January 2005, Steve Laub (who replaced David Lee in November 2004) resigned from the positions of chief executive officer and president and from the board of directors, Steve Tirado was appointed as chief executive officer and president and to the board as well, and Chris Paisley was appointed chairman of the board of directors.

•  In February 2005, Jaime Garcia-Meza was appointed as vice president of our storage business.

•  In April 2005, Robert C. Gargus retired from the position of chief financial officer and Darrel Slack was appointed as his successor.

•  In April 2005, four of our then independent outside directors, David Courtney (chairman of the audit committee), Keith McAuliffe, Chris Paisley (chairman of the board) and Richard Sanquini, resigned from our board of directors and board committees.

•  In April 2005, Darrel Slack, our then chief financial officer, was elected to our board of directors.

•  In May 2005, Masood Jabbar and Peter Hanelt were elected to our board of directors.

•  In June 2005, David Lee did not stand for re-election as a director at our annual meeting of stockholders, and accordingly, Dr. Lee resigned from our board of directors.

•  In June 2005, PricewaterhouseCoopers LLP resigned as our independent registered public accounting firm. In July 2005, we appointed Deloitte & Touche LLP as our new independent registered public accounting firm.

•  In August 2005, Darrel Slack began a personal leave of absence.

•  In August 2005, Dale Brown resigned from the positions of chief accounting officer and corporate controller.

•  In August 2005, Robert Freeman was appointed as interim chief financial officer and chief accounting officer .

•  In September 2005, Darrel Slack resigned from the position of chief financial officer and from our board of directors and the board of directors of HDMI Licensing, LLC, our wholly-owned subsidiary.

•  In October 2005, William George was elected to our board of directors.

•  In October 2005, Robert Bagheri resigned from the position of executive vice president of operations.

•  In October 2005, Ahmad Ghaemmaghami was appointed as interim executive vice president of operations.

•  In October 2005, John LeMoncheck, then vice president, consumer electronics and PC/display, left Silicon Image.

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•  In October 2005, John Shin was appointed as interim vice president, consumer electronics and PC/display and subsequently became VP of Worldwide Engineering consolidating all engineering within his organization.

•  In November 2005, Robert Freeman’s position changed from interim chief financial officer to chief financial officer.

•  In December 2005, William Raduchel was elected to our board of directors.

•  In January 2006, Peter Rado was appointed as vice president of worldwide operations and quality.

•  In January 2006, Dale Zimmerman was appointed as our vice president of worldwide marketing.

•  In February 2006, John Hodge was elected to our board of directors.

Such past and future transitions may continue to result in disruptions in our operations and require additional costs.

Industry cycles may strain our management and resources.

Cycles of growth and contraction in our industry may strain our management and resources. To manage these industry cycles effectively, we must:

•  improve operational and financial systems;

•  train and manage our employee base;

•  successfully integrate operations and employees of businesses we acquire or have acquired;

•  attract, develop, motivate and retain qualified personnel with relevant experience; and

•  adjust spending levels according to prevailing market conditions.

If we cannot manage industry cycles effectively, our business could be seriously harmed.

Our operations and the operations of our significant customers, third-party wafer foundries and third-party assembly and test subcontractors are located in areas susceptible to natural disasters.

Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes, and the operations of CMD, which we acquired, are based in the Los Angeles area, which is also susceptible to earthquakes. TSMC, the outside foundry that produces the majority of our semiconductor products, is located in Taiwan. Advanced Semiconductor Engineering, or ASE, one of the subcontractors that assembles and tests our semiconductor products, is also located in Taiwan. For the years ended December 31, 2005, 2004 and 2003 customers and distributors located in Taiwan generated 25%, 25% and 34% of our revenue, respectively, and customers and distributors located in Japan generated 22%, 20%, and 15% of our revenue, respectively. Both Taiwan and Japan are susceptible to earthquakes, typhoons and other natural disasters.

Our business would be negatively affected if any of the following occurred:

•  an earthquake or other disaster in the San Francisco Bay Area or the Los Angeles area damaged our facilities or disrupted the supply of water or electricity to our headquarters or our Irvine facility;

•  an earthquake, typhoon or other disaster in Taiwan or Japan resulted in shortages of water, electricity or transportation, limiting the production capacity of our outside foundries or the ability of ASE to provide assembly and test services;

•  an earthquake, typhoon or other disaster in Taiwan or Japan damaged the facilities or equipment of our customers and distributors, resulting in reduced purchases of our products; or

•  an earthquake, typhoon or other disaster in Taiwan or Japan disrupted the operations of suppliers to our Taiwanese or Japanese customers, outside foundries or ASE, which in turn disrupted the operations of these

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customers, foundries or ASE and resulted in reduced purchases of our products or shortages in our product supply.

Changes in environmental rules and regulations could increase our costs and reduce our revenue.

Several jurisdictions are considering whether to implement rules that would require that certain products, including semiconductors, be made lead-free. We anticipate that some jurisdictions may finalize and enact such requirements. Some jurisdictions are also considering whether to require abatement or disposal obligations for products made prior to the enactment of any such rules. Although several of our products are available to customers in a lead-free condition, most of our products are not lead-free. Any requirement that would prevent or burden the development, manufacture or sales of lead-containing semiconductors would likely reduce our revenue for such products and would require us to incur costs to develop substitute lead-free replacement products, which may take time and may not always be economically or technically feasible, and may require disposal of non-compliant inventory. In addition, any requirement to dispose or abate previously sold products would require us to incur the costs of setting up and implementing such a program.

Provisions of our charter documents and Delaware law could prevent or delay a change in control, and may reduce the market price of our common stock.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include:

•  authorizing the issuance of preferred stock without stockholder approval;

•  providing for a classified board of directors with staggered, three-year terms;

•  requiring advance notice of stockholder nominations for the board of directors;

•  providing the board of directors the opportunity to expand the number of directors without notice to stockholders;

•  prohibiting cumulative voting in the election of directors;

•  requiring super-majority voting to amend some provisions of our certificate of incorporation and bylaws;

•  limiting the persons who may call special meetings of stockholders; and

•  prohibiting stockholder actions by written consent.

Provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us.

The price of our stock fluctuates substantially and may continue to do so.

The stock market has experienced extreme price and volume fluctuations that have affected the market valuation of many technology companies, including Silicon Image. These factors, as well as general economic and political conditions, may materially and adversely affect the market price of our common stock in the future. The market price of our common stock has fluctuated significantly and may continue to fluctuate in response to a number of factors, including, but not limited to:

•  actual or anticipated changes in our operating results;

•  changes in expectations of our future financial performance;

•  changes in market valuations of comparable companies in our markets;

•  changes in market valuations or expectations of future financial performance of our vendors or customers;

•  changes in our key executives and technical personnel; and

•  announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.

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Due to these factors, the price of our stock may decline. In addition, the stock market experiences volatility that is often unrelated to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance.

Continued terrorist attacks or war could lead to further economic instability and adversely affect our operations, results of operations and stock price.

The United States has taken, and continues to take, military action against terrorism and has engaged in war with Iraq and currently has an occupation force there and in Afghanistan. In addition, the current nuclear arms crises in North Korea and Iran could escalate into armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or result in instability in the general economy and financial markets and in consumer demand for the OEM’s products that incorporate our products. Disruptions and instability in the general economy could reduce demand for our products or disrupt the operations of our customers, suppliers, distributors and contractors, many of whom are located in Asia, which would in turn adversely affect our operations and results of operations. Disruptions and instability in financial markets could adversely affect our stock price. Armed hostilities or war in South Korea could disrupt the operations of the research and development contractors we utilize there, which would adversely affect our research and development capabilities and ability to timely develop and introduce new products and product improvements.

We indemnify certain of our licensing customers against infringement.

We indemnify certain of our licensing agreements customers for any expenses or liabilities resulting from third-party claims of infringements of patent, trademark, trade secret, or copyright rights by the technology we license. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any claim. In the event that we were required to defend any lawsuits with respect to our indemnification obligations, or to pay any claim, our results of operations could be materially adversely affected.

If we are unable to successfully address the material weakness in our internal controls as described in Item 9A in this Annual Report on Form 10-K, our ability to report our financial results on a timely and accurate basis may be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls. Management’s report is included in this Annual Report on Form 10-K under Item 9A.

As of December 31, 2005, management concluded that a material weakness exists as we did not maintain effective controls to correctly compute the excess tax benefit relating to stock options exercised, which resulted in us recording a material adjustment in the 2005 financial statements that affected the provision for income taxes and stockholders’ equity. Because of this material weakness, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2005. Management has identified the steps necessary to address the material weaknesses described above, and has begun to execute remediation plans, as discussed in Item 9A of this Annual Report on Form 10-K. If we are unable to successfully address the material weakness in our internal controls, our ability to report our financial results on a timely and accurate basis may be adversely affected. As a result, current and potential stockholders and other third parties could lose confidence in our financial reporting which could have a material adverse effect on our business, operating results and stock price.

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Item 1B.   Unresolved Staff Comments

Not applicable.

Item 2.   Properties

Our principal operating facility, consisting of approximately 110,000 square feet of space in Sunnyvale, California, is leased through July 31, 2010. We also have approximately 29,000 square feet of space in Irvine, California, which is leased through November 2008. Until January 2006, we also leased approximately 8,000 square feet of space in Milpitas, California, which we did not occupy in 2005. In Taiwan, we lease office space consisting of approximately 6,500 square feet for a period of three years. We also lease office space in Japan, Korea, China and the United Kingdom. We believe that our facilities are adequate to meet our operational requirements at least through the end of 2006.

Item 3.   Legal Proceedings

In 2001, we filed a suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis Microchip, Inc. (collectively, “Genesis”) for infringement of our U.S. patent number 5,905,769 (Case No.: CA-01-266-R). In 2002, we added a claim for infringement of our U.S. patent number 5,974,464. In December 2002, the parties entered into an agreement that apparently settled the case. The agreement was reflected in a Memorandum of Understanding (MOU), which contemplated, among other things, the execution of a more detailed “definitive agreement” by December 31, 2002. Disputes arose, however, regarding the interpretation of certain terms of the MOU, and the parties were unable to conclude a definitive agreement. The parties’ disputes were brought before the court, and on July 15, 2003, the court held that the MOU constituted a binding settlement agreement, and that our interpretation of the MOU was correct. Thereafter, the court ordered Genesis to make certain payments described in the MOU to the Court’s escrow account, and on December 19, 2003, the court entered judgment based on its July 15, 2003 ruling.

Genesis appealed the judgment to the U.S. Court of Appeals for the Federal Circuit on January 16, 2004. On January 28, 2005, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction, holding that the judgment below was not final and appealable. Specifically, the Court of Appeals found that the parties’ agreement to settle the case, as embodied in the MOU, required that Genesis pay us, rather than the district court’s escrow account, certain of the payments described in the MOU.

The case was remanded to the district court, where the parties subsequently agreed to a stipulated order whereby the funds held by the district court were transferred to Silicon Image, under restrictions, until appeals are exhausted. On July 22, 2005, based on the stipulated order, the court dismissed the case with prejudice. Genesis filed a renewed appeal to the Federal Circuit, asserting among other things that the district court erred in its interpretation of the MOU, that the MOU (as interpreted by the court) constitutes patent misuse, and that the district court erred in construing certain claim terms in the asserted patents. A hearing on that appeal is scheduled for April 5, 2006, and a ruling is expected within two to three months thereafter.

We and certain of our officers and directors, together with our underwriters, have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all defendants were part of a scheme to manipulate the price of Silicon Image’s stock in the aftermarket following our initial public offering in October 1999. Response to the complaint and discovery in this action on behalf of Silicon Image and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for the time being. In February 2003, the Court denied motions to dismiss brought by the underwriters and certain issuers and ordered that the case may proceed against certain issuers including against Silicon Image. A proposed settlement has been negotiated and has received preliminary approval by the Court. In the event that the settlement is granted final approval, we do not expect it to have a material effect on our results of operations or financial position. This settlement will not require Silicon Image to pay any settlement amounts nor issue any securities. In the event that the settlement is not finally approved, we cannot accurately predict the outcome of the litigation, but we intend to defend this matter vigorously.

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We and certain of our officers were named as defendants in a securities class action captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus,” commenced on January 31, 2005. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleged that Silicon Image and certain of our officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiff and approving the selection of lead counsel. On July 27, 2005 plaintiffs filed a consolidated amended complaint (“CAC”). The CAC no longer named Mr. Gargus as an individual defendant, but added Dr. David Lee as an individual defendant. The CAC also expanded the class period from June 25, 2004 to April 22, 2005. Defendants filed a motion to dismiss the CAC on September 26, 2005. Plaintiffs subsequently received leave to file, and did file, a second consolidated amended complaint (“Second CAC”) on December 8, 2005. The Second CAC extends the end of the class period from April 22, 2005 to October 13, 2005 and adds additional factual allegations under the same causes of action against Silicon Image, Mr. Tirado and Dr. Lee. The complaint also adds a new plaintiff, James D. Smallwood. Defendants filed a motion to dismiss the Second CAC on February 9, 2006 and that motion is currently scheduled to be heard on June 9, 2006.

On January 14, 2005, we received a preliminary notification that the Securities and Exchange Commission had commenced a formal investigation involving trading in our securities. On February 14, 2005, through our legal counsel, we received a formal notification of that investigation and associated subpoenas. We are fully cooperating with the SEC in this matter.

In addition, we have been named as defendants in a number of judicial and administrative proceedings incidental to our business and may be named again from time to time.

We intend to defend such matters vigorously, and although adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on our results of operations, financial position or cash flows.

Item 4.   Submission of Matters to a Vote of Securities Holders

Not applicable.

PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares have been traded on the NASDAQ Stock Market since our initial public offering on October 6, 1999. Our common shares trade under the symbol “SIMG”. Our shares are not listed on any other markets or exchanges. The following table shows the high and low closing prices for our common shares as reported by the NASDAQ Stock Market:

	High		Low
2005
Fourth Quarter	$	10.27	$	7.06
Third Quarter		12.25		8.89
Second Quarter		12.40		9.50
First Quarter		16.55		9.26
2004
Fourth Quarter	$	17.86	$	12.00
Third Quarter		13.10		10.14
Second Quarter		14.00		9.44
First Quarter		12.45		7.51

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As February 28, 2006, we had approximately 142 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

We have never declared or paid cash dividends on shares of our capital stock. We intend to retain any future earnings to finance growth and do not anticipate paying cash dividends.

In December 2005, we repurchased 143,350 shares of restricted stock at an aggregate price of $573 from a former employee. These shares were originally issued in connection with our acquisition of Transwarp Networks, Inc. in April 2003.

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Item 6.   Selected Financial Data

The following selected financial data should be read in connection with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Historical results of operations are not necessarily indicative of future results.

	Year Ended December 31,
	2005			2004			2003			2002			2001
	(In thousands, except employees and per share data)
Statements of Operations Data:
Revenue	$	212,399		$	173,159		$	103,525		$	81,539		$	51,966
Cost of revenue(1)		83,105			68,614			47,192			39,299			25,342
Gross margin		129,294			104,545			56,333			42,240			26,624
% of revenue		60.9	%		60.4	%		54.4	%		51.8	%		51.2	%
Research and development(2)	$	44,860		$	61,459		$	43,386		$	40,205		$	34,816
% of revenue		21.1	%		35.5	%		41.9	%		49.3	%		67.0	%
Selling, general and administrative(3)	$	31,984		$	42,702		$	23,095		$	27,010		$	23,382
% of revenue		15.1	%		24.7	%		22.3	%		33.1	%		45.0	%
Income (loss) from operations	$	51,572		$	(961	)	$	(17,719	)	$	(40,850	)	$	(78,530	)
Net income (loss)	$	49,549		$	(324	)	$	(12,810	)	$	(40,092	)	$	(76,108	)
Net income (loss) per share:
Basic	$	0.63		$	—		$	(0.18	)	$	(0.62	)	$	(1.32	)
Weighted average shares — basic		79,254			75,081			69,412			64,283			57,790
Diluted	$	0.59		$	—		$	(0.18	)	$	(0.62	)	$	(1.32	)
Weighted average shares — diluted		83,957			75,081			69,412			64,283			57,790
Consolidated Balance Sheet and Other Data as of Year End:
Cash, cash equivalents and short-term investments	$	151,562		$	93,520		$	37,254		$	35,833		$	41,218
Working capital		152,204			97,107			37,674			27,787			36,179
Total assets		233,021			154,908			87,742			77,616			90,162
Tangible assets		219,415			140,204			71,693			64,595			68,534
Long-term debt obligations		6,867			—			—			—			819
Total stockholders’ equity		176,546			122,079			62,393			48,170			67,324
Tangible net book value	$	162,940		$	107,375		$	46,344		$	35,149		$	45,696
Regular full-time employees		384			337			250			249			266
(1) Includes stock compensation expense (benefit)	$	(1,383	)	$	2,777		$	583		$	1,189		$	279
(2) Includes stock compensation expense (benefit)		(3,851	)		16,647			6,863			7,396			9,343
(3) Includes stock compensation expense (benefit)		(3,297	)		13,359			2,542			2,522			2,768

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Prior to 2000, we focused most of our efforts on the sale and development of PanelLink DVI transmitters, receivers and controllers for the PC and display market. In 2000, in order to decrease our dependence on the PC business, we began focusing our resources on entering two new markets, CE and storage, which we believed would grow significantly and in which we could apply our technology and expertise in high-speed serial interfaces. During 2000, we acquired DVDO, a provider of digital video processing systems for the CE market and Zillion, a developer of high-speed transmission technology for data storage applications. In 2001, we focused on accelerating our entry into the CE and storage markets, leveraging our IP into licensing revenue, and restructuring the company to improve profitability. During 2001, we acquired CMD, a provider of storage subsystems and semiconductors designed for storage area networks, and SCL, a provider of mixed-signal and high-speed circuit designs. From 2002 through 2005, we focused on our diversification strategy and the continued expansion of our presence in the CE and storage markets, including the introduction of our first HDMI products for the CE market in 2003, as well as continuing to leverage our intellectual property to generate revenue. We also focused on improving our profitability and reducing our cash usage throughout this period.

From 2002 through 2004, we achieved solid revenue growth, resulting in revenue of $81.5 million, $103.5 million, and $173.2 million for the fiscal years ended December 31, 2002, 2003, and 2004, respectively. We were also able to successfully leverage our intellectual property to generate $6.7 million, $14.2 million, and $20.8 million of development, licensing and royalty revenue for the fiscal years ended December 31, 2002, 2003, and 2004, respectively. During 2005 we continued this strong performance, achieving $212.4 million of revenue (representing a 22.7% increase compared to 2004), $49.5 million of net income (compared to a net loss of $324,000 for 2004), an increase in cash and short-term investments of $58.0 million (compared to an increase of $56.3 million in 2004), and $18.5 million of development, licensing and royalty revenue (compared to $20.8 million of this type of revenue in 2004).

Products sold into the PC market have been declining as a percentage of our total revenues and generated 23.2% of our revenue in 2005, 23.8% of our revenue in 2004, and 32.0% of our revenues in 2003. If we include licensing revenues, these percentages would be 23.8%, 24.0%, and 34.9% for the years ended December 31, 2005, 2004, and 2003, respectively. In the PC market, during 2005, our business was favorably impacted by the continued market share growth of Intel’s PCI Express integrated graphic chipsets (IGCs). All desktop and notebook PC platforms based on Intel IGCs require the use of a discrete SDVO transmitter for supporting DVI or HDMI functionality, and we continue to maintain strong market share in the discrete DVI transmitter market. Our transmitter business was also positively impacted by increasing OEM demand for the DVI dual link feature in desktop and notebook PCs, a market where we are the only provider of discrete DVI dual link transmitters. Finally, our business in the PC market was favorably impacted by demand for our integrated panel controllers that are incorporated into LCD panels used in digital LCD monitors. This demand led to 19.4% sales growth in PC integrated circuits from 2004 to 2005. The PC market saw DVI adoption expand significantly. In addition, we generated licensing revenue in 2005 by licensing certain technology to companies for use in making products for the dual-mode interface market.

When Intel moved from PCI to PCI Express on the Grantsdale platform, it changed the interface for DVI transmitters and moved from the Digital Video Output (DVO) interface to the new Serial Digital Video Output (SDVO) interface. Our DVI transmitter was designed to work with Intel’s SDVO port in the Intel Grantsdale platform, and sales of this transmitter will continue to be driven by the success of the Grantsdale platform where DVI is offered. We expect DVI adoption rates to continue to expand over the next two years as the market moves away from analog and dual-mode (combination of analog and digital) solutions to all-digital, higher quality and lower-cost solutions. Correspondingly, we expect the prices of digital displays to continue to decrease and drive increased demand for digital only displays that incorporate DVI transmitters and panel controllers such as those sold by us. We continued to grow our next generation of integrated controller panel (IPC) product line in 2005 with the introduction of two customer specific IPCs.

Generally, our transmitter products continued to experience competitive pressure in 2005, primarily from integration by the graphics chip suppliers such as ATI Technologies and nVidia. Explore Technologies, Chrontel Thine Electronics and Texas Instruments also remain competitors. Because of this increased competition there were

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lower average selling prices for these products during 2005. We expect graphics card manufacturers to continue to integrate a transmitter into their graphics chip, thus eliminating the need for a discrete transmitter device in many host products. Solutions that utilize the integrated graphics supplied by the Intel chipset and that wish to connect to the LCD monitor via DVI will be the primary focus of our transmitter business. In addition, we generated licensing revenue by licensing certain technology to companies for use in making products for the dual mode monitor interface market.

Products sold into the CE market have been increasing as a percentage of our total revenues and generated 51.2%, 41.2% and 24.9% of our total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. If we include licensing revenues, these numbers would be 55.8%, 48.8%, and 32.2% for the years ended December 31, 2005, 2004, and 2003, respectively. Demand for our products will be driven primarily by the adoption rate of the HDMI standard within these product categories.

Products sold into the storage market, as a percentage of our total revenues, generated 16.9%, 23.0%, and 29.4% of our revenue for the years ended December 31, 2005, 2004, and 2003, respectively. If we include storage related licensing revenues, these numbers were 20.4%, 27.1%, and 32.9%, for the years ended December 31, 2005, 2004, and 2003, respectively. Demand for our storage semiconductor products is dependent upon the rate at which interface technology transitions from parallel to serial, market acceptance of our SteelVine architecture, and the extent to which SATA and Fibre Channel functionality are integrated into chipsets and controllers offered by other companies, which would make our discrete devices unnecessary. In 2006, we anticipate our legacy storage semiconductor business, Fibre Channel, and parallel ATA revenues to continue decreasing as our SteelVine revenues are projected to increase.

In the storage market, we had a number of new and advanced product offerings during 2005. We were able to achieve numerous design wins with our SATALink products. In particular, there was widespread market acceptance of the PCI-e to two-port SATA solutions for the PC market and a number of major manufacturers incorporated our products into their motherboards. We expect to leverage our storage expertise in the new and rapidly growing area for CE storage devices through our SteelVine architecture. We anticipate that many next-generation consumer devices such as set-top boxes, Personal Video Recorders (PVRs) and media PCs are likely to have one or more external SATA ports. Demand declined throughout 2005 for our parallel ATA products as the market continued to transition from these technologies to serial ATA. We expect demand for these legacy products to continue to decrease significantly throughout 2005 and beyond.

Our licensing activity is complementary to our product sales and it helps us to monetize our intellectual property and accelerate market adoption curves associated with our technology. Most of our licenses include a field of use restriction that prevents the licensee from building a chip in direct competition with those market segments we have chosen to pursue. Revenue from development for licensees, licensing and royalties accounted for 8.7%, 12.0% and 13.7% of our revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances. Although we attempt to make these factors predictable, many of these factors require significant judgments.

In 2004, we launched PanelLink Cinema Partners^tm, LLC a wholly-owned subsidiary of Silicon Image, Inc., which was formally changed to Simplay Labs, LLC (Simplay) in December 2005. Simplay operates and markets the Simplay HD^tm Testing Program, a consumer electronics testing program designed for leading consumer electronics (CE) manufacturers and technology providers. Current members of the program include Hitachi, LG, Mitsubishi, Samsung, Sony, TTE and others. The Simplay HD Testing Program is open to all manufacturers of consumer electronics devices implementing HDMI/HDCP including HDTV’s, DTV’s, Set-Top Boxes (STB’s), DVD players, A/V receivers and cables. The program also maintains broad industry support from a variety of leading digital content providers including The Walt Disney Company, Fox, Universal and Warner Bros.

The Simplay HD^tm Testing Program is designed to help consumers know that the digital entertainment devices that they purchase have been tested according to specifications aimed at maximizing the delivery HD content. The program consists of testing, branding and awareness initiatives directed at retailers as well as consumers. At its core, the program is based on the Simplay HD Compatibility Test Specification (CTS) for device manufacturers. Testing encompasses HDCP functionality in conjunction with HDMI, as well as compatibility (“plug-testing”) between

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devices from different manufacturers. Products that pass have been verified to meet the Simplay HD Testing Program requirements and are licensed to use the Simplay HD logo, enabling consumers to purchase digital entertainment devices with the confidence that they will be able to receive and play the latest digital content with state of the art technology. Leveraging this branding component, the Simplay HD Testing Program will be providing education to retailers on the importance of Simplay HD verification.

During 2005, we also focused on improving our profitability and cash flows. Our cash and short-term investments increased by $58.0 million in 2005, versus an increase of $56.3 million in 2004. Our net income for the year ended December 31, 2005, was $49.5 million compared to a net loss of $324,000 for the year ended December 31, 2004.

Commitments, Contingencies and Concentrations

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our top five customers, including distributors, generated 54%, 47%, and 41% of our revenue in 2005, 2004, and 2003, respectively. The increase in 2005 from 2004 and 2003 levels can be attributed to the geographical concentration of our revenue as these customers are primarily in Asia. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEM’s rely upon third-party manufacturers or distributors to provide purchasing and inventory management functions. In 2005, 52% of our revenue was generated through distributors, compared to 45% in 2004 and 42% in 2003. World Peace Inc., comprised 17.2%, 15.0% and 13.6% of our revenue in 2005, 2004 and 2003 respectively. Microtek comprised 10.6%, 12.0% and 11.2% of our revenue in 2005, 2004 and 2003 respectively. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases, we would expect a decrease in the percentage of our revenue generated through distributors.

A significant portion of our revenue is generated from products sold overseas. Sales (including licensing) to customers in Asia, including distributors, generated 74%, 67%, and 69% of our revenue in 2005, 2004, and 2003, respectively. The reason for our geographical concentration in Asia is that most of our products are part of flat panel displays, graphic cards and motherboards, the majority of which are manufactured in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our geographic revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has been denominated in U.S. dollars.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. We believe the following accounting policies to be most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain:

Revenue recognition

For products sold directly to end-users, or to distributors that do not receive price concessions and do not have rights of return, we recognize revenue upon shipment and title transfer if we believe collection is reasonably assured. Reserves for sales returns are estimated based primarily on historical experience and are provided at the time of shipment. The amount of sales returns and allowances has not been, and is not expected to be, material.

The majority of our products are sold to distributors with agreements allowing for price concessions and product returns. We recognize revenue based on our best estimate of when the distributor sold the product to its end customer based on point of sales reports received from our distributors. Due to the timing of receipt of these reports, we recognize distributor sell-through using information that lags quarter end by one month. Revenue is not recognized upon shipment since, due to various forms of price concessions; the sales price is not substantially fixed

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or determinable at that time. Price concessions are recorded when incurred, which is generally at the time the distributor sells the product to an end-user. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given period of time. Revenue is earned when the distributor sells the product to an end-user, at which time our sales price to the distributor becomes fixed. Our revenue is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us periodic data regarding the product, price, quantity, and end customer shipments as well as the quantities of our products they still have in stock. In determining the appropriate amount of revenue to recognize, we use this data and apply judgment in reconciling differences between their reported inventories and activities. If distributors incorrectly report their inventories or activities, or if our judgment is in error, it could lead to inaccurate reporting of our revenues and income. We have controls in place to minimize the likelihood of this occurrence, but there is no absolute assurance that this will not occur.

License revenue is recognized when an agreement with a licensee exists, the price is fixed or determinable, delivery or performance has occurred, and collection is reasonably assured. Generally, we expect to meet these criteria and recognize revenue at the time we deliver the agreed-upon items. However, we may defer recognition of revenue until either cash is received if collection is not reasonably assured at the time of delivery or, in the event that the arrangement includes undelivered elements for which the fair value cannot be determined, until the earlier of such time that the fair value can be determined or the elements are delivered. The fair value of undelivered elements is generally based upon the price charged when the elements are sold separately. A number of our license agreements require customer acceptance of deliverables, in which case we would defer recognition of revenue until the licensee has accepted the deliverables and either payment has been received or is expected within 90 days of acceptance. Certain licensing agreements provide for royalty payments based on agreed upon royalty rates. Such rates can be fixed or variable depending on the terms of the agreement. The amount of revenue we recognize is determined based on a time period or on the agreed-upon royalty rate, extended by the number of units shipped by the customer. To determine the number of units shipped, we rely upon actual royalty reports from our customers when available, and rely upon estimates in lieu of actual royalty reports when we have a sufficient history of receiving royalties from a specific customer for us to make an estimate based on available information from the licensee such as quantities held, manufactured and other information. These estimates for royalties necessarily involve the application of management judgment. As a result of our use of estimates, period-to-period numbers are “trued-up” in the following period to reflect actual units shipped. To date, such “true-up” adjustments have not been significant. In cases where royalty reports and other information are not available to allow us to estimate royalty revenue, we recognize revenue only when royalty reports are received. Development revenue is recognized when a project is completed and accepted by the other party to the development agreement, and collection is reasonably assured. In certain instances, we recognize development revenue using the lesser of non-refundable cash received or the results of using a proportional performance measure, based on the achievement of project milestones. Our license revenue recognition depends upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances.

Allowance for Doubtful Accounts

We review collectibility of accounts receivable on an on-going basis and provide an allowance for amounts we estimate will not be collectible. During our review, we consider our historical experience, the age of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency. Write-offs to date have not been material. At December 31, 2005, we had $30.6 million of gross accounts receivable and an allowance for doubtful accounts of $417,000. While we endeavor to accurately estimate the allowance, we may record unanticipated write-offs in the future.

Inventories

We record inventories at the lower of actual cost, determined on a first-in first-out (FIFO) basis, or market. Actual cost approximates standard cost and standard cost variances. Provisions are recorded for excess and obsolete inventory, and are estimated based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will

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be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six months demand are written down to zero and the related provision is recorded as a cost of revenue. While we endeavor to accurately predict demand and stock commensurate inventory levels, we may record unanticipated material inventory write-downs in the future, which may negatively impact our operating results.

Goodwill and intangible assets

We adopted the Statement of Financial Accounting Standard No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets on January 1, 2003. This standard requires that goodwill no longer be amortized, and instead, be tested for impairment on a periodic basis. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant management judgement to forecast future operating results, projected cash flows and current period market capitalization levels. In estimating the fair value of the business, we make estimates and judgments about the future cash flows. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage our business, there is significant judgment in determining such future cash flows. We also consider market capitalization (adjusted for unallocated monetary assets such as cash, marketable debt securities and debt) on the date we perform the analysis. Based on our annual impairment test performed for 2005, we concluded that there was no impairment of goodwill. However, there can be no assurance that we will not incur charges for impairment of goodwill in the future, which could adversely affect our earnings.

Deferred Tax Assets

We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. To date, as a result of our uncertainty regarding the realizability of our deferred tax assets, we have recorded a 100% valuation allowance. A significant element of our deferred tax assets are the benefits received from employee stock transactions for excess tax deductions. If these stock transactions are realized, such benefits will be recorded as a reduction of income taxes payable, with a corresponding increase in stockholders’ equity.

Accrued Liabilities

Certain of our accrued liabilities are based largely on estimates. For instance, we record a liability on our consolidated balance sheet each period for the estimated cost of goods and services rendered to us, for which we have not received an invoice. Additionally, a component of our restructuring accrual related to a loss we expect to incur for excess leased facility space is based on numerous assumptions and estimates, such as the market value of the space and the time it will take to sublease the space. Our estimates are based on historical experience, input from sources outside the company, and other relevant facts and circumstances. Actual amounts could differ materially from these estimates.

