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, 2004

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)

(408) 616-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.001 par value

      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 an accelerated filer (as defined in Rule 12b-2 under the Securities Exchange Act of 1934).     Yes þ          No o

      The aggregate market value of voting and non-voting common equity held by non-affiliates at June 30, 2004 was approximately $793,090,145, based on the last reported sale price of common stock on the NASDAQ Stock Market on that date of $13.11 per share. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock (based on Schedule 13G reports filed by such persons in February 2004) and shares held by officers and directors of the Registrant as of June 30, 2004 have