Certain of our licensing agreements indemnify our customers for expenses or liabilities resulting from claimed infringements of patent, trademark or copyright by third parties related to intellectual property content of our products. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to a claim.

Stock-Based Compensation Expense

We are required to determine the fair value of stock option grants to non-employees, and to record the amount as an expense over the period during which services are provided to us. Management calculates the fair value of these stock option grants using the Black-Scholes model, which requires us to estimate the life of the stock option,

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the volatility of our stock, an appropriate risk-free interest rate, and our dividend yield. We also fair-value certain repriced options. The calculation of fair value is highly sensitive to the expected life of the stock option and the volatility of our stock, both of which we estimate based primarily on historical experience.

Legal Matters

We are subject to various legal proceedings and claims, either asserted or unasserted. We evaluate, among other factors, the degree of probability of an unfavorable outcome and reasonably estimate the amount of the loss. Significant judgment is required in both the determination of the probability and as to whether an exposure can be reasonably estimated. When we determine that it is probable that a loss has been incurred, the effect is recorded promptly in the consolidated financial statements. Although the outcome of these claims cannot be predicted with certainty, we do not believe that any of the existing legal matters will have a material adverse effect on our financial condition and results of operations. However, significant changes in legal proceedings and claims or the factors considered in the evaluation of those matters could have a material adverse effect on our business, financial condition and results of operations.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 153, Exchanges of Nonmonetary Assets, (SFAS No. 153) which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did not have a material impact on our financial position, results of operations, or cash flows.

In December 2004, the FASB issued Statement No. 123R, Share-Based Payment (SFAS No. 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS No. 123R eliminates the alternative of applying the intrinsic value measurement provisions of APB No. 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). SFAS No. 123R will be effective for our fiscal quarter beginning January 1, 2006, and requires the use of the Modified Prospective Application Method. Under this method, SFAS No. 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of the awards for which the requisite service has not been rendered (such as unvested options) that is outstanding as of the date of adoption shall be recognized as the remaining services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS No. 123. The actual effects of adopting SFAS No. 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards and the assumed award forfeiture rates. We have not determined the full impact of SFAS No. 123R, however we do anticipate that its adoption could have a material impact on our financial position and results of operations in 2006.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154) which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statement — An Amendment of APB Opinion No. 28. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principal unless it is not practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and we are required to adopt it starting with the quarter ending March 31, 2006. Although we continually evaluate accounting policies, we do not believe adoption of SFAS No. 154 will have a material impact on the our financial position, results of operations, or cash flows.

On March 29, 2005, the SEC issued SAB No. 107, which provides guidance on the interaction between SFAS No. 123R, and certain SEC rules and regulations. SAB No. 107 provides guidance that may simplify some of the SFAS No. 123R’s implementation challenges.

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In November 2004, the FASB issued SFAS No. 151 (SFAS No. 151), Inventory Costs, an amendment of ARB No. 43 Chapter 4. This statement amends the guidance in ARB No. 43, Chapter 4 Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires those items to be excluded from the cost of inventory and expensed when incurred. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for companies at the beginning of the first interim or annual period beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material effect on our financial position, results of operations, or cash flows.

Reclassifications

Patent assertion cost of $519,000 and $2,152,000 for the years ended December 31, 2004 and 2003, respectively, have been reclassified from a stand-alone caption in the accompanying Consolidated Statements of Operations, to selling, general and administrative expense to be consistent with the current year presentation. Patent assertion costs included within selling, general and administrative expense for the year ended December 31, 2005 totaled $326,000. The reclassifications had no effect on previously disclosed net loss, cash flow or stockholders’ equity.

Annual Results of Operations

REVENUE

	2005			Change			2004			Change		2003
	(Dollars in thousands)
Consumer Electronics	$	108,712			52.3	%	$	71,377			177.1%	$	25,762
Personal Computer		49,212			19.4	%		41,223			24.3%		33,163
Storage Products		35,999			(9.4	)%		39,750			30.7%		30,410
Total product revenue	$	193,923			27.3	%	$	152,350			70.5%	$	89,335
Percentage of total revenue		91.3	%					88.0	%				86.3	%
Development, licensing and royalties	$	18,476			(11.2	)%	$	20,809			46.6%	$	14,190
Percentage of total revenue		8.7	%					12.0	%				13.7	%
Total revenue	$	212,399			22.7	%	$	173,159			67.3%	$	103,525

REVENUE (with development, licensing and royalty revenues (collectively, “licensing revenue”), by product line)

	2005		Change			2004		Change		2003
	(Dollars in thousands)
Consumer Electronics	$	118,578		40.2	%	$	84,604		153.9%	$	33,326
Personal Computer		50,484		21.4	%		41,585		15.2%		36,108
Storage Products		43,337		(7.7	)%		46,970		37.8%		34,091
Total revenue	$	212,399		22.7	%	$	173,159		67.3%	$	103,525

Total revenue for 2005 was $212.4 million and represented a sequential growth of 22.7% over 2004. The increase in the CE product revenue was primarily due to strong sales volumes of HDMI receivers and transmitters reflecting the overall success and market acceptance of our technologies, and HDMI in particular. The growth in PC product revenue was driven primarily by our new PC transmitters that incorporate our DVI technology and our intelligent panel controllers, which are key components in LCD displays, partially offset by erosion in the average selling prices of products. The decrease in storage product revenue was due to the trend of declining sales of our legacy storage systems products and Fibre Channel SerDes, which are being phased out of customer applications, partially offset by contributions from our new SATA and Steelvine products. We license our technology in each of our areas of business, but usually limit the scope of the license to market areas that are complementary to our

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product sales and do not directly compete with our direct product offerings. The decrease in licensing revenues in 2005 relative to 2004, was attributable primarily to the deferral of revenue for certain development projects.

Total revenues for 2004 were $173.2 million and represented a sequential growth of 67.3% over 2003. During 2004, all elements of revenue grew, compared to 2003. The increases in the revenue for CE and storage products were attributable to our new product offerings at the time, adoption of our technologies, as well as the continued overall growth of these markets, resulting in increased volumes. The growth in revenue for PC products was driven primarily by the adoption of DVI and a slightly better than expected ramp in Intel’s Grantsdale platform, partially offset by lower average selling prices and the continued softness in the overall growth rate of the PC market in general. The increase in storage product revenue was due to new product offerings was offset by a trend of declining contributions from our legacy storage systems products, which are being phased out of customer applications over time. The increase in licensing revenues during 2004, relative to 2003, was attributable primarily to licensing revenues associated with HDMI.

COST OF REVENUE AND GROSS MARGIN

	2005			Change		2004			Change		2003
	(Dollars in thousands)
Cost of revenue(1)	$	83,105			21.1%	$	68,614			45.4%	$	47,192
Gross margin	$	129,294			23.7%	$	104,545			85.6%	$	56,333
Percentage of total revenue		60.9	%				60.4	%				54.4	%
(1) Includes stock compensation expense (benefit)	$	(1,383	)			$	2,777				$	583

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well as related overhead costs. Gross margin (revenue minus cost of revenue), as a percentage of revenue was 60.9%, 60.4%, and 54.4% for 2005, 2004 and 2003, respectively. The increase in gross margin from 2004 to 2005 was due to $4.2 million less in stock compensation expense partially offset by $2.3 million less in licensing revenue, which have a disproportionate impact on gross profit compared to product sales, erosion in the selling prices of our products, and higher overhead expenses. In 2006, we expect an increase in the erosion of our average selling prices as a result of increased competition. We plan to offset this average selling price erosion through cost savings and new product launches.

The increase in gross margin from 2003 to 2004 was attributable primarily to increased licensing revenues, manufacturing cost reductions, and improved mix whereby higher margin CE products represented a increased proportion of revenue relative to lower margin PC and storage products. These factors were offset by lower average product pricing, higher overhead costs related to increased headcount in operations areas and a $2.2 million increase in stock compensation expense.

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OPERATING EXPENSES

	2005			Change			2004			Change			2003
	(Dollars in thousands)
Research and development(1)	$	44,860			(27.0	)%	$	61,459			41.7	%	$	43,386
Percentage of total revenue		21.1	%					35.5	%					41.9	%
Selling, general and administrative(2)	$	31,984			(25.1	)%	$	42,702			84.9	%	$	23,095
Percentage of total revenue		15.1	%					24.7	%					22.3	%
Total stock compensation expense (benefit) (incl. amount from COGS)	$	(8,531	)		(126.0	)%	$	32,783			228.2	%	$	9,988
Percentage of total revenue		(4.0	)%					18.9	%					9.6	%
Amortization of intangible assets	$	1,098			(18.4	)%	$	1,345			21.9	%	$	1,103
Restructuring expense (recovery)		(220	)		(100.0	)%		—			(100.0	)%		986
In-process research and development		—			0.0	%		—			(100.0	)%		5,482
Gain on escrow settlement, net		—			0.0	%		—			(100.0	)%		4,618
Interest income and other, net		3,410			374.9	%		718			146.7	%		291
Gain on investment security		1,297			40.1	%		926			100.0	%		—
(1) Includes stock compensation expense (benefit)		(3,851	)					16,647						6,863
(2) Includes stock compensation expense (benefit)		(3,297	)					13,359						2,542

Research and Development.  R&D expense consists primarily of compensation and related costs for employees, fees for independent contractors, the cost of software tools used for designing and testing our products and costs associated with prototype materials. R&D expense, including non-cash stock compensation expense, was $44.9 million, or 21.1% of revenue, for 2005, compared to $61.5 million, or 35.5% of revenue, for 2004, and $43.4 million, or 41.9% of revenue, for 2003. The decrease in 2005 was primarily due to the $20.5 million decrease in stock compensation expense related to R&D functions as well as the benefit from a credit to expense of approximately $1.8 million related to three engineering projects that are being funded by outside parties, irrespective of the results of the projects. These items were partially offset by an increase in the number of R&D projects as well higher salaries and wages resulting from an increased number of engineers on staff. Additional costs are also attributable to the increasing level of complexity in our new products. The increase in 2004, relative to 2003, was primarily due to an increase in the number of R&D projects to support the multiple markets in which we operate, as well as additional personnel, including a full year of expense relating to personnel who joined Silicon Image from TransWarp. Non-cash stock compensation expense (benefit) for R&D activities was $(3.9) million for 2005, $16.6 million for 2004 and $6.9 million for 2003.

Selling, General and Administrative.  SG&A expense consists primarily of employee compensation and benefits, sales commissions, and marketing and promotional expenses. Including non-cash stock compensation expense, SG&A expense was $32.0 million, or 15.1% of revenue for 2005, $42.7 million, or 24.7% of revenue for 2004, and $23.1 million, or 22.3% of revenue for 2003. The decrease in SG&A expense for 2005 was due to the $16.7 million decrease in stock compensation expense and a significant decrease in legal costs relating to corporate governance issues. These items were partially offset by higher salaries and wages, higher fees for consulting and professional services, and higher commissions on higher sales. We expect selling, general and administrative expenses to increase in 2006 due to increased marketing activities and our expansion into international markets. The increase during 2004, as compared to 2003, primarily resulted from increased headcount to support our increased rate of growth, approximately $1.0 million incurred during the first half of 2004 relating to costs associated with the Audit Committee examination, and $1.2 million relating to our preparation for Sarbanes-Oxley Section 404. Non-cash stock compensation expense (benefit) for SG&A activities was $(3.3) million for 2005, $13.4 million for 2004 and $2.5 million for 2003.

Stock Compensation.  Total stock compensation expense (benefit) was $(8.5) million or (4.0)% of revenue for 2005, $32.8 million or 18.9% of revenue for 2004, and $10.0 million or 9.6% of revenue for 2003. The decrease in the stock compensation expense in 2005 as compared to 2004 is attributable primarily to a decrease in our stock

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price during 2005. The average stock price for 2005 was $10.58 as compared to $12.13 for 2004. The increase in total stock compensation expense from 2003 to 2004 can be attributed primarily to a increase in the price of our stock during stock during 2004. The change in fair value of our common stock affects our stock compensation expense (benefit) primarily because of the impact of variable accounting applied to certain option grants that were repriced in prior years. On December 22, 2000, we implemented an option exchange program to allow employees and certain consultants to exchange approximately 3,000,000 stock options with a weighted average exercise price of $25.39 for new options with an exercise price of $5.63 (the fair market value on that date). On April 4, 2001, this program was extended to executives at the December 22, 2000 price (which was greater than the fair market value of our stock on April 4, 2001). Under this program, new options vest over a four-year period and expire in six years. Compensation expense associated with the option exchange program will be recorded until the options are exercised or expire. The compensation expense or benefit for the increase or decrease, respectively, in the fair market value of our common stock in excess of the option’s exercise price is recognized immediately for vested options and is recognized over the vesting period using an accelerated method for unvested employee options.

Amortization of Goodwill and Intangible Assets.  During 2005, we recorded $1.1 million of amortization of intangible assets, compared to $1.3 million and $1.1 million of expense for the amortization of intangible assets for 2004 and 2003, respectively. The amortization expense recorded related to intangible assets acquired in connection with the acquisition of Transwarp Networks. The decrease in 2005 was due to the portion of intangible assets related to assembled workforce, which was amortized over eighteen months, being fully amortized at the end of 2004.

In-process Research and Development.  In-process research and development represents technology that has not reached technological feasibility and that has no alternative future use as of the acquisition date.

Transwarp Networks, Inc. (TWN).  During the quarter ended June 30, 2003, we completed the acquisition of the assets of TWN and recorded a one-time expense of $5.5 million for in-process research and development. As of the acquisition date, there was one identified development project that met the necessary criteria — “Polaris”. The value of this project was determined by estimating the future cash flows from the time it was expected to be commercially feasible, discounting the net cash flows to present value, and applying a percentage of completion to the calculated values. The net cash flows from the identified project were based on estimates of revenue, cost of revenue, research and development expenses, selling, general and administrative expenses and applicable income taxes. The technology related to the Polaris project was incorporated into our Steelvine product line, which began generating revenue in 2004 and is expected to continue. We based our revenue projections on estimates of market size and growth, expected trends in technology and the expected timing of new product introductions by our competitors and us. The discount rate used for this project was 30%, which we believe was appropriate based on the risk associated with technology that was not yet commercially feasible. The percentage of completion for this project was based on research and development expenses incurred immediately prior to the acquisition as a percentage of the total estimated research and development expenses required to bring this project to technological feasibility. As of the date of the acquisition, we estimated that Polaris was 17% complete, with total projected costs of approximately $3.3 million. Shipments of this product commenced during 2004.

Impairment of Intangible Assets.  Based on our annual impairment test performed for 2005, in accordance with SFAS No. 142, we concluded that there was no impairment of our goodwill and intangible assets in fiscal 2005. The impairment analysis was based on our estimates of forecasted discounted cash flows as well as our market capitalization at that time.

Restructuring.  In March 2003, we reorganized parts of the marketing and product engineering activities of the Company into lines of business for personal computer (PC), consumer electronics (CE) and storage products to enable us to better manage our long-term growth potential. In connection with this reorganization, we reduced our workforce by 27 people, or approximately 10%.These reductions were primarily in engineering and operations functions. Because of this workforce reduction, we recorded restructuring expense of $1.0 million in the first quarter of 2003, consisting of cash severance-related costs of $340,000 and non-cash severance-related costs of $646,000, representing the intrinsic value of modified stock options.

Severance related costs were determined based on the amount of pay people received that was not for services performed and by measuring the intrinsic value of stock options that were modified to the benefit of terminated

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employees. For those employees terminated in the three-month period ending March 31, 2003, the remaining service period from the communication date did not exceed 60 days.

Severance and benefits payments are substantially complete. The following table presents restructuring activity for 2003 through December 31, 2005 (in thousands):

	Severance			Leased
	and Benefits			Facilities			Total
Balance as of December 31, 2002	$	138		$	2,598		$	2,736
2003 provision		986			—			986
Cash payments		(441	)		(760	)		(1,201	)
Non-cash activity		(646	)		—			(646	)
Balance as of December 31, 2003		37			1,838			1,875
Cash payments		(5	)		(834	)		(839	)
Balance as of December 31, 2004		32			1,004			1,036
Cash payments		—			(759	)		(759	)
Adjustment related to lease modification		—			(220	)		(220	)
Non-cash activity		(32	)		—			(32	)
Balance as of December 31, 2005	$	—		$	25		$	25

Interest Income.  Interest income was $3.6 million, $945,000, and $498,000 for 2005, 2004 and 2003, respectively. The increases in interest income from 2004 to 2005, and from 2003 to 2004 were attributable primarily to the increased cash and investment balances and higher interest rates.

Interest Expense and Other Net.  Net interest expense and other was $195,000, $227,000, and $207,000 for 2005, 2004, and 2003, respectively.

Gain on investment security.  In 2005, we recorded a net gain of $1.3 million from the mark to market and subsequent sale of our holdings in Leadis Technology, Inc (“Leadis”). In 2004, we recorded a net gain of $926,000 related to this investment. These holdings related to equity we acquired in a transaction with Leadis. As of December 31, 2005 our investment in Leadis was fully liquidated. Our typical practice is not to hold equity shares for investment purposes.

Provision for Income Taxes.  For the year ended December 31, 2005, we recorded a provision of $6.7 million for income tax expense. This amount included a $5.4 million non-cash charge associated with stock option exercises. The remaining $1.3 million was primarily for taxes in certain foreign jurisdictions and estimated provision for U.S. alternative minimum taxes for the fiscal year ended December 31, 2005. The income tax provision of $1.0 million recorded in 2004 was primarily for foreign withholding taxes payable in connection with our licensing contracts, other foreign taxes where we recently commenced operations, and an estimated provision for U.S. alternative minimum taxes. Due to our loss in 2003, no provision for income taxes was recorded in that year.

At December 31, 2005, we had a net operating loss (NOL) carryforward for federal income tax purposes of approximately $67.6 million that expires through 2024. In the event of a cumulative ownership change greater than 50%, as defined, over a three year period, the availability of net operating losses to offset future taxable income may be limited.

Gain on escrow settlement, net.  During the quarter ended March 31, 2003, we recognized a net gain of $4.6 million associated with the settlement of an escrow claim against the selling shareholders of CMD. There were no similar transactions in 2005 or 2004.

Earnings per share.  In our press release dated February 16, 2006 announcing our financial position as of December 31, 2005 and our results of operations for the year then ended, we calculated our diluted earnings per share under the treasury stock method using our effective tax rate to determine the amount of tax benefits from the assumed exercise of stock options. Subsequent to the issuance of our press release and prior to the issuance of this Annual Report on Form 10-K we revised our calculation of diluted earnings per share by using our statutory tax rate instead of our effective tax rate to determine to amount of the tax benefits from the assumed exercise of stock

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options. As a result, our diluted earnings per share increased from $0.57 as previously reported in the press release to $0.59 as reported in this Annual Report on Form 10-K.

Liquidity and Capital Resources

	2005			Change			2004			Change			2003
	(Dollars in thousands)
Cash and cash equivalents	$	77,877		$	54,597		$	23,280		$	5,346		$	17,934
Short term investments		73,685			3,445			70,240			50,920			19,320
Total cash, cash equivalents and short term investments	$	151,562		$	58,042		$	93,520		$	56,266		$	37,254
Percentage of total assets		65.0	%					60.4	%					42.5	%
Total current assets	$	201,812		$	71,876		$	129,936		$	66,913		$	63,023
Total current liabilities		(49,608	)		(16,779	)		(32,829	)		(7,480	)		(25,349	)
Working capital	$	152,204		$	55,097		$	97,107		$	59,433		$	37,674
Cash provided by (used in) operating activities	$	55,620		$	19,174		$	36,446		$	39,339		$	(2,893	)
Cash used in investing activities		(12,189	)		40,951			(53,140	)		(49,793	)		(3,347	)
Cash provided by financing activities		11,166			(10,874	)		22,040			12,779			9,261
Net increase in cash and cash equivalents	$	54,597		$	49,251		$	5,346		$	2,325		$	3,021

Since our inception, we have financed our operations through a combination of private sales of convertible preferred stock, our initial public offering, lines of credit, capital lease financings, and operating cash flows. At December 31, 2005, we had $152.2 million of working capital and $151.6 million of cash, cash equivalents and short-term investments. If we are not able to generate cash from operating activities, we will liquidate short-term investments or, to the extent available, utilize credit arrangements to meet our cash needs.

Operating activities

Operating activities provided $55.6 million of cash during 2005. Increases in accounts receivable, inventories, accounts payable, accrued liabilities, deferred license revenue, and deferred margin on sales to distributors and decreases in prepaid assets and other current assets used $2.4 million in cash.

Net accounts receivable increased to $30.1 million at December 31, 2005 from $19.4 million at December 31, 2004. The increase was primarily due to increased sales volume and the days of sales outstanding (44 days at December 31, 2005, compared to 38 days at December 31, 2004).

Inventories increased to $17.1 million at December 31, 2005 from $13.9 million at December 31, 2004. The increase is attributable primarily to increased sales during the year 2005 and to support future projected sales activity. Our inventory turns increased to 6.0 at December 31, 2005 from 4.8 at December 31, 2004. Inventory turns are computed on an annualized basis, using the most recent quarter results, and are a measure of the number of times inventory is replenished during the year.

Accounts payable and accrued liabilities increased to $13.4 million and $14.0 million, respectively, at December 31, 2005 from $6.8 million and $13.4 million, respectively, at December 31, 2004. The increase in accounts payable was due to the timing of when certain accounts payables became due, and the increase in accrued liabilities was primarily due to various activities at the end of 2005.

Deferred margin on sales to distributors increased to $13.8 million at December 31, 2005 from $10.0 million at December 31, 2004. The increase is principally due to the effect of increased distributor related shipments at December 31, 2005 as compared to December 31, 2004.

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We expect our sales through distributors to increase as a percentage of our total product sales. Accordingly, we expect our inventory and deferred margin on sales to distributors to increase as well.

Investing and financing activities

We used $12.2 million of cash in our investing activities in 2005. We used $6.2 million for the purchase of property and equipment and a net $8.2 million to purchase short-term investments, which were partially offset by the proceeds use from the sale of our investment in Leadis Technology, Inc. We expect capital spending to increase in 2006 as we invest in additional testing resources.

We generated $11.2 million from financing activities in 2005. This included $11.4 million in proceeds received from issuances of common stock from stock option exercises and ESPP purchases, offset by $259,000 for the repayment of debt.

Debt and Lease Obligations

In October 2002, we entered into a $3.6 million term loan to refinance $3.1 million of debt acquired in connection with our acquisition of CMD and $500,000 of other bank debt. This loan bore interest at prime plus 0.25% and required monthly payments through its maturity of October 1, 2004. This loan was repaid in full during fiscal 2004. During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment during fiscal 2004. This term loan bears interest at 5% and requires monthly payments through its maturity in February 2004. As of December 31, 2004, $48,000 was outstanding under these term loans.

In November 2004, we leased certain capital equipment under a lease arrangement accounted for as a capital lease. The principal balance outstanding under this lease arrangement as of December 31, 2005 and 2004 was approximately $230,000 and $441,000, respectively.

In December 2002, we entered into a non-cancelable operating lease renewal for our principal operating facility, including an additional 30,000 square feet of space in an adjacent building, that commenced in August 2003 and expires in July 2010. In June 2004, the lease terms were amended and we leased approximately 28,000 square feet of additional space (for a total leased area of approximately 109,803 square feet). The revised agreement provides for a rent free period for the additional space and thereafter initial base monthly rental payments of $107,607 and provides for annual increases of 3% thereafter. As a result of the lease modification we recorded an adjustment of $220,000 to the restructuring accrual with an offsetting reduction of our operating expense for the year ended December 31, 2005.

In June 2001, in connection with our acquisition of CMD, we acquired the lease of an operating facility in Irvine, California with average monthly rental payments of approximately $100,000 through November 2005. We subleased parts of this facility to three separate third parties. These sublease agreements were co-terminous leases and expired in November 2005. These subleases collectively generated monthly sublease income of approximately $40,000 to offset our payments. Effective December 2005, the original lease was terminated and we entered into a new non-cancelable operating lease agreement. Under the terms of the new agreement, base monthly rental lease payments of $42,000 are required and increases annually 3% thereafter.

Additionally, in connection with our acquisition of SCL in July 2001, we acquired the lease of a facility in Milpitas, California with average monthly rental payments of approximately $18,000 per month which expires in January 2006. We do not occupy the Milpitas facility and therefore are accounting for the remaining monthly payments in the restructuring reserve as described in Note 3 to the Consolidated Financial Statements.

We also lease office space in China, Taiwan, Korea, United Kingdom and Japan.

Rent expense totaled $1.7 million, $1.8 million, and $1.9 million in 2005, 2004 and 2003, respectively. Future minimum lease payments under operating leases have not been reduced by expected sublease rental income or by the amount of our restructuring accrual that relates to leased facilities.

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Future minimum payments for our operating leases, capital lease obligations, inventory and other purchase commitments and minimum royalty obligations to a related party at December 31, 2005 are as follows (in thousands):

	Payments Due in
			Less Than						More Than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Contractual Obligations:
Capital lease obligations	$	260	$	260	$	—	$	—	$	—
Operating lease obligations		11,325		3,494		5,486		2,345		—
Inventory and other purchase commitments		19,462		19,462		—		—		—
Minimum royalty obligations to a related party		200		100		100		—		—
Total	$	31,247	$	23,316	$	5,586	$	2,345	$	—

As of December 31, 2005, the future minimum rental payments on our capital leases was $260,000 which includes approximately $30,000 of interest and sales tax. The entire amount of capital lease obligations have been presented as current liabilities on the face of the consolidated balance sheet.

Based on our estimated cash flows for 2006, we believe our existing cash, cash equivalents and short-term investments are sufficient to meet our capital and operating requirements for at least the next 12 months. Our future operating and capital requirements depend on many factors, including the levels at which we generate product revenue and related margins, the timing and extent of development, licensing and royalty revenues, investments in inventory and accounts receivable, the cost of securing access to adequate manufacturing capacity, our operating expenses, including legal and patent assertion costs, and general economic conditions. In addition, cash may be required for future acquisitions should we choose to pursue any. To the extent existing resources and cash from operations are insufficient to support our activities, we may need to raise additional funds through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

Fixed Income Investments

As of December 31, 2005, we had an investment portfolio of fixed income securities as reported in short-term investments, including those classified as cash equivalents of approximately $151.6 million. These securities are subject to interest rate fluctuations. Changes in interest rates could adversely affect the market value of our fixed income investments. A sensitivity analysis was performed on our investment portfolio as of December 31, 2005. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, 100, or 150 basis points over a twelve-month time horizon. The following represents the potential decrease to the value of our fixed income securities given a negative shift in the yield curve used in our sensitivity analysis (in thousands).

0.5%		1.0%		1.5%
$	388	$	776	$	1,163

We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines of our fixed income portfolios. The guidelines also establish credit quality standards, limits on exposure to any one security issue, limits on exposure to any one issuer and limits on exposure to the type of instrument. Due to limited duration and credit risk criteria established in our guidelines we do not expect the exposure to interest rate risk and credit risk to be material.

Market Price

Components of our stock compensation expense are tied to our stock price. Changes in our stock price can have a significant affect on the amount recorded as stock compensation expense.

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Foreign Currency Exchange Risk

All of our sales are denominated in U.S. dollars, and substantially all of our expenses are incurred in U.S. dollars, thus limiting our exposure to foreign currency exchange risk. We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or speculative purposes. The direct effect of an immediate 10% change in foreign currency exchange rates should not have a material effect on our future operating results or cash flows; however, a long term increase in foreign currency rates would likely result in increased wafer, packaging, assembly or testing costs. Additionally, many of our foreign distributors price our products in the local currency of the countries in which they sell. Therefore, significant strengthening of the U.S. dollar relative to those foreign currencies could result in reduced demand or lower U.S. dollar prices for our products, which would negatively affect our operating results.

Item 8.   Financial Statements and Supplementary Data

The Financial Statements and Supplemental Data required by this item are set forth at the pages indicated at Item 15(a).

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our disclosure controls and procedures, they are included in the scope of our periodic controls evaluation.

For the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as a result of the material weakness in internal control over financial reporting in the tax accounting area discussed below, our disclosure controls and procedures as of the end of the period covered by this report were not effective.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

•  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

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•  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

A “material weakness” is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance, and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 2005 based on the framework established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control — Integrated Framework. Management is not permitted to conclude that our internal control over financial reporting is effective if there are one or more material weaknesses in internal control over financial reporting. As of December 31, 2005, management identified a material weakness in our internal control over financial reporting which resulted from the failure to maintain effective controls over the accounting for income taxes. Specifically, the controls we designed to correctly compute the excess tax benefit related to stock options exercised did not operate effectively. This also resulted in us recording a material adjustment in the 2005 financial statements that affected the provision for income taxes and stockholders’ equity. This control deficiency results in more than a remote likelihood that a material misstatement of annual or interim financial statements would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness. Management concluded that, as a result of the material weakness described above, our internal control over financial reporting was not effective as of December 31, 2005, based on the COSO criteria.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the fourth quarter of our 2005 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except that our Board of Directors determined that the material weakness we previously reported in our quarterly reports on Form 10-Q for the quarters ended September 30, 2005, June 30, 2005 and March 31, 2005 regarding the ineffective oversight of our internal control over financial reporting by the Audit Committee had been remediated as of December 31, 2005, given that enough time had elapsed to determine that the Audit Committee was providing effective oversight.

Management and the Audit Committee intend to remediate the material weakness concerning income taxes described above, and have begun to implement the following actions:

1. Perform an extensive reconciliation of our income tax accounts.

2. Utilize outside consultants to assist management in the analysis of complex tax accounting and disclosure matters.

3. Assess our staffing in the accounting and finance areas to ensure we have adequate technical tax expertise.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Silicon Image, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Silicon Image Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of the material weakness identified in management’s assessment based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

•  The Company lacked appropriate controls related to accounting for income taxes. Specifically, the controls designed by the Company to correctly compute the excess tax benefit relating to stock options exercised did not operate effectively. This resulted in the Company recording a material adjustment in the 2005 financial statements that affected the provision for income taxes and stockholders’ equity.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows as of and for the year ended December 31, 2005 of the Company, and this report does not affect our report on such financial statements.

58

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2005, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows as of and for the year ended December 31, 2005, of the Company and our report dated March 15, 2006 expressed an unqualified opinion on those financial statements.

/s/  DELOITTE & TOUCHE LLP

San Jose, California

March 15, 2006

59

Item 9B.   Other Information

Not applicable.

PART III

Item 10.   Directors and Executive Officers of the Registrant

The information required by this Item, which will be set forth under the captions “Proposal No. 1 Election of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Compliance” in Silicon Image’s Proxy Statement for its 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 11.   Executive Compensation

The information required by this Item, which will be set forth under the captions “Director Compensation,” “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” in Silicon Image’s Proxy Statement for its 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item regarding ownership of Silicon Image’s securities, which will be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in Silicon Image’s Proxy Statement for its 2006 Annual Meeting of Stockholders, is incorporated herein by reference. The information required by this Item regarding Silicon Image’s equity compensation plans, which will be set forth under the caption “Equity Compensation Plans” in Silicon Image’s Proxy Statement for its 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 13.   Certain Relationships and Related Transactions

The information required by this Item, which will be set forth under the caption “Certain Relationships and Related Transactions” in Silicon Image’s Proxy Statement for its 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 14.   Principal Accountant Fees and Services

The information required by this Item, which will be set forth under the caption “Audit and Related Fees” in Silicon Image’s Proxy Statement for its 2006 Annual Meeting of Stockholders, is incorporated herein by reference.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a) The following documents are filed as a part of this Form:

1. Financial Statements:

	Page
Consolidated Balance Sheets at December 31, 2005 and December 31, 2004		62
Consolidated Statements of Operations for the three years ended December 31, 2005		63
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2005		64
Consolidated Statements of Cash Flows for the three years ended December 31, 2005		65
Notes to Consolidated Financial Statements		66
Unaudited Selected Quarterly Financial Data for the two years ended December 31, 2005		88
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm		89
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm		90

60

2. Financial Statement Schedules

Schedules not listed in Item 15(a)(1) above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

3. Exhibits.

The exhibits listed in the Index to Exhibits are incorporated herein by reference as the list of exhibits required as part of this Annual Report on Form 10-K.

61

SILICON IMAGE, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2004
	(In thousands, except share and per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents	$	77,877		$	23,280
Short-term investments		73,685			70,240
Accounts receivable, net of allowances for doubtful accounts of $417 in 2005 and $745 in 2004		30,141			19,417
Inventories		17,072			13,926
Prepaid expenses and other current assets		3,037			3,073
Total current assets		201,812			129,936
Property and equipment, net		9,613			9,494
Goodwill		13,021			13,021
Intangible assets, net		585			1,683
Other assets		7,990			774
Total assets	$	233,021		$	154,908
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	13,372		$	6,833
Accrued liabilities		13,952			13,418
Deferred license revenue		8,283			2,127
Debt obligations and capital leases		230			489
Deferred margin on sales to distributors		13,771			9,962
Total current liabilities		49,608			32,829
Other Long-term liabilities		6,867			—
Total liabilities		56,475			32,829
Commitments and contingencies (Notes 6 and 9)
Stockholders’ Equity:
Convertible preferred stock, par value $0.001; 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, par value $0.001; 150,000,000 shares authorized; shares issued and outstanding: 80,491,557 — 2005 and 78,131,604 — 2004		80			78
Additional paid-in capital		307,149			299,744
Unearned compensation		(6,742	)		(7,632	)
Accumulated deficit		(123,429	)		(172,978	)
Accumulated other comprehensive income (loss)		(512	)		2,867
Total stockholders’ equity		176,546			122,079
Total liabilities and stockholders’ equity	$	233,021		$	154,908

See accompanying Notes to Consolidated Financial Statements.

62

SILICON IMAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2005			2004			2003
	(In thousands, except per share amounts)
Revenue:
Product	$	193,923		$	152,350		$	89,335
Development, licensing and royalties		18,476			20,809			14,190
Total revenue	$	212,399		$	173,159		$	103,525
Cost of revenue and operating expenses:
Cost of revenue(1)		83,105			68,614			47,192
Research and development(2)		44,860			61,459			43,386
Selling, general and administrative(3)		31,984			42,702			23,095
Amortization of intangible assets		1,098			1,345			1,103
In-process research and development		—			—			5,482
Restructuring expense (recovery)		(220	)		—			986
Total cost of revenue and operating expenses		160,827			174,120			121,244
Income (loss) from operations		51,572			(961	)		(17,719	)
Gain on escrow settlement, net		—			—			4,618
Interest income		3,605			945			498
Interest expense and other, net		(195	)		(227	)		(207	)
Gain on investment security		1,297			926			—
Income (loss) before provision for income taxes		56,279			683			(12,810	)
Provision for income taxes		6,730			1,007			—
Net income (loss)	$	49,549		$	(324	)	$	(12,810	)
Net income (loss) per share — basic	$	0.63		$	(0.00	)	$	(0.18	)
Net income (loss) per share — diluted	$	0.59		$	(0.00	)	$	(0.18	)
Weighted average shares — basic		79,254			75,081			69,412
Weighted average shares — diluted		83,957			75,081			69,412
(1) Includes stock compensation expense (benefit)	$	(1,383	)	$	2,777		$	583
(2) Includes stock compensation expense (benefit)		(3,851	)		16,647			6,863
(3) Includes stock compensation expense (benefit)		(3,297	)		13,359			2,542

See accompanying Notes to Consolidated Financial Statements.

63

SILICON IMAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

									Notes									Accumulated
						Additional			Receivable									Other
	Common Stock					Paid-In			from			Unearned			Accumulated			Comprehensive
	Shares			Amount		Capital			Stockholders			Compensation			Deficit			Income (Loss)			Total
	(In thousands)
Balance at December 31, 2002		66,640		$	67	$	214,459		$	(109	)	$	(6,403	)	$	(159,844	)	$	—		$	48,170
Net loss		—			—					—			—			(12,810	)		—			(12,810	)
Net issuances of common stock		3,488			3		9,223			—			—			—			—			9,226
Common stock issued for ESPP		613			—		2,263			—			—			—			—			2,263
Common stock issued for acquisitions (Note 2)		2,576			2		9,491			—			—			—			—			9,493
Stock reacquired pursuant to settlement (Note 2)		(950	)		—		(4,692	)		—			—			—			—			(4,692	)
Compensation expense for option modification		—			—		646			—			—			—			—			646
Repayments of note receivable		—			—		—			109			—			—			—			109
Unearned compensation		—			—		4,606			—			(4,606	)		—			—			—
Stock compensation expense		—			—		7,175			—			2,813			—			—			9,988
Balance at December 31, 2003		72,367			72		243,171			—			(8,196	)		(172,654	)		—			62,393
Net loss		—			—		—			—			—			(324	)		—			(324	)
Unrealized net gain on available-for-sale investments		—			—		—			—			—			—			2,867			2,867
Total comprehensive income		—			—		—			—			—			—			—			2,543
Net issuances of common stock		5,140			5		20,998			—			—			—			—			21,003
Common stock issued for ESPP		616			1		2,720			—			—			—			—			2,721
Common stock issued for acquisitions		9			—		—			—			—			—			—			—
Compensation expense for option modification		—			—		1,527			—			—			—			—			1,527
Tax benefit from employee stock transactions		—			—		636			—			—			—			—			636
Stock compensation expense		—			—		30,692			—			564			—			—			31,256
Balance at December 31, 2004		78,132			78		299,744			—			(7,632	)		(172,978	)		2,867			122,079
Net income		—			—		—			—			—			49,549			—			49,549
Foreign currency translation adjustments		—			—		—			—			—			—			(22	)		(22	)
Unrealized net loss on available-for-sale investments		—			—		—			—			—			—			(3,357	)		(3,357	)
Total comprehensive income		—			—		—			—			—			—			—			46,170
Net issuances of common stock		1,787			2		7,584			—			—			—			—			7,586
Common stock issued for ESPP		716			—		3,840			—			—			—			—			3,840
Restricted common stock repurchased		(143	)		—		(1	)		—			—			—			—			(1	)
Tax benefit from employee stock transactions		—			—		5,403			—			—			—			—			5,403
Stock compensation benefit		—			—		(9,421	)		—			890			—			—		$	(8,531	)
Balance at December 31, 2005		80,492		$	80	$	307,149		$	—		$	(6,742	)	$	(123,429	)	$	(512	)	$	176,546

See accompanying Notes to Consolidated Financial Statements

64

SILICON IMAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2005			2004			2003
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	49,549		$	(324	)	$	(12,810	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization		6,108			4,903			4,734
Provision for doubtful accounts		194			75			151
Stock compensation expense (benefit)		(8,531	)		32,783			9,988
Amortization of intangible assets		1,098			1,345			1,103
Amortization of investment premium		469			—			—
In-process research and development		—			—			5,482
Impairment of goodwill and intangible assets		—			—			—
Non-cash restructuring		—			—			646
Non-cash gain on escrow settlement, before cash costs		—			—			(4,692	)
Gain on investment security		(1,297	)		(926	)		—
Tax benefit from employee stock transactions		5,403			636			—
Loss on sale of investments		45			—			—
Loss on disposal of property and equipment		148			—			—
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable		(10,918	)		(6,738	)		(1,316	)
Inventories		(3,146	)		(3,614	)		(3,011	)
Prepaid expenses and other assets		(313	)		115			(851	)
Accounts payable		6,539			391			(3,904	)
Accrued liabilities and deferred license revenue		6,463			5,112			(1,554	)
Deferred margin on sales to distributors		3,809			2,688			3,141
Cash provided by (used in) operating activities		55,620			36,446			(2,893	)
Cash flows from investing activities:
Purchases of short-term investments		(94,561	)		(75,109	)		(23,000	)
Proceeds from sales of short-term investments		86,349			27,932			24,600
Proceeds from sale of investment security		2,171			—			—
Purchases of property and equipment		(6,169	)		(5,963	)		(5,096	)
Proceeds from sale of property and equipment		21			—			—
Cash acquired in business combination, net of acquisition costs		—			—			149
Cash used in investing activities		(12,189	)		(53,140	)		(3,347	)
Cash flows from financing activities:
Proceeds from issuances of common stock		11,426			23,724			11,489
Net repayments of stockholders’ notes receivable		—			—			109
Repayments of debt and capital lease obligations		(259	)		(1,684	)		(2,467	)
Repurchase of restricted stock		(1	)		—			—
Refund of security deposits on leasing arrangements		—			—			130
Cash provided by financing activities		11,166			22,040			9,261
Net increase in cash and cash equivalents		54,597			5,346			3,021
Cash and cash equivalents — beginning of period		23,280			17,934			14,913
Cash and cash equivalents — end of period	$	77,877		$	23,280		$	17,934
Supplemental cash flow information:
Acquisitions of property and equipment under capital lease arrangements	$	—		$	441		$	383
Cash payments for interest	$	34		$	54		$	140
Stock and options issued with the TransWarp acquisition	$	—		$	—		$	14,371
Cash payments for taxes	$	946		$	310		$	—
Unrealized net gain (loss) on available-for-sale securities	$	(3,357	)	$	3,743		$	—
Accrued property and equipment purchases	$	227		$	—		$	—
Foreign currency translation adjustments	$	(22	)	$	—		$	—
Reimbursable tenant improvements	$	—		$	582		$	—
Increase in restricted cash and related long-term liability associated with ongoing litigation	$	6,867		$	—		$	—

See accompanying Notes to Consolidated Financial Statements.

65

SILICON IMAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 —  THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

Silicon Image, Inc. (referred to herein as “We”, “Our”, “the Company”, or “Silicon Image”), a Delaware corporation, was incorporated June 11, 1999. The Company is a leading provider of multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. Silicon Image establishes industry-standard and high-speed digital interfaces for standards-based IC products.

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. Our financial results are affected by a wide variety of factors, including general global economic conditions, economic conditions specific to the semiconductor industry, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. As a result, we may experience significant period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.

Basis of presentation

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates. Areas where significant judgment and estimates are applied include revenue recognition, allowance for doubtful accounts, inventory valuation, realization of long lived assets, including goodwill, income taxes, accrued liabilities, including restructuring, stock based compensation and legal matters. The consolidated financial statements include the accounts of Silicon Image, Inc. and our subsidiaries after elimination of all significant inter-company balances and transactions.

Reclassifications

Patent assertion cost of $519,000 and $2,152,000 for the years ended December 31, 2004 and 2003, respectively, have been reclassified from a stand-alone caption in the accompanying Consolidated Statements of Operations, to selling, general and administrative expense to be consistent with the current year presentation. Patent assertion costs included within selling, general and administrative expense for the year ended December 31, 2005 totaled $326,000. The reclassifications had no effect on previously disclosed net loss, cash flows or stockholders’ equity.

Revenue recognition

For products sold directly to end-users, or to distributors that do not receive price concessions and do not have rights of return, we recognize revenue upon shipment and title transfer if we believe collection is reasonably assured. Reserves for sales returns are estimated based primarily on historical experience and are provided at the time of shipment.

The majority of our products are sold to distributors with agreements allowing for price concessions and product returns. Accordingly, we recognize revenue based on our best estimate of when the distributor sold the product to its end customer. Our estimate of distributor sell-through to end customers is based on point of sales reports received from our distributors. Due to the timing of receipt of these reports, we recognize distributor sell-through using information that lags quarter end by one month. Revenue is not recognized upon shipment since, due to various forms of price concessions, the sales price is not substantially fixed or determinable at that time.

Additionally, these distributors have contractual rights to return products, up to a specified amount for a given period of time. Revenue is earned when the distributor sells the product to an end-user, at which time our sales price

66

SILICON IMAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to the distributor becomes fixed. Pursuant to our distributor agreements, older or end-of-life products are sold with no right of return and are not eligible for price concessions. For these products, revenue is recognized upon shipment and title transfer if we believe collection is reasonable assured.

At the time of shipment to distributors, we record a trade receivable for the selling price since there is a legally enforceable right to payment, relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor, and record the gross margin in “deferred margin on sales to distributors”, a component of current liabilities on our consolidated balance sheet. Deferred margin represents the estimated gross margin on the sale to the distributor; however, the amount of actual gross margin we recognize in future periods could be less than the deferred margin as a result of future price concessions. We do not reduce deferred margin by estimated future price concessions; instead, price concessions are recorded when incurred, which is generally at the time the distributor sells the product to an end-user. The difference between deferred margin and the margin actually recognized has not been material in the past; however, since price concessions are highly dependent upon market conditions, there can be no assurance that the difference will not be material in the future. Price concessions are not granted for amounts in excess of the deferred margin.

License revenue is recognized when an agreement with a licensee exists, the price is fixed or determinable, delivery or performance has occurred, and collection is reasonably assured. Generally, we expect to meet these criteria and recognize revenue at the time we deliver the agreed-upon items. However, we may defer recognition of revenue until either cash is received if collection is not reasonably assured at the time of delivery or, in the event that the arrangement includes undelivered elements for which the fair value cannot be determined, until the earlier of such time that the fair value can be determined or the elements are delivered. The fair value of undelivered elements is generally based upon the price charged when the elements are sold separately. A number of our license agreements require customer acceptance of deliverables, in which case we would defer recognition of revenue until the licensee has accepted the deliverables and either payment has been received or is expected within 90 days of acceptance. Certain licensing agreements provide for royalty payments based on agreed upon royalty rates. Such rates can be fixed or variable depending on the terms of the agreement. The amount of revenue we recognize is determined based on a time period or on the agreed-upon royalty rate, extended by the number of units shipped by the customer. To determine the number of units shipped, we rely upon actual royalty reports from our customers when available, and rely upon estimates in lieu of actual royalty reports when we have a sufficient history of receiving royalties from a specific customer for us to make an estimate based on available information from the licensee such as quantities held, manufactured and other information. These estimates for royalties necessarily involve the application of management judgment. As a result of our use of estimates, period-to-period numbers are “trued-up” in the following period to reflect actual units shipped. To date, such “true-up” adjustments have not been significant. In cases where royalty reports and other information are not available to allow us to estimate royalty revenue, we recognize revenue only when royalty reports are received. Development revenue is recognized when a project is completed and accepted by the other party to the development agreement, and collection is reasonably assured. In certain instances, we recognize development revenue using the lesser of non-refundable cash received or the results of using a proportional performance measure, based on the achievement of project milestones. Our license revenue recognition depends upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances.

Allowance for Doubtful Accounts

We review collectibility of accounts receivable on an on-going basis and provide an allowance for amounts we estimate will not be collectible. During our review, we consider our historical experience, the age of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency.

67

SILICON IMAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31,
	2005			2004		2003
	In thousands
Balance at January 1	$	745		$	670	$	519
Provision for doubtful accounts		194			75		151
Write offs		(522	)		—		—
Balance at December 31	$	417		$	745	$	670

Inventories

We record inventories at the lower of actual cost, determined on a first-in first-out (FIFO) basis, or market. Actual cost approximates standard cost, adjusted for standard cost variances. Standard costs are determined based on our estimate of material costs, manufacturing yields, costs to assemble, test and package our products, and allocable indirect costs. We record differences between standard costs and actual costs as variances. These variances are analyzed and are either included on the consolidated balance sheet or the consolidated statement of operations in order to state the inventories at actual costs on a FIFO basis. Standard costs are evaluated at least annually.

Provisions are recorded for excess and obsolete inventory, and are estimated based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six months demand are written down to zero and the related provision is recorded as a cost of revenue. Once a provision is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product.

Long-lived assets

Consideration paid in connection with acquisitions is required to be allocated to the assets, including identifiable intangible assets, and liabilities acquired. Acquired assets and liabilities are recorded based on our estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates.

For certain long-lived assets, primarily fixed assets and intangible assets, we are required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. We use the straight-line method to depreciate long-lived assets. We evaluate the recoverability of our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We regularly compare the carrying value of long-lived assets to our projection of future undiscounted cash flows, attributable to such assets and in the event that the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the asset’s fair value. Predicting future cash flows attributable to a particular asset is difficult, and requires the use of significant judgment.

We assign the following useful lives to our fixed assets — three years for computers and software, one to five years for equipment and five to seven years for furniture and fixtures. Leasehold improvements and assets held under capital leases are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life, which ranges from two to six years. As of December 31, 2005 and 2004, we had $23.2 million and $24.2 million, respectively in long-lived assets, substantially all of which are located in the United States. Depreciation and amortization expense was $6.1 million, $4.9 million, and $4.7 million. Amortization of intangibles, totaled $1.1 million, $1.3 million, and $1.1 million, for the years ended December 31, 2005, 2004 and 2003, respectively.

Goodwill and intangible assets

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when

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impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.

We adopted SFAS No. 142 effective January 1, 2003. We completed the first step of the transitional goodwill impairment test as of the beginning of fiscal 2003, and the results of that test indicated that our goodwill and intangible assets were not impaired at January 1, 2003. Based on the annual impairment test performed for 2005 and 2004 in accordance with SFAS No. 142, there was no impairment of goodwill or intangible assets at December 31, 2005 and December 31, 2004. The impairment analysis was based on our estimates of forecasted discounted cash flows as well as our market capitalization at that time.

Purchased intangible assets are carried at cost less accumulated amortization.

Components of intangible assets, were as follows (in thousands):

			December 31, 2005					December 31, 2004
	Estimated		Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Useful Lives		Amount		Amortization			Amount		Amortization
Intangible assets subject to amortization:
Acquired technology		36-48 months	$	1,780	$	(1,348	)	$	1,780	$	(863	)
Non-compete agreement		36 months		1,849		(1,696	)		1,849		(1,083	)
			$	3,629	$	(3,044	)	$	3,629	$	(1,946	)
Intangible assets not subject to amortization:
Goodwill			$	13,021	$	—		$	13,021	$	—

Estimated future amortization expense for our intangible assets is as follows for the fiscal years ending December 31 (in thousands):

2006	$	508
2007		77
	$	585

Income taxes

We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. The tax benefit of the net operating loss carryforward resulting from stock option transactions, to the extent such tax benefits pertain to deductions for tax reporting purposes in excess of related amounts reported for financial reporting purposes, is recorded as a credit to additional paid-in capital when utilized. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets.

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Accrued liabilities

Certain of our accrued liabilities are based largely on estimates. For instance, we record a liability on our consolidated balance sheet each period for the estimated cost of goods and services rendered to us, for which we have not received an invoice. Additionally, a component of our restructuring reserve related to a loss we expect to incur for excess leased facility space is based on numerous assumptions and estimates, such as the market value of the space and the time it will take to sublease the space. Our estimates are based on historical experience, input from sources outside the Company, and other relevant facts and circumstances.

Guarantees, Indemnifications and Warranty Liabilities

Certain of our licensing agreements indemnify our customers for expenses or liabilities resulting from claimed infringements of patent, trademark or copyright by third parties related to the intellectual property content of our products. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to a claim.

At the time of revenue recognition, we provide an accrual for estimated costs (included in accrued liabilities in the accompanying consolidated balance sheets) to be incurred pursuant to our warranty obligation. Our estimate is based primarily on historical experience.

	Year Ended
	December 31,
	2005			2004			2003
	(In thousands)
Balance at January 1	$	351		$	271		$	223
Provision for warranties issued during the period		273			300			630
Cash and other settlements made during the period		(242	)		(220	)		(582	)
Balance at December 31	$	382		$	351		$	271

Stock-based compensation

We account for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations, and comply with the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (an amendment to FASB Statement No. 123). Expense associated with stock-based compensation is amortized over the vesting period of the individual award using an accelerated method, as described in Financial Accounting Standards Board Interpretation No. 28.

We are required under SFAS No. 148 to disclose pro forma information regarding option grants made to employees based on specified valuation techniques that produce estimated compensation charges. We provide pro forma net income (loss) and pro forma net income (loss) per share disclosures for stock-based awards made during fiscal 2005, 2004 and 2003, as if the fair-value-based method defined in SFAS No. 123 had been applied. The fair value of the stock-based awards was estimated using the Black-Scholes model.

We are required to determine the fair value of stock option grants to non-employees, and to record the amount as an expense over the period during which services are provided to us. The fair value of each non-employee stock option grant is remeasured at each period end until a commitment date is reached which is generally the vesting date. The Company accounts for employee and director stock option grants in accordance with APB 25 and complies with the disclosure provisions of SFAS No. 123. Management calculates the fair value of these stock option grants using the Black-Scholes model, which requires us to estimate the life of the stock option, the volatility of our stock, an appropriate risk-free interest rate, and our dividend yield. The calculation of fair value is highly

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sensitive to the expected life of the stock option and the volatility of our stock, both of which we estimate based primarily on historical experience.

Pro forma Net Income (Loss)

Had we recorded compensation cost for our options based on the grant-date fair value as prescribed by SFAS No. 123, our net income (loss) would have been as follows (in thousands):

	Year Ended December 31,
	2005			2004			2003
Net income (loss) — as reported	$	49,549		$	(324	)	$	(12,810	)
Stock compensation cost (benefit) included in net income (loss) as reported, net of tax		(6,578	)		27,218			7,078
Stock compensation expense determined using fair value method, net of tax		(15,117	)		(22,769	)		(21,019	)
Pro forma net income (loss)	$	27,854		$	4,125		$	(26,751	)
Basic net income (loss) per share — pro forma	$	0.35		$	0.05		$	(0.39	)
Diluted net income (loss) per share — pro forma	$	0.33		$	0.05		$	(0.39	)
Basic net income (loss) per share — as reported	$	0.63		$	0.00		$	(0.18	)
Diluted net income (loss) per share — as reported	$	0.59		$	0.00		$	(0.18	)

Cash and cash equivalents and short-term investments

We consider all highly liquid investments maturing within three months from the date of purchase to be cash equivalents. All of our investments are categorized as available-for-sale at the consolidated balance sheet dates, and have been presented at fair value.

Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2005:

			Gross		Gross
	Carrying		Unrealized		Unrealized			Estimated
	Value		Gain		Loss			Fair Value
Classified as current assets:
Cash	$	7,929	$	—	$	—		$	7,929
Cash equivalents:
Money market funds		11,399		—		—			11,399
Commercial paper		58,529		20		—			58,549
Total cash equivalents		69,928		20		—			69,948
Total cash and cash equivalents		77,857		20		—			77,877
Short-term investments:
Corporate notes and bonds	$	32,095	$	2	$	(295	)	$	31,802
Asset-backed securities		26,154		—		(107	)		26,047
United States government agencies		15,946		—		(110	)		15,836
Total short-term investments		74,195		2		(512	)		73,685
Total cash and cash equivalents and short-term investments	$	152,052	$	22	$	(512	)	$	151,562

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Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2004:

			Gross		Gross
	Carrying		Unrealized		Unrealized			Estimated
	Value		Gain		Loss			Fair Value
Classified as current assets:
Cash	$	9,592	$	—	$	—		$	9,592
Cash equivalents:
Money market funds		6,201		—		—			6,201
Commercial paper		7,486		1		—			7,487
Total cash equivalents		13,687		1		—			13,688
Total cash and cash equivalents		23,279		1		—			23,280
Short-term investments:
Corporate notes and bonds		29,824		—		(106	)		29,718
Asset-backed securities		5,250		—		(11	)		5,239
United States government agencies		31,374		1		(79	)		31,296
Marketable equity securities*		—		3,987		—			3,987
Total short-term investments		66,448		3,988		(196	)		70,240
Total cash and cash equivalents and short-term investments	$	89,727	$	3,989	$	(196	)	$	93,520

* Unrealized gain on marketable equity security represents our investment in Leadis, Inc. as more fully described in Note 10. This unrealized gain includes approximately $926,000 that was recorded through the consolidated statement of operations as it relates to a derivative financial instrument, and the remainder in the amount of approximately $3.1 million is included in accumulated other comprehensive income as of December 31, 2004. See Note 10 regarding the sale of this investment.

Market values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. With respect to our marketable equity securities, our policy is to review our equity holdings on a regular basis to evaluate whether or not such securities has experienced an other than temporary decline in fair value. Our policy includes, but is not limited to, reviewing each company’s cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporary decline in value exists, it is our policy to write down these investments to the market value and record the related write-down in our consolidated statement of operations.

Concentration of credit risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and short-term investments and accounts receivable. A majority of our cash and investments are maintained with two major financial institutions headquartered in the United States. Cash balances held in foreign countries are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States. As of December 31, 2005, cash balances held in foreign countries were immaterial. As part of our cash and investment management processes, we perform periodic evaluations of the credit standing of the financial institutions and we have not sustained any credit losses from investments held at these financial institutions. The counterparties to the agreements relating to our investment securities consist of various major corporations and financial institutions of high credit standing. We do not believe there is significant risk related to non-performance

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by these counterparties because the amount of credit exposure to any one issuer (except US Government and agency securities) is limited to 5%.

We perform on-going credit evaluations of our customers’ financial condition and may require collateral, such as letters of credit, to secure accounts receivable if deemed necessary. We maintain an allowance for potentially uncollectible accounts receivable based on our assessment of collectibility.

Advertising and Research and Development

Advertising and research and development costs are expensed as incurred. Advertising expense was insignificant in 2005, 2004, and 2003. During the year ended December 31, 2005, the Company recorded a reduction to research and development expense totaling approximately $1.8 million related to funding received from outside parties for three engineering projects. Such funding was provided irrespective of the results of the projects.

Accumulated other comprehensive income (loss)

Accumulated other comprehensive loss of ($512,000) as of December 31, 2005, was comprised of net unrealized losses on available-for-sale securities of ($490,000) and foreign currency translation adjustments of ($22,000). Accumulated other comprehensive income of $2.9 million as of December 31, 2004 was comprised entirely of net unrealized gains on available-for-sale securities

Net income (loss) per share

Basic net income (loss) per share is based on weighted average common shares outstanding, excluding shares subject to repurchase, and diluted net income (loss) per share is based on weighted average common shares and dilutive equivalents outstanding, if any. The following tables set forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

	Year Ended December 31,
	2005			2004			2003
Numerator:
Net income (loss)	$	49,549		$	(324	)	$	(12,810	)
Denominator:
Weighted average shares of common stock outstanding		79,466			75,733			70,042
Less: unvested common shares subject to repurchase		(212	)		(652	)		(630	)
Weighted average shares — basic		79,254			75,081			69,412
Dilutive common stock options		4,491			—			—
Unvested common stock shares subject to repurchase		212			—			—
Weighted average shares — diluted		83,957			75,081			69,412
Net income (loss) per share — basic		0.63			(0.00	)		(0.18	)
Net income (loss) per share — diluted		0.59			(0.00	)		(0.18	)

The weighted average securities that were anti-dilutive and excluded from our net income per share calculation were approximately 6,488,000 for the year ended December 31, 2005. For the years ended December 31, 2004 and 2003, all common share equivalents would have been anti-dilutive and have therefore been excluded from the diluted net loss per share calculation. The weighted average securities that were anti-dilutive and excluded from our calculation of net loss per share were approximately 20,257,000 and 20,028,000, for the years ended December 31, 2004 and 2003, respectively.

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Recent accounting pronouncements

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, (SFAS No. 153) which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June  15, 2005. The adoption of SFAS No. 153 did not have a material impact on our financial position, results of operations, or cash flows.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS No. 123R eliminates the alternative of applying the intrinsic value measurement provisions of APB 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). SFAS No. 123R will be effective for our fiscal quarter beginning January 1, 2006, and requires the use of the Modified Prospective Application Method. Under this method, SFAS No. 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of the awards for which the requisite service has not been rendered (such as unvested options) that is outstanding as of the date of adoption shall be recognized as the remaining services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS No. 123. The actual effects of adopting SFAS No. 123R will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards and the assumed award forfeiture rates. We have not determined the full impact of SFAS No. 123R, however we do anticipate that its adoption could have a material impact on our results of operations in 2006.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154) which replaces APB Opinion No. 20 Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statement — An Amendment of APB Opinion No. 28. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principal unless it is not practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and we are required to adopt it starting with the quarter ending March 31, 2006. Although we continually evaluate accounting policies, we do not believe adoption of SFAS No. 154 will have a material impact on the our financial position, results of operations, or cash flows.

NOTE 2 —  GAIN ON ESCROW SETTLEMENT

On June 7, 2001, we issued approximately 6.4 million shares, including 1.4 million that were held in escrow, of our common stock in exchange for all outstanding shares of CMD, a provider of storage subsystems and semiconductors. The total purchase price for this acquisition was $45.1 million, consisting of common stock with a fair value of $30.6 million, 3.7 million stock options with a fair value of $13.6 million, and transaction costs, consisting of investment advisory, legal and other professional service fees, of $865,000.

A certain number of shares were being held in escrow as our security for indemnification obligations of CMD’s shareholders. On August 7, 2002, we filed a demand for arbitration with the American Arbitration Association against the principal shareholders of CMD relating to shares held in escrow in connection with our acquisition of CMD. Pursuant to agreements by which we acquired CMD, a portion of the Silicon Image common stock issued to the principal stockholders of CMD was held in two separate escrow pools as collateral for the indemnification obligations of these shareholders. We previously made indemnification claims against these escrow pools for the release of escrow shares with a value of approximately $5.4 million, which claims were contested by the principal shareholders of CMD. On February 28, 2003, we and the principal shareholders of CMD entered into a settlement agreement and mutual release, pursuant to which our indemnification claims were resolved.

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As a result of the settlement, we received 949,780 of the escrowed shares, valued at approximately $4.7 million, and recorded a net non-operating gain of $4.6 million for the year ended December 31, 2003.

NOTE 3 —  ASSET IMPAIRMENT AND RESTRUCTURING ACTIVITIES

In March 2003, we reorganized parts of the marketing and product engineering activities of the Company into lines of business for personal computer (PC), consumer electronics (CE) and storage products to enable us to better manage our long-term growth potential. In connection with this reorganization, we reduced our workforce by 27 people, or approximately 10%. These reductions were primarily in engineering and operations functions. Because of this workforce reduction, we recorded restructuring expense of $1.0 million in the first quarter of 2003, consisting of cash severance-related costs of $340,000 and non-cash severance-related costs of $646,000, representing the intrinsic value of modified stock options.

Severance related costs were determined based on the amount of pay people received that was not for services performed and by measuring the intrinsic value of stock options that were modified to the benefit of terminated employees. For those employees terminated in the three-month period ending March 31, 2003, the remaining service period from the communication date did not exceed 60 days.

Severance and benefits payments are substantially complete. The following table presents the changes to our restructuring reserves from 2003 through December 31, 2005 (in thousands):

	Severance			Leased
	and Benefits			Facilities			Total
Balance as of December 31, 2002	$	138		$	2,598		$	2,736
2003 provision		986			—			986
Cash payments		(441	)		(760	)		(1,201	)
Non-cash activity		(646	)		—			(646	)
Balance as of December 31, 2003		37			1,838			1,875
Cash payments		(5	)		(834	)		(839	)
Balance as of December 31, 2004		32			1,004			1,036
Cash payments		—			(759	)		(759	)
Adjustment related to lease modification		—			(220	)		(220	)
Non-cash activity		(32	)		—			(32	)
Balance as of December 31, 2005	$	—		$	25		$	25

Effective December 2005, we renegotiated a lease for our Irvine, California facility, which was identified in our restructuring activities in 2001, that provided for early termination. We recorded an expense recovery of $220,000 to the restructuring accrual with an offsetting reduction of our operating expenses for the year ended December 31, 2005, resulting from this lease modification.

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NOTE 4 —  CONSOLIDATED BALANCE SHEET COMPONENTS

	December 31,
	2005			2004
	(In thousands)
Inventories:
Raw materials	$	3,123		$	3,089
Work in process		4,511			2,372
Finished goods		9,438			8,465
	$	17,072		$	13,926
Property and equipment:
Computers and software	$	16,669		$	14,641
Equipment		16,601			12,820
Furniture and fixtures		2,259			2,178
		35,529			29,639
Less: accumulated depreciation		(25,916	)		(20,145	)
	$	9,613		$	9,494

Property and equipment as of December 31, 2005 and 2004, includes approximately $582,000 relating to leasehold improvements that were reimbursable by the landlord. This amount was recorded with an offsetting credit to other accrued liabilities, which is amortized as a reduction of rent expense over the term of the lease agreement. Property and equipment as of December 31, 2005 and 2004, also include equipment acquired under a capital lease arrangement. As of December 31, 2005 and 2004, the principal payments outstanding on this capital lease was approximately $230,000 and $441,000, respectively. Amortization relating to assets acquired under capital lease arrangements is included in depreciation expense.

	December 31,
	2005		2004
	(In thousands)
Accrued liabilities:
Accrued payroll and related expenses	$	4,738	$	6,473
Restructuring accrual (see Note 3)		25		1,036
Accrued legal fees		490		910
Warranty accrual (see Note 1)		382		351
Bonus accrual		2,615		3,122
Other accrued liabilities		5,702		1,526
	$	13,952	$	13,418

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NOTE 5 —  INCOME TAXES

We recorded a provision for income taxes amounting to $6.7 million and $1.0 million for the years ended December 31, 2005 and 2004, respectively. No provision for income taxes was recorded for the year ended December 31, 2003 since we generated both book and tax losses.

	Years Ended December 31,
	2005		2004		2003
Current:
Federal	$	701	$	636	$	—
State		13		—		—
Foreign		613		371		—
		1,327		1,007		—
Charge in lieu of taxes		5,403		—
Total provision for taxes	$	6,730	$	1,007	$	—

The charge in lieu of taxes represents the tax benefit from deductions for employee stock transactions, in excess of related amounts reported for financial reporting purposes, that is recorded as a direct increase to additional paid-in capital instead of a reduction to the income tax provision.

Our effective tax rate differs from the federal statutory rate due to the following:

	Years Ended December 31,
	2005			2004			2003
Tax provision (benefit) at federal statutory rate	$	19,751		$	239		$	(4,355	)
Nondeductible expenses		70			471			3,690
Tax losses not utilized (utilized)		(19,821	)		(710	)		665
Changes in valuation allowance related to employee stock transactions		5,403			—			—
Alternative minimum taxes		701			636			—
State taxes		13			—			—
Foreign taxes		613			371			—
Tax provision	$	6,730		$	1,007		$	—

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Deferred income tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of net deferred income tax assets were (in thousands):

	December 31,
	2005			2004
Net operating losses carryforward	$	23,666		$	35,099
Stock based compensation		4,888			13,386
Tax credits		16,898			11,482
Inventory valuation		1,285			2,833
Capitalized research and development		2,873			5,117
Other items not currently deductible		2,663			3,687
		52,273			71,604
Less: valuation allowance		(52,273	)		(71,604	)
	$	—		$	—

As of December 31, 2005, we had research credit carryforwards of approximately $7.3 million and $8.9 million for federal and state tax purposes, respectively. The federal credit carryforwards expire through 2024. The California credit carryforwards can be carried forward indefinitely.

At December 31, 2005, we had a net operating loss carryforward for federal income tax purposes of approximately $67.6 million that expires through 2025. Of such amount, approximately $43.1 million relates to excess deductions for tax purposes associated with stock option transactions and approximately $24.5 million is due to losses from operations. In the event of a cumulative change in ownership of greater than 50%, as defined, over a three year period, the availability of net operating losses to offset future taxable income may be limited.

Management believes that available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets, and therefore a full valuation allowance has been recorded to reduce the carrying value of such assets to zero. Objective evidence includes our history of losses, the highly-competitive industry in which we operate and the uncertainty regarding continued market acceptance of our products. We will continue to assess the realizability of deferred tax assets based on actual and forecasted operating results. If we subsequently conclude that it is more likely than not that the deferred tax assets will be recovered and, accordingly, reverse the valuation allowance, the portion of the reversal associated with the excess deductions for tax reporting purposes resulting from stock option transactions will be recorded as a credit to additional paid-in capital. As of December 31, 2005, the deferred tax assets of $52.3 million included $18.4 million of such excess deductions for tax reporting purposes.

NOTE 6 —  DEBT, LEASE AND OTHER OBLIGATIONS

In October 2002, we entered into a $3.6 million term loan to refinance $3.1 million of debt acquired in connection with our acquisition of CMD and $500,000 of other bank debt. This loan bore interest at prime plus 0.25% and required monthly payments through its maturity of October 1, 2004. This loan was repaid in full during fiscal 2004. During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment during fiscal 2004. This term loan bears interest at 5% and requires monthly payments through its maturity in February 2004. As of December 31, 2004, $48,000 was outstanding under these term loans. There were no amounts due under the these loans at December 31, 2005.

In November 2004, we leased certain capital equipment under a lease arrangement accounted for as a capital lease. The principal balance outstanding under this lease arrangement as of December 31, 2005 and 2004 were approximately $230,000 and $441,000, respectively.

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In December 2002, we entered into a non-cancelable operating lease renewal for our principal operating facility, including an additional 30,000 square feet of space in an adjacent building, that commenced in August 2003 and expires in July 2010. In June 2004, the lease terms were amended and we leased approximately 28,000 square feet of additional space (for a total leased area of approximately 109,803 square feet). The revised agreement provides for a rent free period for the additional space and thereafter initial base monthly rental payments of $107,607 and provides for annual increases of 3% thereafter. As a result of the lease modification, we recorded an adjustment of $220,000 to the restructuring accrual with an offsetting reduction to operating expenses for the year ended December 31, 2005.

In June 2001, in connection with our acquisition of CMD, we acquired the lease of an operating facility in Irvine, California with average monthly rental payments of approximately $100,000 through November 2005. We subleased parts of this facility to three separate third parties. These sublease agreements were co-terminous leases and expired in November 2005. These subleases collectively generated monthly sublease income of approximately $40,000 to offset our payments. Effective December 2005, the original lease was terminated and we entered into a new non-cancelable operating lease agreement. Under the terms of the new agreement, base monthly rental lease payments of $42,000 are required and increases annually 3% thereafter.

Additionally, in connection with our acquisition of SCL in July 2001, we acquired the lease of a facility in Milpitas, California with average monthly rental payments of approximately $18,000 per month which expires in January 2006. We do not occupy the Milpitas facility and therefore are accounting for the remaining monthly rental payments in our restructuring reserve.

We also lease office space in China, Taiwan, Korea, United Kingdom and Japan.

Rent expense totaled $1.7 million, $1.8 million, and $1.9 million in 2005, 2004 and 2003, respectively. Future minimum lease payments under operating leases have not been reduced by expected sublease rental income or by the amount of our restructuring accrual that relates to leased facilities.

Future minimum payments for our operating leases, and capital lease obligations and minimum royalty obligations to a related party (Note 11) at December 31, 2005 are as follows (in thousands):

	Payments Due in
			Less Than						More Than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Contractual Obligations:
Capital lease obligations	$	260	$	260	$	—	$	—	$	—
Operating lease obligations		11,325		3,494		5,486		2,345		—
Minimum royalty obligations due to a related party		200		100		100		—		—
Total	$	11,785	$	3,854	$	5,586	$	2,345	$	—

As of December 31, 2005, the future minimum rental payments on our capital leases was $260,000 which includes approximately $30,000 of interest and sales tax. The entire amount of capital lease obligations have been presented as current liabilities on the face of the consolidated balance sheet.

NOTE 7 —  STOCKHOLDERS’ EQUITY

1999 Equity Incentive Plan (the “1999 Plan”)

In September 1995, the Board of Directors adopted the 1995 Equity Incentive Plan (the “1995 Plan”), which provides for the granting of incentive stock options (ISOs) and non-qualified stock options (NSOs) to employees, directors and consultants. In accordance with the 1995 Plan, the stated exercise price shall not be less than 100% and 85% of the fair market value of our common stock on the date of grant for ISOs and NSOs, respectively. In

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September 1998, the 1995 Plan was amended to allow ISOs to be exercised prior to vesting. We have the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such right expires as the options vest.

In October 1999, the 1999 Plan became the successor to the 1995 Plan and was changed to prohibit early exercise of stock options. The number of shares reserved for issuance under the 1999 Plan will be increased automatically on January 1 of each year by an amount equal to 5% of our total outstanding common shares as of the immediately preceding December 31.

In June and July 2001, in connection with the CMD and SCL acquisitions, we assumed all outstanding options and options available for issuance under the CMD 1999 Stock Incentive Plan and SCL 1999 Stock Option Plan. In April 2004, in connection with the TransWarp acquisition, we assumed all outstanding options and options available for issuance under the TransWarp Stock Option Plan. The terms of these Plans are very similar to those of the 1999 Plan. Our assumption of the CMD, SCL and TransWarp Plans and the outstanding options did not require the approval of, and was not approved by, our stockholders.

Options granted under all Plans are exercisable over periods not to exceed ten years and vest over periods ranging from one to five years. Some options provide for accelerated vesting if certain identified milestones are achieved.

Non-plan options

In 2004 and 2003, our Board of Directors granted non-plan options to purchase 1.7 million and 625,000 shares, respectively, of our common stock to three executives and an employee. There were no non-plan option grants in 2005. All non-plan options were granted with exercise prices equal to the fair market value on the date of grant and with vesting periods ranging from four to five years, and expire in ten years, except that the repriced options (discussed in detail under “Stock Option Exchange (Repricing)”) were priced above our stock’s fair market value on the date of the repricing and expire in six years. Our non-plan option grants did not require the approval of, and were not approved by, our stockholders.

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Option Data

The following table summarizes information with respect to our stock option Plans, including options granted outside of the Plans (in thousands except per share data):

																Number of Option Shares Outstanding
																												Weighted
	Options Available for Future Issuance																		Non-Stockholder									Average
	1995 and			Non-Stockholder Approved Plans from Acquisitions												Stockholder			Approved									Exercise
	1999			CMD			SCL			TWN						Approved			Plans from			Non-						Price per
	Plans			Plan			Plan			Plan			Total			Plan			Acquisitions			Plan*			Total			Share
At December 31, 2002		1,186			268			77			—			1,531			12,084			5,913			1,904			19,901		$	3.96
Authorized		3,332			—			—			—			3,332			—			—			—			—			—
Assumed		—			—			—			162			162			—			632			—			632			1.27
Granted		(3,596	)		(787	)		(167	)		(64	)		(4,614	)		3,596			1,147			625			5,368			5.86
Canceled		1,058			670			239			—			1,967			(1,058	)		(957	)		(234	)		(2,249	)		3.73
Exercised		—			—			—			—			—			(1,399	)		(1,752	)		(340	)		(3,491	)		2.64
At December 31, 2003		1,980			151			149			98			2,378			13,223			4,983			1,955			20,161			4.63
Authorized		3,618			—			—			—			3,618			—			—			—			—			—
Granted		(5,264	)		(189	)		(264	)		(43	)		(5,760	)		5,264			496			1,700			7,460			12.85
Canceled		1,145			124			169			—			1,438			(1,145	)		(293	)		—			(1,438	)		5.67
Exercised		—						—			—			—			(3,255	)		(1,162	)		(719	)		(5,136	)		4.09
At December 31, 2004		1,479			86			54			55			1,674			14,087			4,024			2,936			21,047			7.61
Authorized		3,907			—			—			—			3,907			—			—			—			—			—
Granted		(4,587	)		(152	)		(68	)		(36	)		(4,843	)		4,587			256			—			4,843			11.31
Canceled		1,576			93			30			18			1,717			(1,576	)		(141	)		(1,702	)		(3,419	)		12.40
Exercised		—			—			—			—			—			(962	)		(501	)		(324	)		(1,787	)		4.24
At December 31, 2005		2,375			27			16			37			2,455			16,136			3,638			910			20,684		$	7.98

* primarily used as inducements for new officers

At December 31, 2005, 10,839,000 options were vested and 12,000 unvested shares had been exercised and remain subject to our repurchase rights. Of the options outstanding at December 31, 2005, and in the absence of acceleration of vesting or cancellations, approximately 4,054,000 shares will vest in 2006, 3,052,000 in 2007, 2,013,000 in 2008, 660,000 in 2009, and 66,000 in 2010 and thereafter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information with respect to options outstanding at December 31, 2005 is as follows:

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
	Number of		Exercise		Remaining		Number of		Exercise
Ranges of Exercise Prices	Shares		Price		Contractual Life		Shares		Price
	(In thousands)				(In years)		(In thousands)
$ 0.06 - $ 1.80		2,239	$	1.12		5.54		2,020	$	1.12
$ 1.90 - $ 4.42		2,361		3.44		5.46		2,096		3.37
$ 4.44 - $ 5.63		3,218		5.21		3.90		2,363		5.42
$ 5.77 - $ 6.23		2,584		6.16		7.06		1,315		6.15
$ 6.26 - $ 9.15		2,479		7.96		8.82		818		7.84
$ 9.16 - $10.81		2,074		9.95		8.71		446		9.97
$10.85 - $12.86		2,268		12.11		8.65		681		12.19
$12.90 - $16.75		2,545		15.00		7.82		1,034		15.69
$16.79 - $17.86		916		17.02		8.90		258		17.01
		20,684	$	7.98		6.94		11,031	$	6.34

The weighted average grant-date fair value of options granted was $8.14, $9.29, and $4.23 per option during 2005, 2004, and 2003, respectively. The grant-date fair value was estimated using the Black-Scholes pricing model with the following assumptions:

	Year Ended
	December 31,
	2005			2004			2003
Expected life (years)		5.00			5.00			5.00
Risk-free interest rate		4.23	%		3.40	%		3.30	%
Dividend yield		—			—			—
Expected volatility		90	%		90	%		90	%

Stock Option Exchange (Repricing)

On December 22, 2000, we implemented an option exchange program to allow employees and certain consultants to exchange approximately 3,000,000 stock options with a weighted average exercise price of $25.39 per share for new options with an exercise price of $5.63 per share (the fair market value on that date). On April 4, 2001, this program was extended to executives at the December 22, 2000 price (which was greater than the fair market value of our stock on April 4, 2001). Under this program, new options vest over a four-year period and expire in six years. Compensation expense associated with the option exchange program will be recorded until the options are exercised or expire and the expense or benefit for the increase or decrease, respectively, in the fair market value of our common stock in excess of the option’s exercise price is recognized immediately for vested options and is recognized over the vesting period using an accelerated method for unvested employee options. At December 31, 2005, there were 1.6 million repriced options outstanding of which all were fully vested. Management anticipates that the variable accounting associated with the repriced options will cease upon the adoption of SFAS No. 123R, effective January 1, 2006.

Employee Stock Purchase Plan

In October 1999, we adopted the 1999 Employee Stock Purchase Plan (the “Purchase Plan”) and reserved 500,000 shares of common stock for issuance under the Purchase Plan. The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during two-year offering periods with exercise dates every six months.

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Shares are purchased using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of our common stock at either the first day of each offering period or the date of purchase. In 2005, 2004, and 2003, 716,000, 616,000, and 613,000 shares of common stock, respectively, were sold under the Purchase Plan at average prices of $5.36, $4.43, and $3.69 per share, respectively. A total of 925,000 shares were reserved for future issuance at December 31, 2005. The number of shares reserved for issuance under the Purchase Plan is increased automatically on January 1 of each year by an amount equal to 1% of our total outstanding common shares as of the immediately preceding December 31.

The weighted average, grant-date fair value of stock purchase rights granted in 2005, 2004 and 2003 was $4.73, $2.69 and $2.60, respectively, per share. The grant date fair value was estimated using the Black-Scholes pricing model with the following assumptions:

	Year Ended
	December 31,
	2005			2004			2003
Expected life (years)		1.22			1.32			1.42
Risk-free interest rate		3.7	%		1.2	%		1.5	%
Dividend yield		—			—			—
Expected volatility		59	%		85	%		90	%

Option Grants to Non-employees

During 2005, 2004, and 2003, we granted non-employees options to purchase 121,000, 362,000, and 454,000 shares of our stock at weighted average exercise prices of $11.25, $10.09, and $5.28 per share, respectively, in return for engineering, administration and consultancy services. Total compensation expense recognized in 2005 for option grants to non-employees was $2.6 million.

The non-employee options are recorded at fair value and adjusted to market over the performance period. The fair value during 2005 was estimated using the Black-Scholes pricing model based on an expected life of five years for the expected life, a risk-free interest rate of 4.0%, expected volatility of 90%, and dividend yield of zero.

NOTE 8 —  SEGMENT AND GEOGRAPHIC INFORMATION

We operate in a single industry segment (as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information) encompassing the design, development and sale of solutions for applications that require high-bandwidth cost-effective solutions for high-speed data communications. Our chief operating decision maker is our Chief Executive Officer.

Revenue by geographic area was as follows (in thousands):

	Year Ended December 31,
	2005		2004		2003
Taiwan	$	53,579	$	42,715	$	35,534
Japan		46,170		34,620		15,980
United States		54,593		48,391		27,259
Hong Kong		6,819		5,243		6,025
Korea		20,663		8,015		4,871
Other		30,575		34,175		13,856
	$	212,399	$	173,159	$	103,525

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue by product line was as follows (in thousands):

	Year Ended December 31,
	2005		2004		2003
Consumer Electronics	$	108,712	$	71,377	$	25,762
Personal Computers		49,212		41,223		33,163
Storage products		35,999		39,750		30,410
Development, licensing and royalties		18,476		20,809		14,190
	$	212,399	$	173,159	$	103,525

Revenue by product line, including development, licensing and royalties, was as follows (in thousands):

	Year Ended December 31,
	2005		2004		2003
Consumer Electronics	$	118,578	$	84,604	$	33,326
Personal Computers		50,484		41,585		36,108
Storage products		43,337		46,970		34,091
	$	212,399	$	173,159	$	103,525

For all periods presented, substantially all of our long-lived assets were located within the United States.

In 2005, two customers generated 17% and 11% of our total revenue and at December 31, 2005, one customer represented 13% of gross accounts receivable. In 2004, two customers generated 15% and 12% of our total revenue and at December 31, 2004 one customer represented 10% of gross accounts receivable. In 2003, one customer generated 15% of our total revenue and at December 31, 2003 three customers represented 17%, 12%, and 10% of gross accounts receivable. Our top five customers, including distributors, generated 54%, 47%, and 41% of our revenue in 2005, 2004 and 2003, respectively.

Cost of sales information by product line is not available. Accordingly, only revenue by product line is presented.

NOTE 9 —  LEGAL PROCEEDINGS

In 2001, we filed a suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis Microchip, Inc. (collectively, “Genesis”) for infringement of our U.S. patent number 5,905,769 (Case No.: CA-01-266-R). In 2002, we added a claim for infringement of our U.S. patent number 5,974,464. In December 2002, the parties entered into an agreement that apparently settled the case. The agreement was reflected in a Memorandum of Understanding (MOU), which contemplated, among other things, the execution of a more detailed “definitive agreement” by December 31, 2002. Disputes arose, however, regarding the interpretation of certain terms of the MOU, and the parties were unable to conclude a definitive agreement. The parties’ disputes were brought before the court, and on July 15, 2003, the court held that the MOU constituted a binding settlement agreement, and that our interpretation of the MOU was correct. Thereafter, the court ordered Genesis to make certain payments described in the MOU to the Court’s escrow account, and on December 19, 2003, the court entered judgment based on its July 15, 2003 ruling.

Genesis appealed the judgment to the U.S. Court of Appeals for the Federal Circuit on January 16, 2004. On January 28, 2005, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction, holding that the judgment below was not final and appealable. Specifically, the Court of Appeals found that the parties’ agreement to settle the case, as embodied in the MOU, required that Genesis pay us, rather than the district court’s escrow account, certain of the payments described in the MOU.

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The case was remanded to the district court, where the parties subsequently agreed to a stipulated order whereby the funds held by the district court were transferred to Silicon Image, under restrictions, until appeals are exhausted. On July 19, 2005 the court sent $6.8 million to Silicon Image, which we have deposited in a segregated account, as required by court order, and will not use the funds until Genesis has exhausted all of its appeals. These restricted funds are included with other assets with a corresponding long-term liability, included in other long-term liabilities in the accompanying consolidated balance sheets as of December 31, 2005. These funds and the related interest earned of $0.1 million are restricted as of December 31, 2005, and will be recognized as other income once Genesis has exhausted their appeals and the litigation is deemed final. On July 22, 2005, based on the stipulated order, the court dismissed the case with prejudice. Genesis filed a renewed appeal to the Federal Circuit, asserting among other things that the district court erred in its interpretation of the MOU, that the MOU (as interpreted by the court) constitutes patent misuse, and that the district court erred in construing certain claim terms in the asserted patents. A hearing on that appeal is scheduled for April 5, 2006, and a ruling is expected within two to three months thereafter.

We and certain of our officers and directors, together with certain investment banks, have been named as defendants in a securities class action suit filed against us on behalf of purchasers of our securities between October 5, 1999 and December 6, 2000. It is alleged that the prospectus related to our initial public offering was misleading because it failed to disclose that the underwriters of our initial public offering had solicited and received excessive commissions from certain investors in exchange for agreements by investors to buy our shares in the aftermarket for predetermined prices. Due to inherent uncertainties in litigation, we cannot accurately predict the outcome of this litigation; however, a proposed settlement has been negotiated and has received preliminary approval by the Court. This settlement will not require Silicon Image to pay any settlement amounts nor issue any securities. In the event that the settlement is not granted final approval, we believe that these claims are without merit and we intend to defend vigorously against them.

We and certain of our officers were named as defendants in a securities class action captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus,” commenced on January 31, 2005. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleged that Silicon Image and certain of our officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiff and approving the selection of lead counsel. On July 27, 2005 plaintiffs filed a consolidated amended complaint (“CAC”). The CAC no longer named Mr. Gargus as an individual defendant, but added Dr. David Lee as an individual defendant. The CAC also expanded the class period from June 25, 2004 to April 22, 2005. Defendants filed a motion to dismiss the CAC on September 26, 2005. Plaintiffs subsequently received leave to file, and did file, a second consolidated amended complaint (“Second CAC”) on December 8, 2005. The Second CAC extends the end of the class period from April 22, 2005 to October 13, 2005 and adds additional factual allegations under the same causes of action against Silicon Image, Mr. Tirado and Dr. Lee. The complaint also adds a new plaintiff, James D. Smallwood. Defendants filed a motion to dismiss the Second CAC on February 9, 2006 and that motion is currently scheduled to be heard on June 9, 2006.

On January 14, 2005, we received a preliminary notification that the Securities and Exchange Commission had commenced a formal investigation involving trading in our securities. On February 14, 2005, through our legal counsel, we received a formal notification of that investigation and associated subpoenas. We are fully cooperating with the SEC in this matter.

In addition, we have been named as defendants in a number of judicial and administrative proceedings incidental to our business and may be named again from time to time.

We intend to defend such matters vigorously, and although adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on our results of operations, financial position or cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 —  GAIN ON EQUITY INVESTMENT

In October 2000, as consideration for the transfer of certain technology, we received from Leadis Technology Inc. (Leadis), a development stage privately controlled enterprise, 300,000 shares of preferred stock and a derivative warrant to purchase 75,000 shares of our common stock. Initially these shares were valued at zero due to the early stage of Leadis’ development and other uncertainties as to the realization of this investment. During the quarter ended June 30, 2004, Leadis completed an initial public offering of its stock. In connection with the initial public offering the preferred stock was converted into common stock on a 1:1 basis. In connection with the initial public offering, we were subject to a lock-up agreement whereby we were restricted from selling the stock and the common stock underlying the warrant for a period of six months ending December 2004, (for the duration of the lock-up period we were also restricted from engaging in hedging or other transactions which would result in or lead to the sale or disposition of the shares underlying the derivative warrant). For the three and six month periods ended June 30, 2004, we valued the warrant using the Black-Scholes model and recorded a gain of approximately $990,000. In September 2004, we net exercised the derivative warrant for equivalent shares of common stock (74,397 shares), and based on the price of the stock at that date, recorded a loss of $64,000 on these shares.

Our 374,397 Leadis common shares were marked to market (as an available for sale security), with any resulting gain/loss recorded as other comprehensive income (loss) until sold or considered impaired on other than a temporary basis. Our typical practice has been not to hold shares for investment purposes. The value of our common stock holding in Leadis was determined to be approximately $4.0 million as of December 31, 2004, based on Leadis’ closing market price ($10.65) at that date. This amount was classified as a short-term investment. In February 2005, we sold approximately 23,600 shares at a price range from $7.40 to $7.50. These shares related to the warrant shares and consequently in connection with this sale, we recorded a loss of approximately $120,000 for the three-month period ended March 31, 2005. During the three month period ended June 30, 2005, we sold the remainder of our holdings in Leadis at prices ranging from $5.38 to $6.06 per share, and recorded a net realized gain of approximately $1.4 million.

NOTE 11 —  RELATED PARTY TRANSACTIONS

On November 8, 2005, the Board of Directors of Silicon Image approved Dr. David Lee, Chairman of the Board of Directors of Simplay Labs, LLC, a wholly-owned subsidiary of Silicon Image, Inc., making an investment in and joining the Board of Directors of Synerchip Co., Ltd. a Mauritius company (“Synerchip”). On November 21, 2005, Dr. Lee was appointed to the Board of Directors of Synerchip, Dr. Lee made a personal investment in the amount of $10,000 directly in Synerchip, and a limited partnership he controls made an investment in the amount of $500,000 in Synerchip. Sunplus Technology Co., Ltd. (“Sunplus”), a long time customer and vendor of Silicon Image, also has Board representation and an investment in Synerchip. Because of Sunplus’ representation on the Board of Directors of Synerchip and investment in Synerchip, Synerchip may be deemed an affiliate of Sunplus.

In addition, there are other related party transactions with Sunplus and its related subsidiaries and affiliates as described below:

In 2005, we entered a three-year joint development, marketing and manufacturing agreement with Sunplus pursuant to which Sunplus licensed certain digital video processor technology to Silicon Image. In connection with this agreement, Silicon Image paid $350,000 to Sunplus in related license and prepaid royalty fees in 2005, of which $300,000 was included in other assets and $50,000 was included in prepaid expenses at December 31, 2005. In addition, Silicon Image is required to pay Sunplus minimum annual royalties of $100,000 for 2006 and 2007.

In 2005, Silicon Image paid $2,078,000 to Sunplus for purchases of integrated semiconductors which was included in inventory or, to the extent sold to customers, in cost of sales.

In 2005, Silicon Image paid $74,000 to Synerchip Technology, a Taiwanese Company (“Synerchip Technology”) for purchases of integrated semiconductors which was included in inventory or, to the extent sold to customers, in cost of sales.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In August 2005, Silicon Image entered into a cost-reimbursement arrangement with Synerchip Technology for a joint development in certain transmitter technology and paid $150,000 for related research and development expenses. In connection with this arrangement, Silicon Image and Synerchip Technology entered into two Technology License Agreements for software and firmware licenses so that Synerchip may use our intellectual property for such development.

In September 2005, Silicon Image entered into a three-year Authorized Testing Center Operations Agreement with Worldplus Technology Co., Ltd., a wholly-owned subsidiary of Sunplus, to test products in accordance with compliance testing specifications. In 2005, no testing activities were performed.

In June 2003, Silicon Image and Sunplus entered into a three year Strategic Relationship Agreement for joint manufacturing, marketing, selling and distribution of certain integrated semiconductors. In connection with this agreement, Sunplus paid annual subscription fees to Silicon Image in the amount of $200,000 in 2005, which was recorded in development, licensing and royalty revenue.

In March 2002, Silicon Image and Sunplus entered into a five-year Technology License Agreement pursuant to which Sunplus licensed certain LVDS receiver technology from Silicon Image. In connection with this agreement, Sunplus has paid $291,000 to Silicon Image in related royalties fees in 2005, which was included in development, licensing, and royalty revenue.

NOTE 12 – SUBSEQUENT EVENT

On March 15, 2006, we entered into a consulting agreement with Dr. Lee. Under this agreement, on March 24, 2006 (the effective date of the agreement), Dr. Lee will resign as an employee of Silicon Image and its related subsidiary Simplay Labs and his existing severance agreement will be terminated. The agreement then provides for Dr. Lee to serve as a consultant for Silicon Image, for a term of one year. The agreement contemplates that Dr. Lee will spend at least 80% of his work time performing consulting services for Silicon Image, and provides for payment of fees to Dr. Lee of $40,000 per month, as well as an aggregate of $500,000 that is payable upon achievement of specified milestones. Finally, the agreement provides that options to purchase Silicon Image common stock that are held by Dr. Lee will continue to vest during the consulting period, and will be exercisable for a period of nine months after termination of services under the agreement (three months in the case of termination for violation of certain non-competition obligations under the agreement). We have also agreed to reimburse Dr. Lee for health insurance premiums paid by him for a period of 18 months following the effective date of the agreement.

87

UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

The following table sets forth the Company’s consolidated statements of operations data for the eight quarters ended December 31, 2005. This unaudited quarterly information has been prepared on the same basis as the Company’s audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of this data.

	Three Months Ended
	Mar 31			Jun 30			Sep 30		Dec 31
	(In thousands, except per share amounts)
2005
Total revenue	$	44,320		$	50,721		$	56,002	$	61,356
Gross margin(1)		28,815			29,734			35,134		35,611
Income from operations(2)		16,466			8,684			14,797		11,625
Net income		16,633			10,460			9,903		12,553
Net income per share — basic	$	0.21		$	0.13		$	0.12	$	0.16
Net income per share — diluted	$	0.19		$	0.12		$	0.11	$	0.15
Weighted average shares — basic		78,307			78,981			79,736		80,315
Weighted average shares — diluted		83,963			83,928			84,051		84,042
2004
Total revenue	$	35,858		$	43,361		$	47,868	$	46,072
Gross margin(3)		21,343			25,666			29,664		27,872
Income (loss) from operations(4)		(7,627	)		(1,101	)		8,099		(332	)
Net income (loss)		(7,860	)		(262	)		7,877		(79	)
Net income (loss) per share — basic	$	(0.11	)	$	—		$	0.11	$	—
Net income (loss) per share — diluted	$	(0.11	)	$	—		$	0.09	$	—
Weighted average shares — basic		72,328			73,352			74,976		76,774
Weighted average shares — diluted		72,328			73,352			85,890		76,774

(1) Includes stock compensation expense (benefit)	$	(1,196	)	$	41	$	(252	)	$	24
(2) Includes stock compensation expense (benefit)	$	(9,327	)	$	1,302	$	(1,447	)	$	941
(3) Includes stock compensation expense (benefit)	$	1,152		$	849	$	(110	)	$	886
(4) Includes stock compensation expense	$	12,068		$	9,132	$	1,527		$	10,056

88

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Silicon Image, Inc.

We have audited the accompanying consolidated balance sheet of Silicon Image, Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such 2005 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/  DELOITTE & TOUCHE LLP

San Jose, California

March 15, 2006

89

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Silicon Image, Inc.:

In our opinion, the accompanying consolidated balance sheet as of December 31, 2004 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004 present fairly, in all material respects, the financial position of Silicon Image, Inc and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
San Jose, California
March 14, 2005

90

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SILICON IMAGE, INC.

By:  /s/  STEVE TIRADO

Steve Tirado

Chief Executive Officer
(Principal Executive Officer)

Dated: March 16, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/s/  Steve Tirado Steve Tirado	Director, President and Chief Executive Officer (Principal Executive Officer)	March 16, 2006
/s/  Robert R. Freeman Robert R. Freeman	Chief Financial Officer (Principal Financial Officer)	March 16, 2006
/s/  William George William George	Director	March 16, 2006
/s/  Peter Hanelt Peter Hanelt	Director	March 16, 2006
/s/  John Hodge John Hodge	Director	March 16, 2006
/s/  David A. Hodges David A. Hodges	Director	March 16, 2006
/s/  Masood Jabbar Masood Jabbar	Director	March 16, 2006
/s/  William Raduchel William Raduchel	Director	March 16, 2006

91

INDEX TO EXHIBITS

Number			Title
	3	.01	Second Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference from Exhibit 3.03 of the Registrant’s Registration Statement on Form S-1 (File No. 333-83665), as amended, declared effective by the Securities and Exchange Commission on October 5, 1999 (the “Form S-1”)).
	3	.02	Restated Bylaws of the Registrant (Incorporated by reference from Exhibit 3.01 of the Form 8-K filed by the Registrant on February 4, 2005).
	3	.03	Certificate of Amendment of Second Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference from Exhibit 3.04 of the Form 10-Q filed by Registrant on August 14, 2001).
	4	.01	Form of Specimen Certificate for Registrant’s common stock (Incorporated by reference from Exhibit 4.01 of the Form S-1).
	4	.02	Third Amended and Restated Investors Rights Agreement dated July 29, 1998, as amended October 15, 1999 (Incorporated by reference from Exhibit 4.04 of the Form S-1).
	10	.01**	Form of Indemnity Agreement entered into between the Registrant and certain of its directors and officers. (Incorporated by reference from Exhibit 10.01 of the Form 10-K filed by the Registrant on March 15, 2004).
	10	.02**	1995 Equity Incentive Plan, as amended through July 20, 1999, and related forms of stock option agreements and stock option exercise agreements (Incorporated by reference from Exhibit 10.02 of the Form S-1).
	10	.03**	1999 Equity Incentive Plan, as amended (including Sub-Plan for UK employees), and related forms of notice of grant of stock options, stock option agreement, stock option exercise notice and joint election (for UK employees).
	10	.04**	1999 Employee Stock Purchase Plan (including Sub-Plan for UK employees) and related enrollment forms, subscription agreements, notice of suspension, notice of withdrawal and joint election (for UK employees).
	10	.05**	Amended and Restated Severance Agreement with David Lee dated August 15, 1997 (Incorporated by reference from Exhibit 10.07 of the Form S-1).
	10	.06*	Business Cooperation Agreement dated September 16, 1998 between Intel Corporation and the Registrant, as amended October 30, 1998 (Incorporated by reference from Exhibit 10.12 of the Form S-1).
	10	.07*	Patent License Agreement dated September 16, 1998 between Intel Corporation and the Registrant (Incorporated by reference from Exhibit 10.13 of the Form S-1).
	10	.08	Digital Visual Interface Specification Revision 1.0 Promoter’s Agreement dated January 8, 1999 (Incorporated by reference from Exhibit 10.14 of the Form S-1).
	10	.09**	Form of Nonqualified Stock Option Agreement entered into between Registrant and its officers (Incorporated by reference from Exhibit 10.21 of the Form S-1).
	10	.10**	Amendment No. 1 to Amended and Restated Severance Agreement with David Lee dated January 23, 2000 (Incorporated by reference from Exhibit 10.26 of the Form 10-K filed by the Registrant on March 30, 2000).
	10	.11**	Amendment No. 2 to Amended and Restated Severance Agreement with David Lee dated March 29, 2001 (Incorporated by reference from Exhibit 10.31 of the Form 10-Q filed by the Registrant on May 15, 2001).
	10	.12**	Non-Plan Stock Option Agreement between Jaime Garcia-Meza and the Registrant dated April 5, 2001 (Incorporated by reference from Exhibit 10.34 of the Form 10-Q filed by the Registrant on May 15, 2001).
	10	.13**	CMD Technology Inc. 1991 Stock Option Plan and related form of Incentive Stock Option Agreement (Incorporated by reference from Exhibit 4.05 of the Form S-8 filed by the Registrant on June 26, 2001).

92

Number			Title
	10	.14**	CMD Technology Inc. 1999 Stock Incentive Plan, as amended, and related form of Stock Option Agreement (Incorporated by reference from Exhibit 10.35 of the Form 10-Q filed by the Registrant on November 14, 2001).
	10	.15**	Silicon Communication Lab, Inc. 1999 Stock Option Plan, as amended, and related form of Stock Option Agreement (Incorporated by reference from Exhibit 10.35 of the Form 10-Q filed by the Registrant on November  14, 2001).
	10	.16**	Non-Plan Stock Option Agreement between Hyun Jong Shin and the Registrant dated November 6, 2001. (Incorporated by reference from Exhibit 10.42 of the Form 10-K filed by the Registrant on March 29, 2002).
	10	.17	Lease Agreement dated April 20, 2000 between LBA-VF III, LLC and CMD Technology (Incorporated by reference from Exhibit 10.43 of the Form 10-Q filed by the Registrant on May 15, 2002).
	10	.18	Lease Agreement dated December 12, 2002 between iSTAR Sunnyvale Partners, L.P. and the Registrant. (Incorporated by reference from Exhibit 10.44 of the Form 10-K filed by the Registrant on March 27, 2003)
	10	.19**	TransWarp Networks, Inc. 2002 Stock Option/Stock Issuance Plan (Incorporated by reference from Exhibit 4.06 of the Form S-8 filed by the Registrant on May 23, 2003).
	10	.20**	Employment Offer Letter between J. Duane Northcutt and the Registrant dated February 19, 2002. (Incorporated by reference from Exhibit 10.27 of the Form 10-K filed by the Registrant on March 15, 2005).
	10	.21**	Employment Offer Letter between Robert Valiton and the Registrant dated April 17, 2004 (Incorporated by reference from Exhibit 10.01 of the Form 10-Q filed by the Registrant on August 9, 2004).
	10	.22**	Employment Offer Letter between Patrick Reutens and the Registrant dated September 20, 2004 (Incorporated by reference from Exhibit 10.2 of the Form 10-Q filed by the Registrant on November 8, 2004).
	10	.23**	Employment Offer Letter between Steve Tirado and the Registrant dated January 24, 2005 (Incorporated by reference from Exhibit 10.36 of the Form 10-K filed by the Registrant on March 15, 2005).
	10	.24**	Employment Offer Letter between Darrel Slack and the Registrant dated April 19, 2005 (Incorporated by reference from Exhibit 10.01 of the Form 8-K filed by the Registrant on April 25, 2005).
	10	.25**	Employment Offer Letter between Jaime Garcia-Meza and the Registrant dated February 8, 2005 (Incorporated by reference from Exhibit 10.37 of the Form 10-K filed by the Registrant on March 15, 2005).
	10	.26**	Director Compensation Plan (Incorporated by reference from Exhibit 10.01 of the Form 10-Q filed by the Registrant on May 10, 2005).
	10	.27**	Letter Agreement between Dale Brown and the Registrant dated April 22, 2005 (Incorporated by reference from Exhibit 10.02 of the Form 10-Q filed by the Registrant on May 10, 2005).
	10	.28*	Business Cooperation Agreement dated April 26, 2005 between Intel Corporation and the Registrant (Incorporated by reference from Exhibit 10.01 of the Form 10-Q filed by the Registrant on August 9, 2005).
	10	.29*	Unified Display Interface Specification Promoters Agreement dated April 26, 2005 among Intel Corporation, National Semiconductor Company and the Registrant (Incorporated by reference from Exhibit 10.02 of the Form 10-Q filed by the Registrant on August 9, 2005).
	10	.30**	Silicon Image, Inc. Bonus Plan for Fiscal Year 2005, as amended (Incorporated by reference from Exhibit 10.01 of the Form 8-K filed by the Registrant on July 25, 2005).
	10	.31**	Silicon Image, Inc. Sales Incentive Plan for Vice President of Worldwide Sales for Fiscal Year 2005 (Incorporated by reference from Exhibit 10.02 of the Form 8-K filed by the Registrant on May 4, 2005).
	10	.32**	Employment Offer Letter between Robert Freeman and the Registrant dated November 8, 2005 (Incorporated by reference from Exhibit 10.01 of the Form 8-K filed by the Registrant on November 14, 2005).

93

Number			Title
	10	.33**	Silicon Image, Inc. Bonus Plan for Fiscal Year 2006 (Incorporated by reference from Exhibit 10.01 of the Form 8-K filed by the Registrant on February 17, 2006).
	10	.34**	Silicon Image, Inc. Sales Incentive Plan for Vice President of Worldwide Sales for Fiscal Year 2006 (Incorporated by reference from Exhibit 10.02 of the Form 8-K filed by the Registrant on February 17, 2006).
	10	.35*/**	Consulting Agreement between David Lee and the Registrant dated March 15, 2006.
	21	.01	Subsidiaries of the Registrant.
	23	.01	Consent of Deloitte & Touche LLP.
	23	.02	Consent of PricewaterhouseCoopers LLP.
	24	.01	Power of Attorney (included on signature page).
	31	.01	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.02	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.01***	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.02***	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
**	This exhibit is a management contract or compensatory plan or arrangement.
***	This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by reference into any filing of the Registrant, in accordance with Item 601 of Regulation S-K.

94

EX-10.03

Exhibit 10.03

SILICON IMAGE, INC.

1999 EQUITY INCENTIVE PLAN

Adopted July 20, 1999
As Amended March 29, 2001
As Amended and Restated May 20, 2003
As Amended and Restated April 5, 2005

          1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company’s future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23.

          2. SHARES SUBJECT TO THE PLAN.

               2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 2,000,000 Shares plus Shares that are subject to: (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued. In addition, any authorized shares not issued or subject to outstanding grants under the Silicon Image, Inc. 1995 Equity Incentive Plan (the “Prior Plan”) on the Effective Date (as defined below) and any shares issued under the Prior Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options granted pursuant to the Prior Plan that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for grant and issuance under the Prior Plan, but will be available for grant and issuance under this Plan. In addition, on the first business day of each calendar year of the Company during the term of the Plan, the aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan will be increased automatically by a number of Shares equal to 5% of the total outstanding shares of the Company, provided, that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year; and, provided further, that no more than 20,000,000 shares shall qualify as ISOs (as defined in Section 5 below). At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan.

               2.2 Adjustment of Shares. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Share amounts set forth in Section 3 below, (c) the number of Shares subject to each Annual Grant described in Section 9 below, (d) the Exercise Prices of and number of Shares subject to outstanding Options, and (e) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee.

          3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person will be eligible to receive more than 1,000,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent or Subsidiary of the Company (including new employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company), who are eligible to receive up to a maximum of 1,500,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan.

          4. ADMINISTRATION.

               4.1 Committee Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, and subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, the Committee will have the authority to:

(a)	construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;
(b)	prescribe, amend and rescind rules and regulations relating to this Plan or any Award;
(c)	select persons to receive Awards;
(d)	determine the form and terms of Awards;

(e)	determine the number of Shares or other consideration subject to Awards;
(f)	determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;
(g)	grant waivers of Plan or Award conditions;
(h)	determine the vesting, exercisability and payment of Awards;
(i)	correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;
(j)	determine whether an Award has been earned; and
(k)	make all other determinations necessary or advisable for the administration of this Plan.

               4.2 Committee Discretion. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company.

          5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code (“ISO”) or Nonqualified Stock Options (“NQSOs”), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:

               5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO (“Stock Option Agreement”), and, except as otherwise required by the terms of Section 9 hereof, will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan.

               5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this

Plan will be delivered to the Participant within a reasonable time after the granting of the Option.

               5.3 Exercise Period. Except for automatic grants to Eligible Directors pursuant to Section 9 hereof, Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company (“Ten Percent Stockholder”) will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines.

               5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan.

               5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the “Exercise Agreement”) in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant’s investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased.

               5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:

(a) If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant’s Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the

Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options.

(b) If the Participant is Terminated because of Participant’s death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of Participant’s Disability), then Participant’s Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant’s legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant’s death or Disability, or (b) twelve (12) months after the Termination Date when the Termination is for Participant’s death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options.

               5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable.

               5.8 Limitations on ISO. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

               5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant’s rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants

affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price.

               5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.

          6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the “Purchase Price”), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following:

               6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement (“Restricted Stock Purchase Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant’s execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee.

               6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan.

               6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant’s individual Restricted Stock Purchase Agreement. Restricted Stock Awards may vary from Participant to Participant and between groups of Participants. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any;

and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Restricted Stock Award, the Committee shall determine the extent to which such Restricted Stock Award has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria.

               6.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Restricted Stock Award only to the extent earned as of the date of Termination in accordance with the Restricted Stock Purchase Agreement, unless the Committee will determine otherwise.

          7. STOCK BONUSES.

               7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the “Stock Bonus Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant’s individual Award Agreement (the “Performance Stock Bonus Agreement”) that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine.

               7.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such

adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.

               7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine.

          8. PAYMENT FOR SHARE PURCHASES.

               8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law:

(a)	by cancellation of indebtedness of the Company to the Participant;
(b)	by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market;
(c)	by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares;
(d)	by waiver of compensation due or accrued to the Participant for services rendered;
(e)	with respect only to purchases upon exercise of an Option, and provided that a public market for the Company’s stock exists:

(1) through a “same day sale” commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an “NASD Dealer”) whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

(2) through a “margin” commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

(f) by any combination of the foregoing.

               8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant.

          9. AUTOMATIC GRANTS TO ELIGIBLE DIRECTORS.

               9.1 Types of Options and Shares. Options granted under this Plan and subject to this Section 9 shall be NQSOs.

               9.2 Eligibility. Options subject to this Section 9 shall be granted only to Eligible Directors.

               9.3 Annual Grants. Immediately following each annual meeting of stockholders, (a) each Eligible Director will automatically be granted an Option for 20,000 Shares, provided the Eligible Director is a member of the Board on such date and has served continuously as a member of the Board of Directors of the Company for a period of at least one year since the date when such Eligible Director first became a member of the Board; (b) each Eligible Director who is a member of a standing committee of the Board will automatically be granted an Option for an additional 5,000 Shares for each such committee on which such Eligible Director serves, provided such Eligible Director is a member of such committee on such date and has served continuously as a member of such committee of the Company for a period of at least one year since the date when such Eligible Director first joined such committee; and (c) if the Chairperson of the Board is an Eligible Director, the Chairperson of the Board will automatically be granted an Option for an additional 5,000 shares, provided he or she is serving as Chairperson of the Board on such date and has served continuously as Chairperson of the Board of the Company for a period of at least one year since the date when such Eligible Director first became Chairperson of the Board. The Options described in this Section 9.3 are referred to as the “Annual Grants.”

               9.4 Exercise Price; Vesting; Exercise Period. The exercise price of an Annual Grant shall be the Fair Market Value of the Shares at the time of grant. Provided the director continues to provide services to the Company, an Annual Grant shall become vested and exercisable with respect to one twenty-fourth (1/24) of the

Shares each month following the date of grant until fully vested; provided, however, that an Annual Grant shall become fully vested immediately prior to the consummation of a Change in Control. The Exercise Period of an Annual Grant shall end five (5) years after the date of grant.

          10. WITHHOLDING TAXES.

               10.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.

               10.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and be in writing in a form acceptable to the Committee

          11. TRANSFERABILITY.

               11.1 Except as otherwise provided in this Section 11, Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Award Agreement with respect to Awards that are not ISOs.

               11.2 All Awards other than NQSO’s. All Awards other than NQSO’s shall be exercisable: (i) during the Participant’s lifetime, only by (A) the Participant, or (B) the Participant’s guardian or legal representative; and (ii) after Participant’s death, by the legal representative of the Participant’s heirs or legatees.

               11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO shall be exercisable: (i) during the Participant’s lifetime only by (A) the Participant, (B) the Participant’s guardian or legal representative, (C) a Family Member of the Participant who has acquired the NQSO by “permitted transfer;” and (ii) after Participant’s death, by the legal representative of the Participant’s heirs or

legatees. “Permitted transfer” means, as authorized by this Plan and the Committee in an NQSO, any transfer effected by the Participant during the Participant’s lifetime of an interest in such NQSO but only such transfers which are by gift or domestic relations order. A permitted transfer does not include any transfer for value and neither of the following are transfers for value: (a) a transfer of under a domestic relations order in settlement of marital property rights or (b) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members or the Participant in exchange for an interest in that entity.

          12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES.

               12.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant’s Purchase Price or Exercise Price pursuant to Section 12.

               12.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant’s purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information.

               12.3 Restrictions on Shares. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all Unvested Shares held by a Participant following such Participant’s Termination at any time within ninety (90) days after the later of Participant’s Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant’s Exercise Price or Purchase Price, as the case may be.

          13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.

          14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant’s Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant’s obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant’s Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid.

          15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree.

          16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.

          17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant’s employment or other relationship at any time, with or without cause.

          18. CORPORATE TRANSACTIONS.

               18.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (d) the sale of substantially all of the assets of the Company, or (e) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards (including without limitation Annual Grants under Section 9) may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, such Awards (including without limitation Annual Grants under Section 9) will expire on such transaction at such time and on such conditions as the Committee will determine. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate upon a transaction described in this Section 18. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee.

               18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of

the occurrence of any transaction described in Section 18.1, any outstanding Awards (including without limitation Annual Grants under Section 9) will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.

               18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company’s award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.

          19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company’s Common Stock is declared effective by the SEC (the “Effective Date”). This Plan shall be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the Board. Upon the Effective Date, the Committee may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial stockholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the stockholders of the Company; (c) in the event that initial stockholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled and any purchase of Shares issued hereunder shall be rescinded; and (d) in the event that stockholder approval of such increase is not obtained within the time period provided herein, all Awards granted pursuant to such increase will be cancelled, any Shares issued pursuant to any Award granted pursuant to such increase will be cancelled, and any purchase of Shares pursuant to such increase will be rescinded.

          20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California.

          21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval.

          22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

          23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings:

               “Award” means any award under this Plan, including any Option, Restricted Stock or Stock Bonus.

               “Award Agreement” means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.

               “Board” means the Board of Directors of the Company.

               “Cause” means the commission of an act of theft, embezzlement, fraud, dishonesty or a breach of fiduciary duty to the Company or a Parent or Subsidiary of the Company.

               “Change of Control” means the consummation of any transaction or series of related transactions which results in all of the holders of record of the Company’s capital stock immediately prior to the transaction or transactions holding less than fifty percent (50%) of the voting power of the surviving entity in the transaction or transactions immediately after the transaction or transactions, including the acquisition of the Company by another entity and any reorganization, merger or consolidation, or which results in the sale of all or substantially all of the assets of the Company; provided, however, if the surviving entity in the transaction or transactions is wholly owned by another entity, then a Change of Control has occurred only if the holders of record of the Company’s capital stock immediately prior to the transaction or transactions hold less than fifty percent (50%) of the voting power of the other entity immediately after the transaction or transactions.

               “Code” means the Internal Revenue Code of 1986, as amended.

               “Committee” means the Compensation Committee of the Board.

               “Company” means Silicon Image, Inc. or any successor corporation.

               “Disability” means a disability, whether temporary or permanent, partial or total, as determined by the Committee. For ISO purposes, “Disability” means a disability within the meaning of Code Section 22(e)(3).

               “Eligible Director” means a member of the Board (1) who is not an employee of the Company or any Parent, Subsidiary or Affiliate of the Company, and (2) whose direct pecuniary interest (as defined by the SEC in Rule 16a-1 promulgated under the Exchange Act) in the Company’s Common Stock is less than five percent (5%) of total shares of Common Stock outstanding.

               “Exchange Act” means the Securities Exchange Act of 1934, as amended.

               “Exercise Price” means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option.

               “Fair Market Value” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(a)	if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal;
(b)	if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal;
(c)	if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal;
(d)	in the case of an Award made on the Effective Date, the price per share at which shares of the Company’s Common Stock are initially offered for sale to the public by the Company’s underwriters in the initial public offering of the Company’s Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or

(e)	if none of the foregoing is applicable, by the Committee in good faith.
	“Family Member” includes any of the following:
(a)	child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the Participant, including any such person with such relationship to the Participant by adoption;
(b)	any person (other than a tenant or employee) sharing the Participant’s household;
(c)	a trust in which the persons in (a) and (b) have more than fifty percent of the beneficial interest;
(d)	a foundation in which the persons in (a) and (b) or the Participant control the management of assets; or
(e)	any other entity in which the persons in (a) and (b) or the Participant own more than fifty percent of the voting interest.

               “Insider” means an officer or director of the Company or any other person whose transactions in the Company’s Common Stock are subject to Section 16 of the Exchange Act.

               “Option” means an award of an option to purchase Shares pursuant to Section 5.

               “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

               “Participant” means a person who receives an Award under this Plan.

               “Performance Factors” means the factors selected by the Committee from among the following measures to determine whether the performance goals established by the Committee and applicable to Awards have been satisfied:

               (a) Net revenue and/or net revenue growth;

               (b) Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth;

               (c) Operating income and/or operating income growth;

               (d) Net income and/or net income growth;

               (e) Earnings per share and/or earnings per share growth;

               (f) Total stockholder return and/or total stockholder return growth;

               (g) Return on equity;

               (h) Operating cash flow return on income;

               (i) Adjusted operating cash flow return on income;

               (j) Economic value added; and

               (k) Individual confidential business objectives.

               “Performance Period” means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for Restricted Stock Awards or Stock Bonuses.

               “Plan” means this Silicon Image, Inc. 1999 Equity Incentive Plan, as amended from time to time.

               “Restricted Stock Award” means an award of Shares pursuant to Section 6.

               “SEC” means the Securities and Exchange Commission.

               “Securities Act” means the Securities Act of 1933, as amended.

               “Shares” means shares of the Company’s Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security.

               “Stock Bonus” means an award of Shares, or cash in lieu of Shares, pursuant to Section 7.

               “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations

other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

               “Termination” or “Terminated” means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor, or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the “Termination Date”).

               “Unvested Shares” means “Unvested Shares” as defined in the Award Agreement.

               “Vested Shares” means “Vested Shares” as defined in the Award Agreement.

THE SILICON IMAGE, INC.
1999 EQUITY INCENTIVE PLAN

SUB-PLAN FOR UK EMPLOYEES

1.	The purpose of this Sub-Plan is to provide incentive for UK tax resident present and future employees of Silicon Image, Inc. and its Parent or Subsidiaries through the grant of options over Common Stock.
2.	This Sub-Plan is governed by the Silicon Image, Inc. 1999 Equity Incentive Plan (the “Plan”) and all its provisions shall be identical to those of the Plan SAVE THAT no Awards shall be made under the Sub-Plan other than to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company.

	Silicon Image, Inc.
Notice of Grant of Stock Options	1060 E. Arques Ave.
(for Optionees other than Non-Employee Directors	Sunnyvale, CA 94085
and Optionees based in the United Kingdom)
Optionee	Option Number: «Number»
«Name»	Plan:                          1999
	ID:                     «ID»
You have been granted an option to buy Silicon Image, Inc. (the “Company”) Common Stock. The pertinent details of your stock option grant are outlined below:

Date of Grant:	«Date»
Total Option Shares:	«Shares»
Exercise Price Per Share:	«Price»
First Vest Date:	«M_1st_vest»
Expiration Date:	Option will expire [immediately on termination for cause and]1 3 months following termination for any reason except death or disability, but in no event later than «Expire».
	(refer to Section 3 of the Stock Option Agreement)
Type of Stock Option:	Nonqualified Stock Option

Vesting and Exercise Period:

Provided that you have continuously provided services to the Company, or any Parent or Subsidiary (as those terms are defined in the Silicon Image, Inc. 1999 Equity Incentive Plan), this Option shall vest and become exercisable as follows: (Vesting Schedule to be provided here)

Acceptance:

Optionee hereby acknowledges receipt of a copy of the Silicon Image, Inc. 1999 Equity Incentive Plan (the “Plan”), Plan Prospectus and the Stock Option Agreement (the “Agreement”). Please refer to the Plan and Plan Prospectus on our intranet website at: Http://intranet under the Finance Department/Stock Information tab. The Agreement is the contract that fixes the terms of your option, including the purchase price and period over which your option can be exercised (purchased). Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all terms and conditions of the Plan and the Agreement. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares, and that the Company has advised Optionee to consult a tax advisor prior to such exercise or disposition.

Please accept this Notice of Grant of Stock Options. You are not obligated to purchase these shares; Silicon Image requires that the acceptance of this document be on file prior to purchase of the shares.

Silicon Image, Inc.

Robert R. Freeman, Chief Financial Officer

«Name»

¹ Language in brackets may or may not appear in individual option agreements.

SILICON IMAGE, INC.

1999 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

(For Optionees other than Non-Employee Directors and Optionees based in the United Kingdom)

          This Stock Option Agreement (this “Agreement”) is made and entered into as of the Date of Grant set forth in the Notice of Grant of Stock Options (the “Notice”) by and between Silicon Image, Inc., a Delaware corporation (the “Company”), and the Optionee. Capitalized terms not defined herein shall have the meanings ascribed to them in the Company’s 1999 Equity Incentive Plan (the “Plan”).

          1. Grant of Option. The Company hereby grants to Optionee an option (this “Option”) to purchase up to the total number of shares of Common Stock of the Company set forth in the Notice as Total Option Shares (collectively, the “Shares”) at the Exercise Price Per Share (the “Exercise Price”) set forth in the Notice, subject to the terms and conditions of this Agreement and the Plan.

          2. Vesting; Exercise Period.

               2.1 Vesting of Shares. This Option shall be exercisable as it vests, unless otherwise indicated in the Notice. Subject to the terms and conditions of the Plan and this Agreement, this Option shall vest and become exercisable pursuant to the vesting schedule specified in the Notice. This Option shall cease to vest upon Optionee’s Termination and Optionee shall in no event be entitled under this Option to purchase a number of shares of the Company’s Common Stock greater than the “Total Option Shares.”

               2.2 Vesting of Options. Shares that are vested pursuant to the schedule set forth in the Notice are “Vested Shares.” Shares that are not vested pursuant to the schedule set forth in the Notice are “Unvested Shares.”

               2.3 Expiration. This Option shall expire on the Expiration Date set forth in the Notice and must be exercised, if at all, on or before the earlier of the Expiration Date or the date on which this Option is terminated in accordance with the provisions of Section 3 hereof.

          3. Termination.

               3.1 Termination for Any Reason Except Death [,] [or] Disability [or Cause].² If Optionee is Terminated for any reason except Optionee’s Death[,] [or] Disability [or Cause], then this Option, to the extent (and only to the extent) that it is vested on the Termination Date, may be exercised by Optionee no later than three (3) months after the Termination Date, but in no event later than the Expiration Date.

               3.2 Termination Because of Death or Disability. If Optionee is Terminated because of Death or Disability of Optionee (or the Optionee dies within three (3)

² Language in brackets throughout this form may or may not appear in individual option agreements.

months after Termination other than for Disability [or Cause]), then this Option, to the extent that it is vested on the Termination Date, may be exercised by Optionee (or Optionee’s legal representative or authorized assignee) no later than twelve (12) months after the Termination Date, but in no event later than the Expiration Date.

               [3.3 Termination for Cause. If Optionee is Terminated for Cause, this Option will expire on the Optionee’s date of Termination.]

               3.4 No Obligation to Employ. Nothing in the Plan or this Agreement shall confer on Optionee any right to continue in the employ of, or other relationship with, the Company or any Parent or Subsidiary of the Company, or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Optionee’s employment or other relationship at any time, with or without Cause.

          4. Manner of Exercise.

               4.1 Stock Option Exercise Agreement. To exercise this Option, Optionee (or in the case of exercise after Optionee’s death, Optionee’s legal representative or authorized assignee) must deliver to the Company an executed stock option exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the “Exercise Agreement”), which shall set forth, inter alia, Optionee’s election to exercise this Option, the number of shares being purchased, any restrictions imposed on the shares and any representations, warranties and agreements regarding Optionee’s investment intent and access to information as may be required by the Company to comply with applicable securities laws. If someone other than Optionee exercises this Option, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise this Option.

               4.2 Limitations on Exercise. This Option may not be exercised unless such exercise is in compliance with all applicable federal and state securities laws, as in effect on the date of exercise. This Option may not be exercised for less than 100 Shares, unless it is exercised as to all Shares then exercisable.

               4.3 Payment. The Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased. Payment may be in the form of cash (by check), or where permitted by law:

(a)	by cancellation of indebtedness of the Company to the Optionee;
(b)	by surrender of shares of the Company’s Common Stock that either: (1) have been owned by Optionee for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Optionee in the open public market; and (3) are clear of all liens, claims, encumbrances or security interests;
(c)	by waiver of compensation due or accrued to Optionee for services rendered;

(d)

provided that a public market for the Company’s stock exists: (1) through a “same day sale” commitment from Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an “NASD Dealer”), whereby Optionee irrevocably elects to exercise this Option and to sell a portion of the Shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (2) through a “margin” commitment from Optionee and an NASD Dealer, whereby Optionee irrevocably elects to exercise this Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or

(f)

by any combination of the foregoing.

               4.4 Tax Withholding. Prior to the issuance of the Shares upon exercise of this Option, Optionee must pay or provide for any applicable federal or state withholding obligations. If the Committee permits, Optionee may provide for payment of withholding taxes upon exercise of this Option by requesting that the Company retain Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Optionee by deducting the Shares retained from the Shares issuable upon exercise.

               4.5 Issuance of Shares. Provided that the Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Optionee, Optionee’s authorized assignee, or Optionee’s legal representative, and shall deliver certificates representing the Shares.

          5. Compliance with Laws and Regulations. The exercise of this Option and the issuance and transfer of Shares shall be subject to compliance by the Company and Optionee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company’s Common Stock may be listed at the time of such issuance or transfer. Optionee understands that the Company is under no obligation to register or qualify the Shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.

          6. Nontransferability of Option. This Option may not be transferred in any manner other than under the terms and conditions of the Plan or by will or by the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the legal representative or authorized assignee of Optionee.

          7. Tax Consequences. Set forth below is a brief summary as of the date the Board adopted the Plan of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

               7.1 Exercise of Nonqualified Stock Option. To the extent this Option does not qualify as an Incentive Stock Option, there may be a regular federal income tax liability upon the exercise of this Option. Optionee will be treated as having received compensation (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. The Company may be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation at the time of exercise.

               7.2 Disposition of Shares. The following tax consequences may apply upon disposition of the Shares.

                    a. Nonqualified Stock Options. If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of a Non-Qualified Stock Option, any gain realized on disposition of the Shares will be treated as a long-term capital gain.

          8. Privileges of Stock Ownership. Optionee shall not have any of the rights of a stockholder with respect to any Shares until the Shares are issued to Optionee.

          9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or the Company to the Compensation Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Optionee.

          10. Entire Agreement. The Plan is incorporated herein by reference. This Agreement, the Notice, the Plan and the Exercise Agreement constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede all prior understandings and agreements with respect to such subject matter.

          11. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated on the Notice or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by facsimile.

          12. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon Optionee and Optionee’s legal representatives or authorized assignee.

          13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to that body of law pertaining to choice of law or conflict of law.

No. «Number»

SILICON IMAGE, INC.

1999 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

(For Non-Employee Directors)

          This Stock Option Agreement (this “Agreement”) is made and entered into as of the Date of Grant set forth below (the “Date of Grant”) by and between Silicon Image, Inc., a Delaware corporation (the “Company”), and the Optionee named below (“Optionee”). Capitalized terms not defined herein shall have the meanings ascribed to them in the Company’s 1999 Equity Incentive Plan (the “Plan”).

Optionee:	«Name»
Total Option Shares:	«Shares»
Exercise Price Per Share:	«Price»
Date of Grant:	«Date»
First Vest Date:	«M_1st_vest»
Expiration Date:	Option will expire [immediately on termination for cause and]1 3 months following termination for any [other]reason except death or disability, but in no event later than «Expire».
	(refer to Section 3 of this Stock Option Agreement)
Type of Stock Option:	Nonqualified Stock Option

          1. Grant of Option. The Company hereby grants to Optionee an option (this “Option”) to purchase up to the total number of shares of Common Stock of the Company set forth above as Total Option Shares (collectively, the “Shares”) at the Exercise Price Per Share set forth above (the “Exercise Price”), subject to all of the terms and conditions of this Agreement and the Plan.

          2. Vesting; Exercise Period.

               2.1 Vesting of Shares. Subject to the terms and conditions of the Plan and this Agreement, this Option shall become vested and exercisable with respect to (for initial grants upon appointment or election to the Board: one forty-eighth (1/48)) (for annual grants: one twenty-fourth (1/24)) of the Shares each month following the date of grant until fully vested; provided, however, than an Annual Grant shall become fully vested immediately prior to the consummation of a Change in Control.

¹ Language in brackets throughout this form may or may not appear in individual option agreements.

          “Change of Control” means the consummation of any transaction or series of related transactions which results in all of the holders of record of the Company’s capital stock immediately prior to the transaction or transactions holding less than fifty percent (50%) of the voting power of the surviving entity in the transaction or transactions immediately after the transaction or transactions, including the acquisition of the Company by another entity and any reorganization, merger or consolidation, or which results in sale of all or substantially all of the assets of the Company; provided, however, if the surviving entity in the transaction or transactions is wholly owned by another entity, then a Change of Control has occurred only if the holders of record of the Company’s capital stock immediately prior to the transactions or transactions hold less than fifty percent (50%) of the voting power of the other entity immediately after the transaction or transactions.

               2.2 Expiration. This Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the earlier of the Expiration Date or the date on which this Option is earlier terminated in accordance with the provisions of Section 3 hereof.

          3. Termination. Except as provided below in this Section, this Option shall terminate and may not be exercised if Optionee ceases to be a member of the Board of Directors of the Company (“Board Member”). The date on which Optionee ceases to be a Board Member shall be referred to as the “Termination Date.”

               3.1 Termination for Any Reason Except Death [,] [or] Disability [or Cause]. If Optionee ceases to be a Board Member for any reason except death [,] [or] Disability [or Cause], then this Option may be exercised by Optionee no later than three (3) months after the Termination Date, but in any event no later than the Expiration Date.

               3.2 Termination Because of Death or Disability. If Optionee ceases to be a Board Member due to Optionee’s death or Disability (or dies within 3 months after Termination other than [for Cause or] because of Disability), then this Option may be exercised by Optionee (or Optionee’s legal representative or authorized assignee) no later than twelve (12) months after the Termination Date, but in any event no later than the Expiration Date.

               [3.3 Termination for Cause. If Optionee is Terminated for Cause, this Option will expire on the Optionee’s date of termination.]

          4. Manner of Exercise.

     4.1 Stock Option Exercise Agreement. To exercise this Option, Optionee (or in the case of exercise after Optionee’s death, Optionee’s executor, administrator, heir or legatee, as the case may be) must deliver to the Company an executed stock option exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the “Exercise Agreement”), which shall set forth, inter alia, Optionee’s election to exercise this Option, the number of shares being purchased, any restrictions imposed on the Shares and any representations, warranties and agreements regarding Optionee’s investment intent and access to information as may be required by the Company to comply with applicable securities laws. If someone other than Optionee exercises this Option, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise this Option.

               4.2 Limitations on Exercise. This Option may not be exercised unless such exercise is in compliance with all applicable federal and state securities laws, as they are in effect on the date of exercise. This Option may not be exercised as to fewer than 100 Shares unless it is exercised as to all Shares as to which this Option is then exercisable.

               4.3 Payment. The Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased in cash (by check), or where permitted by law:

(a)	by cancellation of indebtedness of the Company to the Optionee;
(b)	by surrender of shares of the Company’s Common Stock that either: (1) have been owned by Optionee for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Optionee in the open public market; and (3) are clear of all liens, claims, encumbrances or security interests;
(c)	by waiver of compensation due or accrued to Optionee for services rendered;
(d)	provided that a public market for the Company’s stock exists: (1) through a “same day sale” commitment from Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an “NASD Dealer”) whereby Optionee irrevocably elects to exercise this Option and to sell a portion of the Shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (2) through a “margin” commitment from Optionee and an NASD Dealer whereby Optionee irrevocably elects to exercise this Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company;
(f)	by any combination of the foregoing.

               4.4 Tax Withholding. Prior to the issuance of the Shares upon exercise of this Option, Optionee must pay or provide for any applicable federal or state withholding obligations of the Company. If the Committee permits, Optionee may provide for payment of withholding taxes upon exercise of this Option by requesting that the Company retain Shares with a Fair Market Value equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Optionee by deducting the Shares retained from the Shares issuable upon exercise.

               4.5 Issuance of Shares. Provided that the Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Optionee, Optionee’s authorized assignee, or

Optionee’s legal representative, and shall deliver certificates representing the Shares with the appropriate legends affixed thereto.

          5. Compliance with Laws and Regulations. The exercise of this Option and the issuance and transfer of Shares shall be subject to compliance by the Company and Optionee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company’s Common Stock may be listed at the time of such issuance or transfer. Optionee understands that the Company is under no obligation to register or qualify the Shares with the SEC, any state securities commission or any stock exchange to effect such compliance.

          6. Nontransferability of Option. This Option may not be transferred in any manner other than under the terms and conditions of the Plan or by will or by the laws of descent and distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, successors and assigns of Optionee.

          7. Tax Consequences. Set forth below is a brief summary as of the date the Board adopted the Plan of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

               7.1 Exercise of Nonqualified Stock Option. There may be a regular federal income tax liability upon the exercise of this Option. Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. The Company may be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise.

               7.2 Disposition of Shares. If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of an NQSO, any gain realized on disposition of the Shares will be treated as long-term capital gain.

          8. Privileges of Stock Ownership. Optionee shall not have any of the rights of a stockholder with respect to any Shares until the Shares are issued to Optionee.

          9. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or the Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Optionee.

          10. Entire Agreement. The Plan is incorporated herein by reference. This Agreement and the Plan and the Exercise Agreement constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede all prior understandings and agreements with respect to such subject matter.

          11. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated above or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by facsimile.

          12. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon Optionee and Optionee’s heirs, executors, administrators, legal representatives, successors and assigns.

          13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to that body of law pertaining to choice of law or conflict of law.

          14. Acceptance. Optionee hereby acknowledges receipt of a copy of the Plan and this Agreement. Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all the terms and conditions of the Plan and this Agreement. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares and that the Company has advised Optionee to consult a tax advisor prior to such exercise or disposition.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate by its duly authorized representative and Optionee has executed this Agreement in duplicate as of the Date of Grant.

SILICON IMAGE, INC.	OPTIONEE
Robert R. Freeman	«Name»
Chief Financial Officer

EXHIBIT A
Silicon Image, Inc.
Stock Option Exercise Notice
(for Optionees not based in the United Kingdom)

1. You must submit this form to Stock Administration prior to contacting your broker.
I am exercising my Silicon Image stock options as follows:
(A) Grant/Option #:	(B) Total # of Shares to Exercise:
(C) Cost per Share: $	(D) Total Exercise Cost (B) X (C): $
(E) Grant Type (circle one): ISO      NQ	(F) Tax Amount Due if NQ: $
	Please leave NQ tax amount blank —
	Stock Administration will calculate, if applicable.
(G) Exercise Date:	(H) Are any of these shares unvested? YES  NO
(a) Please leave exercise date blank for methods regarding an	If yes, please consult with your tax advisor
1 & 2 — Stock Administration will complete when transaction is complete.	83(b) election which must be made and filed with the IRS within 30 days of exercise. See Stock Administration for an election form.
Please indicate the transaction method below. See reverse side of this form for a brief explanation of each method.

Method 1	SAME DAY SALE You must contact a Silicon Image designated broker to place this trade. Please indicate which broker you have selected below.
Method 2	SELL TO COVER I am exercising                      shares, but want to sell only                      shares. The balance will be deposited in the account I’ve designated below. You must contact a Silicon Image designated broker to place this trade. Please indicate which broker you have selected below.
Method 3	EXERCISE & HOLD Please attach a personal check, made payable to Silicon Image for the amounts indicated in items (D) and (F) above. Please indicate below where you would like your stock certificate to be mailed.

Broker Name

Broker Address

Account #

Credit Suisse First Boston	Account #                                                    (415) 249-2258
Deutsche Bank Alex Brown	Account #                                                    (415) 617-3252
E*Trade/OptionsLink	It is not necessary to complete this form — please go to
	www.etrade.com or www.optionslink.com
	or call (800) 838-0908 to complete your trade.

I authorize the broker to remit funds to Silicon Image to pay for this exercise and any applicable taxes and I understand that the shares will be sent directly to the broker address I have indicated above. I acknowledge receipt of the prospectus covering shares of common stock offered to optionees under the Company’s Stock Option Plan. The Plan and Option Agreement are incorporated herein by reference. The Exercise Agreement, the Plan and Option Agreement constitute the entire agreement and understanding of the parties and supercede in their entirety all prior understandings and agreements of the Company and Optionee with respect to the subject matter hereof. I UNDERSTAND THAT I MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF THE PURCHASE OR DISPOSITION OF THESE SHARES. I HAVE CONSULTED WITH ANY TAX CONSULTANT(S) I DEEM ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND CERTIFY THAT I AM NOT RELYING ON THE COMPANY FOR TAX ADVICE. ___ (Initial here)

First Name	Middle Initial	Last Name	Signature
Social Security #		Employee ID #	Phone Number
Current Address

EXHIBIT A
Silicon Image, Inc.
Stock Option Exercise Notice
(for Optionees not based in the United Kingdom)

NOTE FOR NON-QUALIFIED (NQ) OPTIONS ONLY — Tax is required to be withheld or collected upon exercise of all non-qualified stock options. The tax is based on the spread between the sale price (closing fair market value if not same day sale) and the exercise price multiplied by 35.75% (25% federal; 9.3% CA state; 1.45% Medicare). In addition, Social Security tax may be withheld or collected depending on what you have paid year to date.

Method 1 — SAME DAY SALE
You are selling all vested shares as indicated on the Exhibit A.

Method 2 — SELL TO COVER
You want to exercise vested shares and sell a portion of these shares to cover the cost and applicable taxes of all the exercised shares. The balance of unsold shares will be deposited into your brokerage account for future sale.

Method 3 — EXERCISE & HOLD
You only want to exercise (purchase) the shares in order to sell them at a later date.

Silicon Image Designated Brokers
Credit Suisse First Boston	Morgan Stanley
Private Client Services	101 California St
650 California St., 31st Floor	San Francisco, CA
San Francisco, CA 94108	(800) 248-3565
Suzette Callejo (415) 249-2258	Jesse Bromberg (415) 693-6876
Fax — (415) 395-1402
E*Trade/OptionsLink	Deutsche Bank Alex. Brown
P.O. Box 989032	101 California Street, 46th Floor
West Sacramento, CA 95798-9858	San Francisco, CA 94111
www.etrade.com or www.optionslink.com	Cheryl Nobusada (415) 617-3252
(800) 838-0908 (press “#0” for service representative)	Fax — (415) 617-4270
(650) 599-0125 (from outside the United States)

	Silicon Image, Inc.
Notice of Grant of Stock Options	1060 E. Arques Ave.
(for Optionees based in the United Kingdom)	Sunnyvale, CA 94086
Optionee	Option Number: «Number»
«Name»	Plan:                               1999
	ID:                                    «ID»

You have been granted an option to buy Silicon Image, Inc. (the “Company”) Common Stock. The pertinent details of your stock option grant are outlined below:

Date of Grant:	«Date»
Total Option Shares:	«Shares»
Exercise Price Per Share:	«Price»
First Vest Date:	«M_1st_vest»
Expiration Date:	Option will expire [immediately on termination for cause and]1 3 months following termination for any reason except death or disability, but in no event later than «Expire».
	(refer to Section 3 of the Stock Option Agreement)
Type of Stock Option:	Nonqualified Stock Option

Vesting and Exercise Period:

Provided that you have continuously provided services to the Company, or any Parent or Subsidiary (as those terms are defined in the UK Sub-Plan of the Silicon Image, Inc. 1999 Equity Incentive Plan), this Option shall vest and become exercisable as follows: (Vesting Schedule to be provided here)

Acceptance:

Optionee hereby acknowledges receipt of a copy of the UK Sub-Plan of the Silicon Image, Inc. 1999 Equity Incentive Plan (the “Sub-Plan”), Plan Prospectus and the Stock Option Agreement (the “Agreement”). Please refer to the Sub-Plan and Plan Prospectus on our intranet website at Http://intranet under the Finance Department/Stock Information tab. The Agreement is the contract that fixes the terms of your option, including the purchase price and period over which your option can be exercised (purchased). Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all terms and conditions of the Sub-Plan, the Agreement and understands exercise is also conditioned on execution of the Joint Election. Optionee acknowledges that there may be adverse tax consequences upon exercise of this Option or disposition of the Shares, and that the Company has advised Optionee to consult a tax advisor prior to such exercise or disposition.

Please sign this Notice of Grant of Stock Options and return it to stock administration. Please retain for your files the copy of this notice stapled to the stock option agreement. You are not obligated to purchase these shares; stock administration requires that this document be on file prior to purchase of the shares.

Silicon Image, Inc.

Steve Tirado, President and CEO

«Name»

¹ Language in brackets may or may not appear in individual option agreements.

SILICON IMAGE, INC.

UK SUB-PLAN OF THE 1999 EQUITY INCENTIVE PLAN

STOCK OPTION AGREEMENT

(For Optionees based in the United Kingdom)

          This Stock Option Agreement (this “Agreement”) is made and entered into as of the Date of Grant set forth in the Notice of Grant of Stock Options (the “Notice”) by and between Silicon Image, Inc., a Delaware corporation (the “Company”), and the Optionee. Capitalized terms not defined herein shall have the meanings ascribed to them in the UK Sub-Plan of the Company’s 1999 Equity Incentive Plan (the “Plan”).

          1. Grant of Option. The Company hereby grants to Optionee an option (this “Option”) to purchase up to the total number of shares of Common Stock of the Company set forth in the Notice as Total Option Shares (collectively, the “Shares”) at the Exercise Price Per Share (the “Exercise Price”) set forth in the Notice, subject to the terms and conditions of this Agreement, the Sub-Plan and the Joint Election (as defined in section 7 of this Agreement).

          2. Vesting; Exercise Period.

               2.1 Vesting of Shares. This Option shall be exercisable as it vests, unless otherwise indicated in the Notice. Subject to the terms and conditions of the Sub-Plan and this Agreement, this Option shall vest and become exercisable pursuant to the vesting schedule specified in the Notice. This Option shall cease to vest upon Optionee’s Termination and Optionee shall in no event be entitled under this Option to purchase a number of shares of the Company’s Common Stock greater than the “Total Option Shares.”

               2.2 Vesting of Options. Shares that are vested pursuant to the schedule set forth in the Notice are “Vested Shares.” Shares that are not vested pursuant to the schedule set forth in the Notice are “Unvested Shares.”

               2.3 Expiration. This Option shall expire on the Expiration Date set forth in the Notice and must be exercised, if at all, on or before the earlier of the Expiration Date or the date on which this Option is terminated in accordance with the provisions of Section 3 hereof.

          3. Termination.

               3.1 Termination for Any Reason Except Death [,] [or] Disability [or Cause].² If Optionee is Terminated for any reason except Optionee’s Death[,] [or] Disability [or Cause], then this Option, to the extent (and only to the extent) that it is vested on the Termination Date, may be exercised by Optionee no later than three (3) months after the Termination Date, but in no event later than the Expiration Date.

               3.2 Termination Because of Death or Disability. If Optionee is Terminated because of Death or Disability of Optionee (or the Optionee dies within three (3) months after Termination other than for Disability [or Cause]), then this Option, to the extent that

² Language in brackets may or may not appear in individual option agreements.

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

it is vested on the Termination Date, may be exercised by Optionee (or Optionee’s legal representative or authorized assignee) no later than twelve (12) months after the Termination Date, but in no event later than the Expiration Date.

               [3.3 Termination for Cause. If Optionee is Terminated for Cause, this Option will expire on the Optionee’s date of Termination.]

               3.4 No Obligation to Employ. Nothing in the Sub-Plan or this Agreement shall confer on Optionee any right to continue in the employ of, or other relationship with, the Company or any Parent or Subsidiary of the Company, or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Optionee’s employment or other relationship at any time, with or without Cause.

          4. Manner of Exercise.

               4.1 Stock Option Exercise Agreement. To exercise this Option, Optionee (or in the case of exercise after Optionee’s death, Optionee’s legal representative or authorized assignee) must deliver to the Company an executed stock option exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the “Exercise Agreement”), which shall set forth, inter alia, Optionee’s election to exercise this Option, the number of shares being purchased, any restrictions imposed on the shares and any representations, warranties and agreements regarding Optionee’s investment intent and access to information as may be required by the Company to comply with applicable securities laws. If someone other than Optionee exercises this Option, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise this Option.

               4.2 Section 431 Election. The Exercise Agreement shall be accompanied by a Section 431, Income Tax (Earnings & Pensions) Act 2003 election, in the form attached hereto as Exhibit B, or such other form as required by the UK Inland Revenue from time to time.

               4.3 Limitations on Exercise. This Option may not be exercised unless such exercise is in compliance with all applicable federal and state securities laws, as in effect on the date of exercise. This Option may not be exercised for less than 100 Shares, unless it is exercised as to all Shares then exercisable.

               4.4 Payment. The Exercise Agreement shall be accompanied by full payment of the Exercise Price for the Shares being purchased. Payment may be in the form of cash (by cheque), or where permitted by law:

(a)	by cancellation of indebtedness of the Company to the Optionee;
(b)	by surrender of shares of the Company’s Common Stock that either: (1) have been owned by Optionee for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

	shares); or (2) were obtained by Optionee in the open public market; and (3) are clear of all liens, claims, encumbrances or security interests;
(c)	by waiver of compensation due or accrued to Optionee for services rendered;
(d)	provided that a public market for the Company’s stock exists: (1) through a “same day sale” commitment from Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an “NASD Dealer”), whereby Optionee irrevocably elects to exercise this Option and to sell a portion of the Shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (2) through a “margin” commitment from Optionee and an NASD Dealer, whereby Optionee irrevocably elects to exercise this Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(f)	by any combination of the foregoing.

               4.5 Tax Withholding. Prior to the issuance of the Shares upon exercise of this Option, Optionee must pay or provide for any Option Tax Liability (as defined in section 6 of this Agreement). Payment of any liability arising under the terms of the Joint Election shall be payable in accordance with the terms of the Joint Election.

               4.6 Issuance of Shares. Provided that the Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Optionee, Optionee’s authorized assignee, or Optionee’s legal representative, and shall deliver certificates representing the Shares.

          5. Tax Consequences. The Optionee should obtain advice from an appropriate independent professional adviser in relation to the United Kingdom taxation implications of the grant, exercise, assignment, release, cancellation or any other disposal of this Option (the “Trigger Event”) pursuant to the Sub-Plan and on any subsequent sale of the Shares. The Optionee should also take advice in respect of the United Kingdom taxation indemnity provisions comprising sections 6a and 6b below.

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

          6. Optionee’s Taxation Indemnity.

               (a) To the extent permitted by law, the Optionee hereby agrees to indemnify and keep indemnified the Company and the Company as trustee for and on behalf of any related corporation, in respect of any liability or obligation of the Company and/or any related corporation to account for income tax (under PAYE) or any other taxation provisions and primary class 1 National Insurance Contributions (“NICs”) in the United Kingdom to the extent arising from a Trigger Event or arising out of the acquisition, retention and disposal of the Shares acquired pursuant to this Option.

               (b) The Company shall not be obliged to allot and issue any Shares or any interest in Shares pursuant to the exercise of the Option unless and until the Optionee has paid to the Company such sum as is, in the opinion of the Company, sufficient to indemnify the Company in full against any liability the Company has to account to the Inland Revenue for any amount of, or representing, income tax and/or primary NICs (the “Option Tax Liability”), or the Optionee has made such other arrangement as in the opinion of the Company will ensure that the full amount of any Option Tax Liability will be recovered from the Optionee within such period as the Company may then determine.

               (c) In the absence of any such other arrangement being made, the Company shall have the right to retain out of the aggregate number of shares to which the Optionee would have otherwise been entitled upon the exercise of an Option, such number of Shares as, in the opinion of the Company, will enable the Company to sell as agent for the Optionee (at the best price which can reasonably expect to be obtained at the time of the sale) and to pay over to the Company sufficient monies out of the net proceeds of sale, after deduction of all fees, commissions and expenses incurred in relation to such sale, to satisfy the Optionee’s liability under such indemnity.

          7. Employer’s NICs. As a condition on exercise of this Option the Optionee shall join with the Company, or if and to the extent that there is a change in the law, any other company or person who is or becomes a secondary contributor for NIC purposes in respect of this Option (the “Secondary Contributor”) in making an election (in such terms and such form as provided in paragraphs 3A and 3B of Schedule 1 to the Social Security Contributions and Benefits Act 1992 which has been approved by the Inland Revenue (the “Joint Election”), for the transfer of the whole or any liability of the Secondary Contributor to Employer’s Class 1 NICs to the Optionee.

          8. Compliance with Laws and Regulations. The exercise of this Option and the issuance and transfer of Shares shall be subject to compliance by the Company and Optionee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company’s Common Stock may be listed at the time of such issuance or transfer. Optionee understands that the Company is under no obligation to register or qualify the Shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.

          9. Nontransferability of Option. This Option may not be transferred in any manner other than under the terms and conditions of the Sub-Plan or by will or by the laws of

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

descent and distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the legal representative or authorized assignee of Optionee.

          10. Privileges of Stock Ownership. Optionee shall not have any of the rights of a stockholder with respect to any Shares until the Shares are issued to Optionee.

          11. Data Protection.

               (a) In order to facilitate the administration of the Sub-Plan, it will be necessary for Silicon Image UK Limited (or its payroll administrators) to collect, hold and process certain personal information about the Optionee and to transfer this data to the Company and to certain third parties such as brokers with whom the Optionee may elect to deposit any Shares acquired under the Sub-Plan. The Optionee consents to Silicon Image UK Limited (or its payroll administrators) collecting, holding and processing its personal data and transferring this data to the Company or any other third parties insofar as is reasonably necessary to implement, administer and manage the Sub-Plan.

               (b) Where the transfer is to be to a destination outside the European Economic Area, the Company shall take reasonable steps to ensure that the Optionee’s personal data continues to be adequate protected and securely held.

               (c) The Optionee understands that the Optionee may, at any time, view its personal data, require any necessary corrections to it or withdraw the consents herein in writing by contacting the Human Resources Department of the Company (but acknowledges that without the use of such data it may not be practicable for Silicon Image UK Limited and the Company to administer the Optionee’s involvement in the Sub-Plan in a timely fashion or at all and this may be detrimental to the Optionee.

          12. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or the Company to the Compensation Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Optionee.

          13. Entire Agreement. The Sub-Plan is incorporated herein by reference. This Agreement, the Notice, the Sub-Plan, the Joint Election and the Exercise Agreement constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede all prior understandings and agreements with respect to such subject matter.

          14. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated on the Notice or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail or Royal Mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by facsimile.

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

          15. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon Optionee and Optionee’s legal representatives or authorized assignee.

          16. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A EMPLOYEE AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.

          13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to that body of law pertaining to choice of law or conflict of law.

This Option Agreement has been executed and delivered as a deed on the date written above.

SIGNED as a Deed

by	in the presence of:
	Witness signature:
	Name:
	Address:
	Occupation:

SIGNED as a DEED

By SILICON IMAGE, INC.acting by the under-mentioned person(s) acting on the authority of the Company in accordance with the laws of the territory of its incorporation:

Steve Tirado, President & CEO

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

EXHIBIT A

EXERCISE AGREEMENT

Silicon Image, Inc.
Stock Option Exercise Notice
(for Optionees based in the United Kingdom)

You must submit this form to Stock Administration prior to contacting your broker.

I am exercising my Silicon Image stock options as follows:
(A) Grant/Option #:	(B) Total # of Shares to Exercise:
(C) Cost per Share: $	(D) Total Exercise Cost (B) X (C): $
(E) Grant Type (circle one): ISO NQ	(F) Tax Amount Due if NQ: $
	Please leave NQ tax amount blank —
	Stock Administration will calculate, if applicable.
(G) Exercise Date:	(H) Are any of these shares unvested? YES    NO
Please leave exercise date blank for methods regarding an 1 & 2 — Stock Administration will complete the IRS	If yes, please consult with your tax advisor 83(b) election which must be made and filed with
when transaction is complete. form.	the IRS within 30 days of exercise. See Stock Administration for an election

Please indicate the transaction method below. See reverse side of this form for a brief explanation of each method.

Method 1	SAME DAY SALE You must contact a Silicon Image designated broker to place this trade. Please indicate which broker you have selected below.
Method 2	SELL TO COVER I am exercising _____ shares, but want to sell only ___ shares. The balance will be deposited in the account I’ve designated below. You must contact a Silicon Image designated broker to place this trade. Please indicate which broker you have selected below.
Method 3	EXERCISE & HOLD Please attach a personal check, made payable to Silicon Image for the amounts indicated in items (D) and (F) above. Please indicate below where you would like your stock certificate to be mailed.

Broker Name

Broker Address

Account #

Credit Suisse First Boston	Account #                                                    (415) 249-2205
Deutsche Bank Alex Brown	Account #                                                    (800) 248-3565
E*Trade/OptionsLink	It is not necessary to complete this form — please go to www.etrade.com or www.optionslink.com or call (800) 838-0908 to complete your trade.

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

I authorize the broker to remit funds to Silicon Image to pay for this exercise and any applicable taxes and I understand that the shares will be sent directly to the broker address I have indicated above. I acknowledge receipt of the prospectus covering shares of common stock offered to optionees under the Company’s Stock Option Plan. The Plan and Option Agreement are incorporated herein by reference. The Exercise Agreement, the Plan and Option Agreement constitute the entire agreement and understanding of the parties and supercede in their entirety all prior understandings and agreements of the Company and Optionee with respect to the subject matter hereof. I UNDERSTAND THAT I MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF THE PURCHASE OR DISPOSITION OF THESE SHARES. I HAVE CONSULTED WITH ANY TAX CONSULTANT(S) I DEEM ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND CERTIFY THAT I AM NOT RELYING ON THE COMPANY FOR TAX ADVICE. ___(Initial here)

First Name	Middle Initial	Last Name	Signature
Social Security #		Employee ID #	Phone Number
Current Address

NOTE FOR NON-QUALIFIED (NQ) OPTIONS ONLY — Tax is required to be withheld or collected upon exercise of all non-qualified stock options. The tax is based on the spread between the sale price (closing fair market value if not same day sale) and the exercise price multiplied by 35.75% (25% federal; 9.3% CA state; 1.45% Medicare). In addition, Social Security tax may be withheld or collected depending on what you have paid year to date.

NOTE FOR UNITED KINGDOM OPTIONS ONLY – Exercise is ineffective if you have not executed the required “joint election” form. Your employer will calculate the income tax and employee’s and employer’s National Insurance contributions when due and will account for these amounts to Her Majesty’s Revenue & Customs (“HRMC”). You are required to reimburse your employer for the amounts contributed by it to HRMC. Your employer may withhold these amounts from your monthly salary. If the total amount of income tax and National Insurance contributions exceeds your salary, you will have to make up for the difference (such as “sell to cover”). Alternatively, the Company may sell or arrange for the sale of shares that you receive from this exercise to cover these amounts. The Company may refuse to deliver your shares to you until all such amounts have been repaid or recovered.

Method 1 — SAME DAY SALE

You are selling all vested shares as indicated on the Exhibit A.

Method 2 — SELL TO COVER

You want to exercise vested shares and sell a portion of these shares to cover the cost and applicable taxes of all the exercised shares. The balance of unsold shares will be deposited into your brokerage account for future sale.

Method 3 — EXERCISE & HOLD

You only want to exercise (purchase) the shares in order to sell them at a later date.

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

Silicon Image Designated Brokers
A Credit Suisse First Boston	Morgan Stanley
Private Client Services	101 California St
201 Spear Street, 16th Floor	San Francisco, CA
San Francisco, CA 94105	(800) 248-3565
Mahnaz Ahmed (415) 249-2202	Jesse Bromberg (415) 693-6876
Fax — (415) 835-8350
E*Trade/OptionsLink
P.O. Box 989032
West Sacramento, CA 95798-9858
www.optionslink.com
(800) 838-0908 (press “0” for service representative)
(650) 599-0125 (from outside the United States)

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

EXHIBIT B

Joint Election under s431 ITEPA 2003 for full or partial disapplication of
Chapter 2 Income Tax (Earnings and Pensions) Act 2003

One Part Election

1. Between

the Employee
whose National Insurance Number is
and
the Company (who is the Employee’s employer)	Silicon Image UK Limited
of Company Registration Number	05293397

2. Purpose of Election

This joint election is made pursuant to section 431(1) or 431(2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and applies where employment-related securities, which are restricted securities by reason of section 423 ITEPA, are acquired.

The effect of an election under section 431(1) is that, for the relevant Income Tax and NIC purposes, the employment-related securities and their market value will be treated as if they were not restricted securities and that sections 425 to 430 ITEPA do not apply. An election under section 431(2) will ignore one or more of the restrictions in computing the charge on acquisition. Additional Income Tax will be payable (with PAYE and NIC where the securities are Readily Convertible Assets).

Should the value of the securities fall following the acquisition, it is possible that Income Tax/NIC that would have arisen because of any future chargeable event (in the absence of an election) would have been less than the Income Tax/NIC due by reason of this election. Should this be the case, there is no Income Tax/NIC relief available under Part 7 of ITEPA 2003; nor is it available if the securities acquired are subsequently transferred, forfeited or revert to the original owner.

3. Application

This joint election is made not later than 14 days after the date of acquisition of the securities by the employee and applies to:

Number of securities
Description of securities	Common Stock of Silicon Image, Inc.
Name of issuer of securities	Silicon Image, Inc.

Silicon Image, Inc.
Stock Option Agreement
1999 Equity Incentive Plan

To be acquired by the Employee after [date of exercise] under the terms of the UK Sub-Plan of the Silicon Image, Inc. 1999 Equity Incentive Plan.

4. Extent of Application

This election disapplies S.431(1) ITEPA: All restrictions attaching to the securities.

5. Declaration

This election will become irrevocable upon the later of its signing or the acquisition of employment-related securities to which this election applies.

In signing this joint election, we agree to be bound by its terms as stated above.

	___/___/___
Signature (Employee)	Date
	___/___/___
SIGNATURE (FOR AND ON BEHALF OF THE COMPANY)	Date
Position in company

Dated: (insert date)

SILICON IMAGE, INC.

- and -

SILICON IMAGE UK LIMITED

- and -

OPTIONEE

JOINT ELECTION

TAYLOR WESSING
Carmelite
50 Victoria Embankment
Blackfriars
London EC4Y 0DX

Tel: +44 (0)20 7300 7000
Fax: +44 (0)20 7300 7100
DX 41 London

FINAL
13/03/2006
Ref: DNK/FXB/SIL–63–10

JOINT ELECTION

BETWEEN

(1)	SILICON IMAGE, INC. whose registered office is at 1060 East Arques Avenue, Sunnyvale CA 94085, USA (the “Company”); and
(2)	SILICON IMAGE UK LIMITED (company registration no. 05293397) whose registered office is at Carmelite, 50 Victoria Embankment, London EC4Y 0DX (the “Employer”); and
(3)	«Name» of «Address» (the Optionee which shall include his executors or administrators in the case of his death).

INTRODUCTION

(A)	The Optionee may be granted, from time to time, options (each one an “Option”) to acquire             shares of common stock in the Company (the “Shares”) on terms to be set out in stock option agreements to be issued to the UK Sub-Plan of the Silicon Image, Inc. 1999 Equity Incentive Plan (the “Plan”).
(B)	This joint election (the “Joint Election”) is in an approved format. The exercise, cancellation, release, assignment or other disposal of an Option is subject to the Optionee entering into this Joint Election.
(C)	The Optionee is currently an employee of the Employer.
(D)	The exercise, release, cancellation, assignment or other disposal of an Option (a “Trigger Event”) (whether in whole or in part), may result in the Employer or, if and to the extent that there is a change in law, any other company or person who becomes the secondary contributor for National Insurance contributions (“NIC”) purposes at the time of such Trigger Event having a liability to pay employer’s (secondary) Class I NICs (or any tax or social security premiums which may be introduced in substitution or in addition thereto) in respect of such Trigger Event.
(E)	Where the context so admits, any reference in this Joint Election:

(i)	to the singular number shall be construed as if it referred also to the plural number and vice versa;
(ii)	to the masculine gender shall be construed as though it referred also to the feminine gender;
(iii)	to a statute or statutory provision shall be construed as if it referred also to that statute or provision as for the time being amended or re-enacted;
(iv)	Shares means shares of common stock of the Company.

AGREED TERMS

1.	Joint Election
1.1	It is a condition of the exercise, cancellation, release, assignment or other disposal of an Option that the Optionee has entered into this Joint Election with the Employer.
1.2	The Optionee, the Company and the Employer elect to transfer the liability (the “Liability”) for all of the employer’s (Secondary) Class I NICs, referred to in (D) above and charged on payments or other benefits arising on a Trigger Event and treated as remuneration and earnings pursuant to section 4(4)(a) of the Social Security Contributions and Benefit Act 1992 (“SSCBA”) to the Optionee. This Joint Election is made pursuant to an arrangement authorised by paragraph 3B, Schedule 1 of the SSCBA.
2.	Restriction on registration until liability paid by Optionee
	The Optionee hereby agrees that no Shares shall be registered in his name until he has met the Liability as a result of a Trigger Event in accordance with this Joint Election.
3.	Payment
3.1	Where, in relation to an Option, the Optionee is liable, or is in accordance with current practice at the date of the Trigger Event believed by the Employer to be liable (where it is believed that the shares under option are readily convertible assets), to account to the Inland Revenue for the Liability, the Optionee and the Employer agree that, upon receipt of the funds to meet the Liability from the Employee, that such funds to meet the Liability shall be paid to the Collector of Taxes or other relevant taxation authority by the Employer on the Optionee’s behalf within 14 days of the end of the income tax month in which the gain on the Option was made (“the 14 day period”) and for the purposes of securing payment of the Liability the Optionee will on the occurrence of a Trigger Event:

(a)	pay to the Employer a cash amount equal to the Liability; and/or
(b)	suffer a deduction from salary or other remuneration due to the Optionee such deduction being in an amount not exceeding the Liability; and/or
(c)	at the request of the Company enter into such arrangement or arrangements necessary or expedient with such person or persons (including the appointment of a nominee on behalf of the Optionee) to effect the sale of Shares acquired through the exercise of the Option to cover all or any part of the Liability and use the proceeds to pay the Employer a cash amount equal to the Liability.

3.2 The Optionee hereby irrevocably appoints the Company and the Employer as his attorney with full power in his name to execute or sign any document and do any other thing which the Company or the Employer may consider desirable for the purpose of giving effect to the Optionee satisfying the Liability under clause 3.1 and satisfying any penalties and interest under clause 3.4. The Optionee further agrees to ratify and confirm whatever the Company and the Employer may lawfully do as his attorney. In particular, the Employer and/or the Company will have the right to enter into such an arrangement (as envisaged by clause 3.1(c)) on the Optionee’s behalf to sell sufficient of the Shares issued or transferred to the Optionee on the exercise of the Option to

	meet the Liability pursuant to clause 3.1 and any penalty or interest arising under clause 3.4.
3.3	The Employer shall pass all monies it has collected from the Optionee in respect of the Liability to the Collector of Taxes by no later than 14 days after the end of the income tax month in which the Trigger Event occurred. The Employer shall be responsible for any penalties or interest that may arise in respect of the Liability from any failure on its part after it has collected any monies from the Optionee to pass the Liability to the Collector of Taxes within the said 14 days period.
3.4	If the Optionee has failed to pay all or part of the Liability to the Employer within the 14 day period the Optionee hereby indemnifies the Employer against such penalties or interest that the Employer would have to pay in respect of the late payment of all or part of the Liability to the Collector of Taxes.
4.	Termination of Joint Election
4.1	This Joint Election shall cease to have effect on the occurrence of any of the following:

(a)	if the terms of this Joint Election are satisfied in the reasonable opinion of the Company, the Employer and the Optionee;
(b)	if the Company, the Employer and the Optionee jointly agree in writing to revoke this Joint Election;
(c)	if the Inland Revenue withdraws approval of this Joint Election so far as it relates to share options covered by the Joint Election but not yet granted;
(d)	if the Options lapse or no Option is otherwise capable of being exercised pursuant to the Plan; and/or
(e)	if the Company and/or the Employer serve notice on the Optionee that the Joint Election is to cease to have effect.

5.	Further assurance
5.1	The Company, Employer and the Optionee shall do all such things and execute all such documents as may be necessary or desirable to ensure that this Joint Election complies with all relevant legislation and/or Inland Revenue requirements.
5.2	The Optionee shall notify the Employer in writing of any Trigger Event which occurs in relation to an Option within three days of such Trigger Event.
5.3	The Company intends, as soon as practicable, to notify the Employer of the Optionee’s intention of exercising an Option and shall provide the Employer with such information available to the Company to enable the Employer to calculate the Liability arising on the Trigger Event.
6.	Secondary Contributor
	The Employer enters into this Joint Election on its own behalf and on behalf of the Company, or, if and to the extent that there is a change in law, any other company or person who is or becomes a secondary contributor for NIC purposes in respect of an Option. It is agreed that the Employer can enforce the terms of this Joint Election against the Optionee on behalf of any such company.

7.	Binding Effect
7.1	The Optionee agrees to be bound by the terms of this Joint Election and for the avoidance of doubt the Optionee shall continue to be bound by the terms of this Joint Election regardless of which country the Optionee is working in when the Liability arises and regardless of whether the Optionee is an employee of the Employer when the Liability arises.
7.2	The Employer and the Company agree to be bound by the terms of this Joint Election and for the avoidance of doubt the Employer and Company shall continue to be bound by the terms of this Joint Election regardless of which country the Optionee is working in when the Liability arises and regardless of whether the Optionee is an employee of the Employer when the Liability arises.
8.	Governing Law
8.1	This Joint Election shall be governed by and construed in accordance with English law and the parties irrevocably submit to the non-exclusive jurisdiction of the English Courts to settle any claims, disputes or issues which may arise out of this deed.

This Joint Election has been executed and delivered as a deed on the date written above.

SIGNED as a Deed

By
	«Name1»

in the presence of:

Witness signature:

Name:

Address:

Occupation:

SIGNED as a DEED

by SILICON IMAGE UK LIMITED

acting by:

Robert Freeman

Director

Steve Tirado

Director

SIGNED as a DEED

By SILICON IMAGE, INC.

acting by the under-mentioned

person(s) acting on the authority

of the Company in accordance

with the laws of the territory of

its incorporation:

Steve Tirado

President and CEO

EX-10.04

Exhibit 10.04

SILICON IMAGE, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN

As Adopted July 20, 1999

     1. Establishment of Plan. Silicon Image, Inc. (the “Company”) proposes to grant options for purchase of the Company’s Common Stock to eligible employees of the Company and its Participating Subsidiaries (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this “Plan”). For purposes of this Plan, “Parent Corporation” and “Subsidiary” shall have the same meanings as “parent corporation” and “subsidiary corporation” in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”). “Participating Subsidiaries” are Parent Corporations or Subsidiaries that the Board of Directors of the Company (the “Board”) designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of 250,000 shares of the Company’s Common Stock is reserved for issuance under this Plan. In addition, on each January 1, the aggregate number of shares of the Company’s Common Stock reserved for issuance under the Plan shall be increased automatically by a number of shares equal to 1% of the total number of outstanding shares of the Company Common Stock on the immediately preceding December 31; provided, that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year; and, provided further, that the aggregate number of shares issued over the term of this Plan shall not exceed 8,000,000 shares. Such number shall be subject to adjustments effected in accordance with Section 14 of this Plan.

     2. Purpose. The purpose of this Plan is to provide eligible employees of the Company and Participating Subsidiaries with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in the affairs of the Company and Participating Subsidiaries, and to provide an incentive for continued employment.

     3. Administration. This Plan shall be administered by the Compensation Committee of the Board (the “Committee”). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.

     4. Eligibility. Any employee of the Company or the Participating Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:

          (a) employees who are not employed by the Company or a Participating Subsidiary (10) days before the beginning of such Offering Period, except that employees who are employed on the Effective Date of the Registration Statement filed by the Company with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) registering the initial public offering of the Company’s Common Stock shall be eligible to participate in the first Offering Period under the Plan;

          (b) employees who are customarily employed for twenty (20) hours or less per week;

          (c) employees who are customarily employed for five (5) months or less in a calendar year;

          (d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period,

Silicon Image, Inc.
1999 Employee Stock Purchase Plan

would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries; and

          (e) individuals who provide services to the Company or any of its Participating Subsidiaries as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes.

     5. Offering Dates. The offering periods of this Plan (each, an “Offering Period”) shall be of twenty-four (24) months duration commencing on February 1 and August 1 of each year and ending on January 31 and July 31 of each year; provided, however, that notwithstanding the foregoing, the first such Offering Period shall commence on the first business day on which price quotations for the Company’s Common Stock are available on the Nasdaq National Market (the “First Offering Date”) and shall end on July 31, 2001. Except for the first Offering Period, each Offering Period shall consist of four (4) six month purchase periods (individually, a “Purchase Period”) during which payroll deductions of the participants are accumulated under this Plan. The first Offering Period shall consist of no more than five and no fewer than three Purchase Periods, any of which may be greater or less than six months as determined by the Committee. The first business day of each Offering Period is referred to as the “Offering Date”. The last business day of each Purchase Period is referred to as the “Purchase Date”. The Committee shall have the power to change the duration of Offering Periods with respect to offerings without stockholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected.

     6. Participation in this Plan. Eligible employees may become participants in an Offering Period under this Plan on the first Offering Date after satisfying the eligibility requirements by delivering a subscription agreement to the Company not later than five (5) days before such Offering Date. Notwithstanding the foregoing, the Committee may set a later time for filing the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. An eligible employee who does not deliver a subscription agreement to the Company by such date after becoming eligible to participate in such Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by filing a subscription agreement with the Company not later than five (5) days preceding a subsequent Offering Date. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan.

     7. Grant of Option on Enrollment. Enrollment by an eligible employee in this Plan with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing (a) the amount accumulated in such employee’s payroll deduction account during such Purchase Period by (b) the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Offering Date (but in no event less than the par value of a share of the Company’s Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company’s Common Stock), provided, however, that the number of shares of the Company’s Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(c) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(b) below with respect to the applicable Purchase Date. The fair market value of a share of the Company’s Common Stock shall be determined as provided in Section 8 below.

     8. Purchase Price. The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:

          (a) The fair market value on the Offering Date; or

          (b) The fair market value on the Purchase Date.

Silicon Image, Inc.
1999 Employee Stock Purchase Plan

          For purposes of this Plan, the term “Fair Market Value” means, as of any date, the value of a share of the Company’s Common Stock determined as follows:

(a)	if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal;
(b)	if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal;
(c)	if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal; or
(d)	if none of the foregoing is applicable, by the Board in good faith, which in the case of the First Offering Date will be the price per share at which shares of the Company’s Common Stock are initially offered for sale to the public by the Company’s underwriters in the initial public offering of the Company’s Common Stock pursuant to a registration statement filed with the SEC under the Securities Act.

     9. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of Shares.

          (a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the participant’s compensation in one percent (1%) increments not less than one percent (1%), nor greater than fifteen percent (15%) or such lower limit set by the Committee. Compensation shall mean all W-2 cash compensation, including, but not limited to, base salary, wages, commissions, overtime, shift premiums and bonuses, plus draws against commissions, provided, however, that for purposes of determining a participant’s compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.

          (b) A participant may increase or decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing more than fifteen (15) days after the Company’s receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Purchase Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions not later than fifteen (15) days before the beginning of such Offering Period.

          (c) A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period commencing more than fifteen (15) days after the Company’s receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the participant’s account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero.

          (d) All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll

Silicon Image, Inc.
1999 Employee Stock Purchase Plan

deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.

          (e) On each Purchase Date, so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant’s account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of this Plan. Any cash remaining in a participant’s account after such purchase of shares shall be refunded to such participant in cash, without interest; provided, however that any amount remaining in such participant’s account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock of the Company shall be carried forward, without interest, into the next Purchase Period or Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.

          (f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the participant’s benefit representing the shares purchased upon exercise of his or her option.

          (g) During a participant’s lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.

     10. Limitations on Shares to be Purchased.

          (a) No participant shall be entitled to purchase stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan. The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.

          (b) No more than two hundred percent (200%) of the number of shares determined by using eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Offering Date as the denominator may be purchased by a participant on any single Purchase Date.

          (c) No participant shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Not less than thirty (30) days prior to the commencement of any Offering Period, the Committee may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the “Maximum Share Amount”). Until otherwise determined by the Committee, there shall be no Maximum Share Amount. In no event shall the Maximum Share Amount exceed the amounts permitted under Section 10(b) above. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period. The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above.

          (d) If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant’s option to each participant affected.

Silicon Image, Inc.
1999 Employee Stock Purchase Plan

          (e) Any payroll deductions accumulated in a participant’s account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest.

     11. Withdrawal.

          (a) Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose. Such withdrawal may be elected at any time at least fifteen (15) days prior to the end of an Offering Period.

          (b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.

          (c) If the Fair Market Value on the first day of the current Offering Period in which a participant is enrolled is higher than the Fair Market Value on the first day of any subsequent Offering Period, the Company will automatically enroll such participant in the subsequent Offering Period. Any funds accumulated in a participant’s account prior to the first day of such subsequent Offering Period will be applied to the purchase of shares on the Purchase Date immediately prior to the first day of such subsequent Offering Period, if any.

     12. Termination of Employment. Termination of a participant’s employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Subsidiary, immediately terminates his or her participation in this Plan. In such event, the payroll deductions credited to the participant’s account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.

     13. Return of Payroll Deductions. In the event a participant’s interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the participant all payroll deductions credited to such participant’s account. No interest shall accrue on the payroll deductions of a participant in this Plan.

     14. Capital Changes. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the “Reserves”), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration”. Such adjustment shall be made by the Committee, whose determination shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option.

     In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that this Plan shall terminate as of a

Silicon Image, Inc.
1999 Employee Stock Purchase Plan

date fixed by the Committee and give each participant the right to purchase shares under this Plan prior to such termination. In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the options under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, the Plan will continue with regard to Offering Periods that commenced prior to the closing of the proposed transaction and shares will be purchased based on the Fair Market Value of the surviving corporation’s stock on each Purchase Date, unless otherwise provided by the Committee consistent with pooling of interests accounting treatment.

     The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation.

     15. Nonassignability. Neither payroll deductions credited to a participant’s account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.

     16. Reports. Individual accounts will be maintained for each participant in this Plan. Each participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.

     17. Notice of Disposition. Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the “Notice Period”). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company’s transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.

     18. No Rights to Continued Employment. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Subsidiary, or restrict the right of the Company or any Participating Subsidiary to terminate such employee’s employment.

     19. Equal Rights And Privileges. All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan.

     20. Notices. All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

Silicon Image, Inc.
1999 Employee Stock Purchase Plan

     21. Term; Stockholder Approval. After this Plan is adopted by the Board, this Plan will become effective on the First Offering Date (as defined above). This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares pursuant to this Plan shall occur prior to such stockholder approval. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) ten (10) years from the adoption of this Plan by the Board.

     22. Designation of Beneficiary.

          (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant’s account under this Plan in the event of such participant’s death subsequent to the end of an Purchase Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant’s account under this Plan in the event of such participant’s death prior to a Purchase Date.

          (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant’s death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

     23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

     24. Applicable Law. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California.

     25. Amendment or Termination of this Plan. The Board may at any time amend, terminate or extend the term of this Plan, except that any such termination cannot affect options previously granted under this Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 21 above within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would:

     (a) increase the number of shares that may be issued under this Plan; or

     (b) change the designation of the employees (or class of employees) eligible for participation in this Plan.

     Notwithstanding the foregoing, the Board may make such amendments to the Plan as the Board determines to be advisable, if the continuation of the Plan or any Offering Period would result in financial accounting treatment for the Plan that is different from the financial accounting treatment in effect on the date this Plan is adopted by the Board.

THE SILICON IMAGE, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

SUB-PLAN FOR UK EMPLOYEES

1.	The purpose of this Sub-Plan is to provide incentive for present and future employees in the United Kingdom of Silicon Image’s Subsidiaries through the grant of options over Common Stock.
2.	This Sub-Plan is governed by the Silicon Image, Inc. 1999 Employee Stock Purchase Plan (the “Plan”) and all its provisions shall be identical to those of the Plan SAVE THAT Section 4 shall be as stated in this Sub-Plan in order to accommodate the specific requirements of UK law.

Section 4 for purposes of this Sub-Plan reads:

     4. Eligibility. Any employee of the Participating Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:

          (a) employees who are not employed by the Company or a Participating Subsidiary (10) days before the beginning of such Offering Period;

          (b) employees who are customarily employed for five (5) months or less in a calendar year;

          (c) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries; and

          (d) individuals who provide services to the Company or any of its Participating Subsidiaries as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes.

SILICON IMAGE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT FORM

Check One:		Complete:
	o New Enrollment or Re-enrollment	Social Security No.
	o Change	Employee No.

o Change in How Shares Are to Be Held in Account
o Increase in Payroll Deduction Level othis Purchase Period onext Offering Period
o Decrease in Payroll Deduction Level othis Purchase Period onext Offering Period
o Suspension of Payroll Deductions for Open Offering Period (Attach Completed Suspension Form)
o Withdrawal (Attach Completed Withdrawal Form)
o Beneficiary Change

1.	Name of Participant
2.	Shares purchased under the Plan should be held in account with the Plan Broker in my name or in my name together with the name(s) indicated below:

Name	Social Security No.
Name	Social Security No.

There may be tax consequences for naming individuals other than your spouse on the account in which Shares purchased under the Plan are held. If spouse (circle one): Joint Tenants/Community Property.

Please notify the Plan Broker directly to transfer or sell your stock.

3.	Payroll Deduction Level (from 1% to 15% in whole percentages):___ (the percentage deduction will be made from your W-2 compensation including base salary, commissions, overtime, shift premiums, bonuses and draws against commissions)
4.	I confirm my spouse’s interest (if married) in the community property herein, and I hereby designate the following person(s) as my beneficiary(ies) to receive all payments and/or stock attributable to my interest under the Plan:

			*To be divided
NAME			as follows:	ADDRESS
Last	First	M.I.		Number	Street
Social Security No.		Relationship		City	State	Zip
Last	First	M.I.		Number	Street
Social Security No.		Relationship		City	State	Zip

* If more than one beneficiary: (1) insert “in equal shares”, or (2) insert percentage to be paid to each beneficiary.

5. The information provided on this Enrollment Form will remain in effect unless and until I complete and submit to Silicon Image, Inc. a new enrollment form.

	SILICON IMAGE, INC. OFFICE USE:
Signature:	Date received by the	:
Name:	Date entered into system:
Date:	Please return this completed form to Silicon Image, Inc.

SILICON IMAGE, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

SUBSCRIPTION AGREEMENT

1.	I elect to participate in the Silicon Image, Inc. (the “Company”) 1999 Employee Stock Purchase Plan (the “Plan”) and to subscribe to purchase shares of the Company’s Common Stock (the “Shares”) in accordance with this Subscription Agreement and the Plan.
2.	I authorize payroll deductions from each of my paychecks in that percentage of my base salary, commissions, overtime, shift premiums, bonuses and draws against commissions as shown on my Enrollment Form, in accordance with the Plan.
3.	I understand that such payroll deductions shall be accumulated for the purchase of Shares under the Plan at the applicable purchase price determined in accordance with the Plan. I further understand that except as otherwise set forth in the Plan, Shares will be purchased for me automatically at the end of each Purchase Period unless I withdraw from the Plan or otherwise become ineligible to participate in the Plan.
4.	I understand that this Subscription Agreement will automatically re-enroll me in all subsequent Offering Periods unless I withdraw from the Plan or I become ineligible to participate in the Plan.
5.	I acknowledge that I have a copy of and am familiar with the Company’s most recent Prospectus which describes the Plan. A copy of the complete Plan and the Prospectus is on file with the Company. (In the case of the initial Plan Purchase Period, the Prospectus will be on file on the first day of the Offering Period.)
6.	I understand that Shares purchased for me under the Plan will be held in a personal account with the Plan Broker unless I request otherwise.
7.	I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan.
8.	I have read and understood this Subscription Agreement.

Signature:

Name:

Date:

Please return this completed form to the Company.

SILICON IMAGE, INC.
UK SUB-PLAN OF THE 1999
EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT FORM

Tick One:		Complete:
	o New Enrollment or Re-enrollment	National Insurance No.
	o Change	Employee No.

o Increase in Payroll Deduction Level othis Purchase Period onext Offering Period
o Decrease in Payroll Deduction Level othis Purchase Period onext Offering Period
o Suspension of Payroll Deductions for Open Offering Period (Attach Completed Suspension Form)
o Withdrawal (Attach Completed Withdrawal Form)
o Beneficiary Change

1.	Name of Participant
2.	Shares purchased under the Sub-Plan will be held in the account with the Plan Broker in your name.
	Please notify the Plan Broker directly if you wish to transfer the shares to an account other than your individual account. NOTE that there may be tax consequences for naming individuals other than your spouse on the account in which Shares purchased under the Sub-Plan are held. You should consult your tax advisor regarding this issue.
	Please notify the Plan Broker directly to transfer or sell your stock.
3.	Payroll Deduction Level (from 1% to 15% in whole percentages):___
	(the percentage deduction will be made from your post-tax remuneration including base salary, commissions, overtime, shift premiums, bonuses and draws against commissions)
4.	I confirm my spouse’s interest (if married) in the community property herein, and I hereby designate the following person(s) as my beneficiary(ies) to receive all payments and/or stock attributable to my interest under the Sub-Plan:

			*To be divided
NAME			as follows:	ADDRESS
Last	First	M.I.		Number	Street
Social Security No.		Relationship		City	State	Zip
Last	First	M.I.		Number	Street
Social Security No.		Relationship		City	State	Zip

* If more than one beneficiary: (1) insert “in equal shares”, or (2) insert percentage to be paid to each beneficiary.

5. The information provided on this Enrollment Form will remain in effect unless and until I complete and submit to Silicon Image, Inc. a new enrollment form.

	SILICON IMAGE, INC. OFFICE USE:
Signature:	Date received
Name:	Date entered into system
Date:

Please return this completed form to Silicon Image, Inc. Human Resources — Fax (408) 830-9531.

SILICON IMAGE, INC.

UK SUB-PLAN OF THE 1999 EMPLOYEE STOCK PURCHASE PLAN

SUBSCRIPTION AGREEMENT

1. I elect to participate in the UK Sub-Plan of the Silicon Image, Inc. (the “Company”) 1999 Employee Stock Purchase Plan (the “Sub-Plan”) and to subscribe to purchase shares of the Company’s Common Stock (the “Shares”) in accordance with this Subscription Agreement and the Sub-Plan.

2. I authorize payroll deductions from each of my post-tax remuneration in that percentage of my base salary, commissions, overtime, shift premiums, bonuses and draws against commissions as shown on my Enrollment Form, in accordance with the Sub-Plan.

3. I understand that such payroll deductions shall be accumulated for the purchase of Shares under the Sub-Plan at the applicable purchase price determined in accordance with the Sub-Plan. I further understand that except as otherwise set forth in the Sub-Plan, Shares will be purchased for me automatically at the end of each Purchase Period unless I withdraw from the Sub-Plan or otherwise become ineligible to participate in the Sub-Plan.

4. I understand that this Subscription Agreement will automatically re-enroll me in all subsequent Offering Periods unless I withdraw from the Plan or I become ineligible to participate in the Sub-Plan.

5. I acknowledge that I have a copy of and am familiar with the Company’s most recent Prospectus which describes the Sub-Plan. A copy of the complete Sub-Plan and the Prospectus is on file with the Company. (In the case of the initial Plan Purchase Period, the Prospectus will be on file on the first day of the Offering Period.)

6. Taxation Indemnity.

(a)	I agree to indemnify and keep indemnified the Company and the Company as trustee for and on behalf of any related corporation, in respect of any liability or obligation of the Company and/or any related corporation to account for income tax (under PAYE) or any other taxation provisions and primary class 1 National Insurance Contributions (“NICs”) in the United Kingdom to the extent arising from the grant, exercise, assignment, release, cancellation or any other disposal of my option or arising out of the acquisition, retention and disposal of the Shares acquired pursuant to the Subscription Agreement.
(b)	The Company shall not be obliged to allot and issue any Shares or any interest in Shares to me unless and until I have paid to the Company such sum as is, in the opinion of the Company, sufficient to indemnify the Company in full against any liability the Company has to account to the Inland Revenue for any amount of, or representing, income tax and/or primary NICs (the “Tax Liability”), or I have made such other arrangement as in the opinion of the Company will ensure that the full amount of any Tax Liability will be recovered from me within such period as the Company may then determine.
(c)	In the absence of any such other arrangement being made, the Company shall have the right to retain out of the aggregate number of shares to which I would be otherwise entitled upon the exercise of my option, such number of Shares as, in the opinion of the Company, will enable the Company to sell as agent for me (at the best price which can reasonably expect to be obtained at the time of the sale) and to pay over to the Company sufficient monies out of the net proceeds of sale, after deduction of all fees, commissions and expenses incurred in relation to such sale, to satisfy my liability under such indemnity.

7. Employer’s NICs. As a consideration of the opportunity to participate in the Sub-Plan I agree to join with the Company or, if and to the extent that there is a change in the law, any other company or person who is or becomes a secondary contributor for NIC purposes in respect of this option (the “Secondary Contributor”) in making an election (in such terms and such form as provided in paragraphs 3A and 3B of Schedule 1 to the Social Security Contributions and Benefits Act 1992) which has been approved by the Inland Revenue (the “Joint Election”), for the transfer of the whole or any liability of the Secondary Contributor to Employer’s Class 1 NICs to me. I realize and agree that if the Company does not have an effective Joint Election on file for me by

the deadline for withdrawal from the Sub-Plan for a given Purchase Date, then the absence of such Joint Election shall be treated as an election by me to withdraw from the Sub-Plan and on such Purchase Date no purchase shall be made for me and any deductions/contributions shall be refunded to me.

8. I understand that Shares purchased for me under the Sub-Plan will be held in a personal account with the Plan Broker unless I request otherwise.

9. Data Protection.

(a)

In order to facilitate the administration of the Sub-Plan, it will be necessary for Silicon Image UK Limited (or its payroll administrators) to collect, hold and process certain personal information about me and to transfer this data to the Company and to the Plan Brokers. I consent to Silicon Image UK Limited collecting, holding and processing its personal data and transferring this data to the Company or any other third parties insofar as is reasonably necessary to implement, administer and manage the Sub-Plan.

(b)

I understand that I may, at any time, view my personal data, require any necessary corrections to it or withdraw the consents herein in writing by contacting the Human Resources Department of the Company (but acknowledge that without the use of such data it may not be practicable for Silicon Image UK Limited and the Company to administer my involvement in the Sub-Plan in a timely fashion or at all and this may be detrimental to me.

10. I hereby agree to be bound by the terms of the Sub-Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Sub-Plan.

11. I have read and understood this Subscription Agreement.

Signature:

Name:

Date:

Please return this completed form to Silicon Image, Inc., Human Resources

Fax (408) 830-9531.

SILICON IMAGE, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF SUSPENSION

I, ___, the undersigned participant in the Offering Period of the Silicon Image, Inc. 1999 Employee Stock Purchase Plan (the “Plan”) which began on ___, hereby notify Silicon Image, Inc. (the “Company”) that I wish to suspend my payroll deductions to the Plan for the remainder of the Offering Period. I understand and agree that my request will be effective beginning with the next payroll period commencing more than 15 days after the Company receives this Notice of Suspension. I understand and agree that payroll deductions credited to my account prior to the date this Notice of Suspension is effective will be used to purchase shares on the next Purchase Date. I further understand that no additional payroll deductions will be made for the purchase of shares in the current Offering Period, and I will be eligible to participate in succeeding Offering Periods only by timely delivering to the Company a new Subscription Agreement and Enrollment Form.

Name and address of Participant (please print):

Name:
Street Address or P.O. Box:
City, State ZIP:
Signature	Date

Please return this form to Human Resources.

SILICON IMAGE, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF WITHDRAWAL

I, ___, the undersigned participant in the Offering Period of the Silicon Image, Inc. 1999 Employee Stock Purchase Plan (the “Plan”) which began on ___, hereby notify Silicon Image, Inc. (the “Company”) that I wish to withdraw from the Offering Period. I direct the Company to pay to me as promptly as practicable all payroll deductions credited to my account with respect to such Offering Period. I understand and agree that my participation in the Plan will terminate and no shares will be purchased for me at the end of the Purchase Period so long as I submit this Notice of Withdrawal to the Company at least 15 days prior to the end of the Purchase Period. I understand and agree that if I submit this Notice of Withdrawal to the Company less than 15 days prior to the end of the Purchase Period, shares will be purchased for me at the end of the Purchase Period, and my participation in the Plan will end at the beginning of the next Purchase Period or Offering Period, as the case may be. I further understand that no additional payroll deductions will be made for the purchase of shares in the current Offering Period, and I shall be eligible to participate in succeeding Offering Periods only by timely delivering to the Company a new Subscription Agreement and Enrollment Form.

Name and address of Participant (please print):

Name:
Street Address or P.O. Box:
City, State ZIP:
Signature	Date

Please return this form to Human Resources.

Dated: (insert date)

SILICON IMAGE, INC.

- and -

SILICON IMAGE UK LIMITED

- and -

PARTICIPANT

JOINT ELECTION

TAYLOR WESSING
Carmelite
50 Victoria Embankment
Blackfriars
London EC4Y 0DX

Tel: +44 (0)20 7300 7000
Fax: +44 (0)20 7300 7100
DX 41 London

FINAL
13/03/2006
Ref: DNK/FXB/SIL–63–10

JOINT ELECTION

BETWEEN

(1)	SILICON IMAGE, INC. whose registered office is at 1060 East Arques Avenue, Sunnyvale CA 94085, USA (the “Company”); and
(2)	SILICON IMAGE UK LIMITED (company registration no. 05293397) whose registered office is at Carmelite, 50 Victoria Embankment, London EC4Y 0DX (the “Employer”); and
(3)	«Name» of «Address» (the “Participant” which shall include his executors or administrators in the case of his death).

INTRODUCTION

(A)	The Participant may be granted, from time to time, options (each one an “Option”) to acquire shares of common stock in the Company (the “Shares”) on terms to be set out in stock purchase agreements to be issued to the UK Sub-Plan of the Silicon Image, Inc. 1999 Employee Stock Purchase Plan (the “Plan”).
(B)	This joint election (the “Joint Election”) is in an approved format. The exercise, cancellation, release, assignment or other disposal of an Option is subject to the Participant entering into this Joint Election.
(C)	The Participant is currently an employee of the Employer.
(D)	The exercise, release, cancellation, assignment or other disposal of an Option (a “Trigger Event”) (whether in whole or in part), may result in the Employer or, if and to the extent that there is a change in law, any other company or person who becomes the secondary contributor for National Insurance contributions (“NIC”) purposes at the time of such Trigger Event having a liability to pay employer’s (secondary) Class I NICs (or any tax or social security premiums which may be introduced in substitution or in addition thereto) in respect of such Trigger Event.
(E)	Where the context so admits, any reference in this Joint Election:

(i)	to the singular number shall be construed as if it referred also to the plural number and vice versa;
(ii)	to the masculine gender shall be construed as though it referred also to the feminine gender;
(iii)	to a statute or statutory provision shall be construed as if it referred also to that statute or provision as for the time being amended or re-enacted;
(iv)	Shares means shares of common stock of the Company.

AGREED TERMS

1.	Joint Election
1.1	It is a condition of the exercise, cancellation, release, assignment or other disposal of an Option that the Participant has entered into this Joint Election with the Employer.

1.2 The Participant, the Company and the Employer elect to transfer the liability (the “Liability”) for all of the employer’s (Secondary) Class I NICs, referred to in (D) above and charged on payments or other benefits arising on a Trigger Event and treated as remuneration and earnings pursuant to section 4(4)(a) of the Social Security Contributions and Benefit Act 1992 (“SSCBA”) to the Participant. This Joint Election is made pursuant to an arrangement authorised by paragraph 3B, Schedule 1 of the SSCBA.

2. RESTRICTION ON REGISTRATION UNTIL LIABILITY PAID BY PARTICIPANT

     The Participant hereby agrees that no Shares shall be registered in his name until he has met the Liability as a result of a Trigger Event in accordance with this Joint Election.

3. PAYMENT

3.1 Where, in relation to an Option, the Participant is liable, or is in accordance with current practice at the date of the Trigger Event believed by the Employer to be liable (where it is believed that the shares under option are readily convertible assets), to account to the Inland Revenue for the Liability, the Participant and the Employer agree that, upon receipt of the funds to meet the Liability from the Employee, that such funds to meet the Liability shall be paid to the Collector of Taxes or other relevant taxation authority by the Employer on the Participant’s behalf within 14 days of the end of the income tax month in which the gain on the Option was made (“the 14 day period”) and for the purposes of securing payment of the Liability the Participant will on the occurrence of a Trigger Event:

(a)	pay to the Employer a cash amount equal to the Liability; and/or
(b)	suffer a deduction from salary or other remuneration due to the Participant such deduction being in an amount not exceeding the Liability; and/or
(c)	at the request of the Company enter into such arrangement or arrangements necessary or expedient with such person or persons (including the appointment of a nominee on behalf of the Participant) to effect the sale of Shares acquired through the exercise of the Option to cover all or any part of the Liability and use the proceeds to pay the Employer a cash amount equal to the Liability.

3.2 The Participant hereby irrevocably appoints the Company and the Employer as his attorney with full power in his name to execute or sign any document and do any other thing which the Company or the Employer may consider desirable for the purpose of giving effect to the Participant satisfying the Liability under clause 3.1 and satisfying any penalties and interest under clause 3.4. The Participant further agrees to ratify and confirm whatever the Company and the Employer may lawfully do as his attorney. In particular, the Employer and/or the Company will have the right to enter into such an arrangement (as envisaged by clause 3.1(c)) on the Participant’s behalf to sell sufficient of the Shares issued or transferred to the Participant on the exercise of the

Option to meet the Liability pursuant to clause 3.1 and any penalty or interest arising under clause 3.4.

3.3 The Employer shall pass all monies it has collected from the Participant in respect of the Liability to the Collector of Taxes by no later than 14 days after the end of the income tax month in which the Trigger Event occurred. The Employer shall be responsible for any penalties or interest that may arise in respect of the Liability from any failure on its part after it has collected any monies from the Participant to pass the Liability to the Collector of Taxes within the said 14 days period.

3.4 If the Participant has failed to pay all or part of the Liability to the Employer within the 14 day period the Participant hereby indemnifies the Employer against such penalties or interest that the Employer would have to pay in respect of the late payment of all or part of the Liability to the Collector of Taxes.

4. TERMINATION OF JOINT ELECTION

4.1 This Joint Election shall cease to have effect on the occurrence of any of the following:

(a)	if the terms of this Joint Election are satisfied in the reasonable opinion of the Company, the Employer and the Participant;
(b)	if the Company, the Employer and the Participant jointly agree in writing to revoke this Joint Election;
(c)	if the Inland Revenue withdraws approval of this Joint Election so far as it relates to share options covered by the Joint Election but not yet granted;
(d)	if the Options lapse or no Option is otherwise capable of being exercised pursuant to the Plan; and/or
(e)	if the Company and/or the Employer serve notice on the Participant that the Joint Election is to cease to have effect.

5. FURTHER ASSURANCE

5.1 The Company, Employer and the Participant shall do all such things and execute all such documents as may be necessary or desirable to ensure that this Joint Election complies with all relevant legislation and/or Inland Revenue requirements.

5.2 The Participant shall notify the Employer in writing of any Trigger Event which occurs in relation to an Option within three days of such Trigger Event.

5.3 The Company intends, as soon as practicable, to notify the Employer of the Participant’s intention of exercising an Option and shall provide the Employer with such information available to the Company to enable the Employer to calculate the Liability arising on the Trigger Event.

6.	SECONDARY CONTRIBUTOR
	The Employer enters into this Joint Election on its own behalf and on behalf of the Company, or, if and to the extent that there is a change in law, any other company or person who is or becomes a secondary contributor for NIC purposes in respect of an Option. It is agreed that the Employer can enforce the terms of this Joint Election against the Participant on behalf of any such company.

7. BINDING EFFECT

7.1 The Participant agrees to be bound by the terms of this Joint Election and for the avoidance of doubt the Participant shall continue to be bound by the terms of this Joint Election regardless of which country the Participant is working in when the Liability arises and regardless of whether the Participant is an employee of the Employer when the Liability arises.

7.2 The Employer and the Company agree to be bound by the terms of this Joint Election and for the avoidance of doubt the Employer and Company shall continue to be bound by the terms of this Joint Election regardless of which country the Participant is working in when the Liability arises and regardless of whether the Participant is an employee of the Employer when the Liability arises.

8. GOVERNING LAW

8.1 This Joint Election shall be governed by and construed in accordance with English law and the parties irrevocably submit to the non-exclusive jurisdiction of the English Courts to settle any claims, disputes or issues which may arise out of this deed.

This Joint Election has been executed and delivered as a deed on the date written above.

SIGNED as a Deed

By
	«Name1»

in the presence of:

Witness signature:

Name:

Address:

Occupation:

SIGNED as a DEED
by SILICON IMAGE UK LIMITED
acting by:

Robert Freeman

Director

Steve Tirado

Director

SIGNED as a DEED
By SILICON IMAGE, INC.
acting by the under-mentioned
person(s) acting on the authority
of the Company in accordance
with the laws of the territory of
its incorporation:

Patrick Reutens

Corporate Secretary

Steve Tirado

President and CEO

EX-10.35

CONFIDENTIAL TREATMENT REQUESTED

EXHIBIT 10.35

CONSULTING AGREEMENT

This Consulting Agreement (“Agreement”) is executed on March 15, 2006 with an effective date as of March 24, 2006 (“Effective Date”), by and between Silicon Image, Inc., a Delaware corporation maintaining its principal place of business at 1060 E. Arques Ave., Sunnyvale, California 94085 (“Company”) and Dr. David D. Lee (“Dr. Lee”).

WHEREAS, Dr. Lee was a founder of the Company, and has served as the Company’s Chief Executive Officer and Chairman of the Board;

WHEREAS, after more than eleven years of service to the Company, Dr. Lee has expressed a desire to transition from full-time employment by the Company and has agreed with Company to continue to advise and provide consulting services to the Company, and also pursue other interests;

WHEREAS, Dr. Lee is willing to perform such services, on the terms set forth below;

WHEREAS, Dr. Lee is working with the Business Strategy Committee of the Board of Directors of the Company (the “Business Strategy Committee”) and the Chief Executive Officer, has substantial knowledge of the Company’s technology and strategy, and may continue to have access to confidential information of Company, and therefore agrees to the non-competition provision in Section 13 below;

NOW THEREFORE, in consideration of the mutual promises contained herein, Company and Dr. Lee agree as follows:

1. Termination of Employment.

A.	Effective as of the Effective Date, Dr. Lee resigns as an employee of Company, and the Severance Agreement (as defined in Section 19 below) between Company and Dr. Lee is terminated as set forth in Section 19. Company agrees that the indemnity agreement entered into as of November 25, 2002 by Company and Dr. Lee (the “Indemnity Agreement”) will continue to remain in effect, in accordance with its terms, after the Effective Date. Furthermore, Company agrees that any other indemnification and exculpation provisions set forth in Company’s Certificate of Incorporation and By-Laws, and any other indemnification and exculpation provisions existing on the Effective Date, shall remain in full force and effect with respect to Dr. Lee in accordance with their terms.
B.	Dr. Lee’s resignation from employment by the Company as of the Effective Date will not result in any acceleration of his existing options to purchase shares of the Company’s stock. Stock options previously granted to Dr. Lee by the Company will continue to vest while Dr. Lee renders services hereunder and remain exercisable according to their terms, provided that upon termination of his Agreement, Dr. Lee’s post-termination exercise period (other than the applicable period for cause, death or disability) shall be nine (9) months; provided further that if Dr. Lee is terminated pursuant to Dr. Lee’s purported violation of Section 13 below, Dr. Lee’s post-termination exercise period shall be reduced to three (3) months. Dr. Lee expressly acknowledges that Dr. Lee has consulted his personal tax advisor as to the effect of Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”). The Company has consulted with its tax advisors regarding Section 409A.
C.	For a period of eighteen months following the Effective Date of this Agreement, (a)

Company will reimburse Dr. Lee for COBRA premiums actually paid by Dr. Lee for Dr. Lee and his eligible family members to continue to receive medical insurance coverage at a level commensurate with the coverage provided to Dr. Lee immediately prior to the Effective Date, or at Dr. Lee’s election the Company will make a lump sum payment equal to the eighteen month COBRA premium so that Dr. Lee may purchase medical insurance coverage; provided, that the foregoing obligation shall cease if a third party commences payment of Dr. Lee’s COBRA or medical insurance premiums, and (b) Company will provide Dr. Lee with administrative assistant support.

2.	Services: Dr. Lee agrees to perform the services described in Exhibit A (the “Services”), and to devote such time as is reasonably necessary to perform the Services. Dr. Lee will perform all Services in a diligent and good faith manner and Company will work in good faith to support Dr. Lee’s work in connection with such Services.
3.	Payment for Services: Company will pay Dr. Lee the fees set forth in Exhibit A for the performance of the Services during the term of this Agreement.
4.	Term: This Agreement will commence on the Effective Date and will continue until the first anniversary of the Effective Date or until termination as provided in Section 14 below. This Agreement may be extended for an additional year upon mutual written agreement of the parties hereto.
5.	Relationship of Parties: Dr. Lee will perform the Services under the general direction of Company’s Chief Executive Officer. Dr. Lee, however, will determine in Dr. Lee’s sole discretion the manner and means by which the services are accomplished, subject to the express condition that Dr. Lee will at all times comply with applicable law. Dr. Lee is an independent contractor without authority to bind Company by contract or otherwise, and neither Dr. Lee nor Dr. Lee’s employees and agents are agents or employees of Company.
6.	Time Commitment: It is anticipated that Dr. Lee will spend at least eighty percent (80%) of his work time, calculated on a quarterly basis, on the Services covered by this Agreement. Company recognizes that the term of this Agreement will be a transition period that will allow Dr. Lee to transition to other employment, and that this Agreement is not intended to preclude Dr. Lee from working on other matters, subject to the terms and conditions of this Agreement.
7.	Employment Taxes and Benefits: Dr. Lee acknowledges and agrees that Dr. Lee is obligated to report as income all compensation received by Dr. Lee pursuant to this Agreement, and Dr. Lee will indemnify, hold harmless and, at Company’s request, defend Company and Company’s subsidiaries, affiliates, directors, officers, employees, agents and independent contractors to the extent of any obligation imposed on Company to pay any withholding taxes, social security, unemployment or disability insurance or similar items, including interest and penalties thereon, in connection with any payments made to Dr. Lee by Company pursuant to this Agreement.
8.	Indemnification:

A. Dr. Lee will indemnify, hold harmless Company against all claims, liabilities, damages, losses and expenses, including but not limited to reasonable attorneys’ fees and costs of suit, finally adjudicated to have arisen out of Dr. Lee’s gross negligence and willful misconduct or any violation of Section 9 below; provided however, that Dr. Lee shall not be obligated to indemnify Company for: (i) settlements entered into without first obtaining Dr. Lee’s written consent; provided such consent shall not be unreasonably withheld; (ii) any action taken at

2

the express direction of Company; or (iii) to the extent such indemnification is adjudicated to be unlawful.

B. Company will defend, indemnify and hold harmless Dr. Lee from and against all claims, liabilities, damages, losses and expenses arising out of Dr. Lee’s lawful actions under the Agreement that are taken at the direction of the Company; provided however, that the Company shall not be obligated to defend, indemnify or hold harmless Dr. Lee under this Agreement for: (i) any matter for which Dr. Lee is obligated to indemnify the Company pursuant to Section 8(A) above; (ii) proceedings and claims initiated or brought voluntarily by Dr. Lee and not by way of defense, except with respect to proceedings specifically authorized by the Board of Directors of the Company or brought to establish or enforce a right to indemnification arising under this Agreement or any statute or law or otherwise, but such indemnification may be provided by Company in specific cases if the Board finds it appropriate, (iii) settlements entered into without the Company’s authorization and prior written consent; (iv) an action for an accounting of profits realized by Dr. Lee in violation of Section 16 of the Securities Exchange Act of 1934 or other similar law; or (v) to the extent such indemnification is adjudicated to be unlawful. As a condition of Company’s obligations under this Section 8.B (collectively, “Company Indemnification Obligations”), Dr. Lee will (1) provide Company with prompt written notice of any claim, liability, damage, loss or expense (collectively, “Claim Against Dr. Lee”) that will give rise to Company Indemnification Obligations (provided that any failure to provide such prompt written notice shall only limit coverage to the extent Company is prejudiced by such failure to provide prompt written notice), (2) permit Company to have sole control of the defense, settlement, adjustment or compromise of any such Claim Against Dr. Lee; provided, that (a) Company will not make any acknowledgment of culpability on Dr. Lee’s behalf without Dr. Lee’s consent, and (b) Dr. Lee may secure his own legal representation at his sole expense, who shall not control or participate in the defense, provided further that if the Company and Dr. Lee are named as co-defendants in an action and there is a conflict of interest that prevents the Company from representing Dr. Lee in such action then, solely with respect to the issues where such conflict of interest exists, Company will no longer control Dr. Lee’s defense in such action and will pay for the reasonable fees and expenses of Dr. Lee’s counsel in such action, and (3) provide Company with all reasonable assistance (which shall not be construed to include the payment of funds by Dr. Lee) in the defense, settlement, adjustment or compromise of any Claim Against Dr. Lee. Nothing herein shall limit Company’s obligations existing as of the Effective Date (including obligations with respect to facts and circumstances occurring after the Effective Date) to indemnify Dr. Lee outside of this Agreement, including under the Indemnity Agreement.

9.

Proprietary Information: The product of all work performed under this Agreement for Company (“Work Product”), will be the sole property of Company, and Dr. Lee hereby assigns to Company all right, title and interest, including but not limited to all patent rights (including rights in any patent application of Company in which Dr. Lee is listed as an inventor), copyright, mask work rights, trade secret rights and other proprietary rights therein. During and after the term of this Agreement Dr. Lee will assist Company and its nominees in every proper way, at Company’s expense, to document, secure, maintain and defend for Company’s own benefit in any and all countries all copyrights, patent rights, mask work rights, trade secret rights and other proprietary rights in and to the Work Product. Since the Work Product is the sole property of Company, Dr. Lee will not seek to charge or demand payment outside of this Agreement for Company use of Work Product or other exploitation of its ownership rights in the Work Product.

10.

Other Information: Dr. Lee acknowledges that Company has not asked him to use any other

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party’s confidential or proprietary information to perform the Services.

11. LIMITATION OF LIABILITY.

A.      IN NO EVENT WILL DR. LEE BE LIABLE TO COMPANY FOR ANY LOSS, DAMAGES, CLAIMS OR COSTS WHATSOEVER FOR CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES, ANY LOST PROFITS OR LOST SAVINGS, ANY DAMAGES RESULTING FROM BUSINESS INTERRUPTION OR ANY PUNITIVE DAMAGES EVEN IF DR. LEE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS, DAMAGES, CLAIMS OR COSTS. THE FOREGOING LIMITATIONS AND EXCLUSIONS APPLY TO THE EXTENT PERMITTED BY APPLICABLE LAW. DR. LEE’S AGGREGATE LIABILITY AND THAT OF HIS AFFILIATES AND SERVICE PROVIDERS UNDER OR IN CONNECTION WITH THIS AGREEMENT (INCLUDING UNDER ANY INDEMNITY SET FORTH IN THIS AGREEMENT) WILL BE LIMITED TO THE AMOUNT PAID TO DR. LEE UNDER THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IN THE EVENT OF A FUNDAMENTAL OR MATERIAL BREACH OR A BREACH OF THE FUNDAMENTAL OR MATERIAL TERMS OF THIS AGREEMENT.

B.      IN NO EVENT WILL COMPANY BE LIABLE TO DR. LEE FOR ANY LOSS, DAMAGES, CLAIMS OR COSTS WHATSOEVER FOR CONSEQUENTIAL, INDIRECT OR INCIDENTAL DAMAGES, ANY LOST PROFITS OR LOST SAVINGS, ANY DAMAGES RESULTING FROM BUSINESS INTERRUPTION OR ANY PUNITIVE DAMAGES EVEN IF COMPANY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS, DAMAGES, CLAIMS OR COSTS. THE FOREGOING LIMITATIONS AND EXCLUSIONS APPLY TO THE EXTENT PERMITTED BY APPLICABLE LAW. COMPANY’S AGGREGATE LIABILITY (IN ADDITION TO COMPENSATION PAYMENTS TO BE MADE TO DR. LEE HEREUNDER) AND THAT OF ITS AFFILIATES AND SERVICE PROVIDERS UNDER OR IN CONNECTION WITH THIS AGREEMENT (INCLUDING UNDER ANY INDEMNITY SET FORTH IN THIS AGREEMENT) WILL BE LIMITED TO $1,000,000. THIS LIMITATION WILL APPLY EVEN IN THE EVENT OF A FUNDAMENTAL OR MATERIAL BREACH OR A BREACH OF THE FUNDAMENTAL OR MATERIAL TERMS OF THIS AGREEMENT. THE LIMITATION SET FORTH IN THIS SECTION 11(B) SHALL NOT APPLY TO COMPANY’S OBLIGATIONS UNDER DR. LEE’S OPTIONS, INDEMNITY AGREEMENT OR EXCULPATION OR INDEMNITY PROVISIONS OF COMPANY’S CERTIFICATE OF INCORPORATION AND BYLAWS.

12.

Confidentiality: Dr. Lee will not, during or for a period of two and one-half years following the termination of this Agreement, directly or indirectly (a) use any of Company’s Confidential Information for the benefit of anyone other than Company, or (b) disclose any of Company’s Confidential Information to anyone other than an employee or independent contractor of Dr. Lee who is obligated by written contract to protect the confidentiality thereof and requires such information to perform hereunder, or an employee, director, attorney or agent of Company, or a person designated by Company as an authorized recipient of Company’s Confidential Information. Company’s Confidential Information includes without limitation all confidential information related to the Services, Company’s confidential know-how, all information regarding Company not known to the general public, and all confidential information disclosed to Company by third parties (whether acquired or developed by Dr. Lee during Dr. Lee’s performance under this Agreement or disclosed by Company employees). Confidential Information does not include information which (c) is known to Dr. Lee at the time of disclosure to Dr. Lee by Company, (d) has become publicly known through no wrongful act of Dr. Lee, (e) has been rightfully received by Dr. Lee from a third party who is authorized to make such disclosure, or (f) has been independently developed by Dr. Lee other than pursuant to this Agreement.

13.

Non-Competition: Dr. Lee agrees not to solicit the services of any of Company’s employees during the term of this Agreement. In addition to not soliciting the services of Company’s

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employees, Dr. Lee agrees not to make a job offer to any Company employees while they are employed by Company during the term of this Agreement. During the term of this Agreement Dr. Lee shall not Compete With The Company in any geographic area where the Company or any subsidiary of the Company engages in business or maintains sales or service representatives or employees. “Compete With The Company” means, directly or indirectly, to engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in (other than a 1% or less passive interest in a publicly traded company), or participate in the financing, operation, management, or control of, any person, firm, corporation or business that engages in a “Restricted Business”, as such term is defined hereafter. “Restricted Business” shall mean any business that is engaged or involved in (or, to Dr. Lee’s knowledge after due inquiry, planning or preparing to engage or become involved in) research, development, production, marketing, leasing, selling or servicing any product, product line or service (but does not include a company that has multiple divisions or business units, and where the product or services are related to a division or unit for which Dr. Lee provides no direct or indirect services or oversight, and for which Dr. Lee does not have any other decision making responsibility) that competes, or would compete, with any product, product line or service that is being designed, developed, manufactured, marketed or sold by the Company or any subsidiary of the Company (or, to Dr. Lee’s knowledge with a product or service that the Company or any such subsidiary is planning or preparing to design, develop, manufacture, market or sell). In the event that Company decides not to pursue an opportunity presented to Company by Dr. Lee, Dr. Lee shall have the right to request that the Company’s Board of Directors (the “Board”) determine whether or not Dr. Lee’s pursuit of such opportunity would result in a violation of the foregoing provisions of this Section 13. Notwithstanding the foregoing, the Company is aware of Dr. Lee’s position on the board of directors of, and Dr. Lee’s investment in, Synerchip Co., Ltd. and, provided Dr. Lee complies with the guidelines adopted by the Company’s Board of Directors for this purpose and attached hereto as Exhibit B, such service and investment will not be considered to Compete With The Company.

14. Termination: Dr. Lee may immediately terminate this Agreement upon Company Cause. “Company Cause” means any breach of this Agreement, if such breach causes material harm to Dr. Lee. The Company may immediately terminate this Agreement upon Dr. Lee Cause. “Dr. Lee Cause” means (i) any breach of this Agreement, if such breach causes material harm to the Company; (ii) any gross negligence or willful misconduct by Dr. Lee in Dr. Lee’s performance of Services that causes harm to the Company; (iii) Dr. Lee’s repeated failure to diligently perform Services in a reasonable manner pursuant to this Agreement; (iv) Dr. Lee’s commission of a crime carrying a minimum sentence of one year as determined under the laws of any nation or political subdivision thereof in which such occurs (or is deemed to occur) or violation of the Foreign Corrupt Practices Act or successor or replacement legislation that results in liability to Company; (v) Dr. Lee’s commission of any act of fraud, embezzlement or dishonesty or breach of fiduciary duties owed to the Company; or (vi) Dr. Lee’s abuse of alcohol or controlled substances that has a detrimental effect upon Dr. Lee’s performance of Services. If Dr. Lee claims he has satisfied a Milestone and the Business Strategy Committee determines that Dr. Lee has not satisfied the Milestone, Dr. Lee may terminate the Agreement but shall not be entitled to any further Milestone payments. Dr. Lee may terminate this Agreement upon any of the events set forth in clauses (a) through (e) of Section 18.1 of Company’s 1999 Equity Incentive Plan, as amended, other than a transaction in which each of the following are true (i) the stockholders of Company before the transaction own more than 40% of the outstanding shares of the combined company, and (ii) members of the Board of Directors of Company prior to the announcement of the transaction represent a majority of the directors following such transaction.

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15.	Effect of Termination: Upon the termination of this Agreement pursuant to Section 14 or upon expiration of the term of this Agreement, each party shall be released from all obligations and liabilities to the other occurring or arising after the date of such termination under this Agreement, as applicable, except that any such termination shall not relieve Dr. Lee or Company of their respective obligations and agreements under any of Sections 1, 3, 7, 8, 9, 10, 11, 12, 14, 15, 17 , 18 and 19 hereof, nor shall any such termination relieve Dr. Lee or Company from any liability arising from any breach of this Agreement, provided, however if this Agreement is terminated by either party pursuant to Section 14, Company shall not be obligated to pay for any Services that have not been rendered or any milestones set forth in Exhibit A that have not been accomplished.
16.	Assignment: The rights and liabilities of the parties hereto shall bind and inure to the benefit of their respective successors, executors and administrators, as the case may be; provided that, since Company has specifically contracted for Dr. Lee’s services, Dr. Lee may not assign or delegate his obligations under this Agreement either in whole or in part without the prior written consent of Company.
17.	Governing Law; Severability: This Agreement shall be governed by and construed in accordance with the laws of the State of California. Both parties agree that arbitration between the parties will take place in Santa Clara County, California and further agree that any dispute regarding the interpretation or enforcement of this Agreement shall be decided by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services (“JAMS”) under the then existing JAMS rules rather than by litigation in court, trial by jury, administrative proceeding or in any other forum. The decision of such arbitration may be enforced by the party in whose favor it is given in any court with jurisdiction over the party against whom enforcement is sought. If any provision of this Agreement other than those provisions relating to the assignment of rights to the Company is found by a court of competent jurisdiction to be unenforceable for any reason, the remainder of this Agreement shall continue in full force and effect.
18.	Export: Dr. Lee will not export outside the United States, if a United States citizen, or re-export, if a foreign citizen, any Confidential Information or direct product thereof, except as permitted by the laws and regulations of the United States and as directed by Company. Company shall not direct Dr. Lee to export outside the United States any Confidential Information or direct product thereof, except as permitted by the laws and regulations of the United States.
19.	Complete Understanding; Modification; Waiver of Benefits under Severance Agreement: This Agreement constitutes the full and complete understanding and agreement of the parties relating to the subject matter hereof and supersedes all prior understandings and agreements relating to such subject matter. Any waiver, modification, or amendment of any provision of this Agreement shall be effective only if in writing and signed by the parties hereto. Where there is a conflict between the terms and conditions of this Agreement and Exhibit A, the terms of this Agreement will control. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. Dr. Lee hereby waives any benefits under that certain August 15, 1997 Amended and Restated Severance Agreement between Dr. Lee and Company as amended on January 24, 2000 and March 29, 2001 (collectively, the “Severance Agreement”), and such agreement (including amendments to such agreement) is hereby terminated without any obligation being owed to the other other than as set forth herein.
20.	Notices: Any notices required or permitted hereunder will be given to the appropriate party at the address specified below or at such other address as the party may specify in writing. Such notice

6

	shall be deemed given upon personal delivery to the appropriate address or three (3) days after the date of mailing if sent by certified or registered mail.
21.	Reporting: Dr. Lee will report to the Chief Executive Officer and/or the Board on the status of Dr. Lee’s performance hereunder upon Company’s request and shall make a report to the Business Strategy Committee on a quarterly basis of the plans described in the milestones set forth in Section II of Exhibit A.

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IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first written above.

COMPANY	CONSULTANT
Silicon Image, Inc.	Name: David D. Lee
1060 E. Arques Ave.	Address Omitted
Sunnyvale, California 94085
Signature: /s/ Steve Tirado	Signature: /s/ David D. Lee
Name: Steve Tirado
Title: Chief Executive Officer

Exhibit A – Statement of Work
Exhibit B – Guidelines for Dr. Lee’s Investment and Service with Synerchip Co., Ltd.

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Exhibit A
Statement of Work

This Statement of Work is pursuant to the Consulting Agreement (the “Agreement”) effective as of March 24, 2006 between Silicon Image, Inc. and David D. Lee (“Dr. Lee”). All capitalized terms used but not otherwise defined herein shall have the meanings given such terms in the Agreement. This Statement of Work shall be governed by all the terms and conditions of the Agreement.

I. Services to be Provided: Dr. Lee shall render such services as may be necessary to complete in a professional manner the projects described as follows:

• Assist in successful transition of relationships and strategy formulation activities for CEO.

• Attend meetings of the Company’s board of directors to which Dr. Lee has been invited by the Company’s board of directors.

• Assist the Company in maintaining and improving Company communications [***]

• Assist in the development of relationships for Simplay Labs, LLC [***]

• [***]

• [***]

• Assist the Company in the development of the UDI 1.0 standard and test specification.

• Assist [***] to complete the development of [***]

• [***]

Company will provide commercially reasonable resources to assist in the provision of the foregoing services.

II. Fee Schedule: Dr. Lee shall be paid $40,000 per month during the term of the Agreement. Dr. Lee agrees that any reimbursable travel and entertainment expenses are to be invoiced to Company at cost and must be in accordance with Company’s travel and expenses policy.

Dr. Lee shall also be paid as set forth below for accomplishment of the milestones set forth below by their applicable Due Dates:

1.	Milestone #1: [***] Payment: $125,000 upon accomplishment of Milestone #1 by July 15, 2006
2.	Milestone #2: [***] Payment: $250,000 upon accomplishment of Milestone #2 by October 15, 2006
3.	Milestone #3: [***] Payment: $125,000 upon accomplishment of Milestone #3 by December 31, 2006 The Business Strategy Committee shall act in good faith in determining whether to accept or reject a plan presented by Dr. Lee.

*** Note: Confidential treatment has been requested with respect to the information contained within the [***] marking. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission.

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The Business Strategy Committee shall act in good faith in determining whether to accept or reject a plan presented by Dr. Lee.

III. Counterparts: This Statement of Work may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument.

IN WITNESS WHEREOF, the parties hereto have signed this Statement of Work as of the date first written above.

COMPANY	DR. LEE
Silicon Image, Inc.	Name: David D. Lee
1060 E. Arques Ave.	Address Omitted
Sunnyvale, California 94085
Signature: /s/ Steve Tirado	Signature: /s/ David D. Lee
Name: Steve Tirado
Title: Chief Executive Officer

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Exhibit B
Guidelines for Dr. Lee’s Investment and Service with Synerchip Co., Ltd. (“Synerchip”)

Dr. Lee agrees not to disclose Company confidential information to Synerchip or Synerchip confidential information to Company, without the express consent of the party owning the confidential information.

If Dr. Lee is asked by Company or Synerchip to negotiate a deal with the other party, Dr. Lee agrees to disclose that request, and his role in the negotiations, to the other party.

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EX-21.01

Exhibit 21.01

List of Subsidiaries

Subsidiary Name	Jurisdiction of Incorporation or Organization
CMD Technology Inc.	California
DVDO, Inc.	California
HDMI Licensing, LLC	Delaware
Simplay Labs, LLC	Delaware
Slice Acquisition Corp.	Delaware
TWN Acquisition Corp.	Delaware
Silicon Image, UK	United Kingdom
Silicon Image KK	Japan
Zillion Technologies, LLC	California

EX-23.01

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-62724, 333-67424 and 333-105497) and Form S-8 (Nos. 333-88543, 333-95713, 333-35738, 333-44768, 333-61218, 333-63900, 333-67730, 333-86324, 333-102771, 333-105498, 333-113856 and 333-123377) of our reports dated March 15, 2006, relating to the consolidated financial statements of Silicon Image, Inc. for the year ended December 31, 2005, and management’s report on the effectiveness of internal control over financial reporting (which report expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness), appearing in this Annual Report on Form 10-K of Silicon Image, Inc. for the year ended December 31, 2005.

\s\ DELOITTE & TOUCHE LLP

San Jose, California
March 15, 2006

EX-23.02

EXHIBIT 23.02

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-62724, 333-67424 and 333-105497) and Form S-8 (Nos. 333-88543, 333-95713, 333-35738, 333-44768, 333-61218, 333-63900, 333-67730, 333-86324, 333-102771, 333-105498, 333-113856 and 333-123377) of Silicon Image, Inc. of our report dated March 14, 2005 relating to the consolidated financial statements which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

San Jose, California
March 15, 2006

EX-31.01

Exhibit 31.01

Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Steve Tirado, certify that:

1.	I have reviewed this annual report on Form 10-K of Silicon Image, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006	/s/ Steve Tirado
	Steve Tirado
	President and Chief Executive Officer (Principal Executive Officer)

EX-31.02

Exhibit 31.02

Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert Freeman, certify that:

1.	I have reviewed this annual report on Form 10-K of Silicon Image, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2006	/s/ Robert Freeman
	Robert Freeman
	Chief Financial Officer (Principal Financial Officer)

EX-32.01

Exhibit 32.01

Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

     In connection with the Annual Report of Silicon Image, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), I, Steve Tirado, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.

Date: March 16, 2006	/s/ Steve Tirado
	Steve Tirado
	President and Chief Executive Officer (Principal Executive Officer)

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02

Exhibit 32.02

Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

     In connection with the Annual Report of Silicon Image, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), I, Robert Freeman, Interim Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.

Date: March 16, 2006	/s/ Robert Freeman
	Robert Freeman
	Chief Financial Officer (Principal Financial Officer)

     A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.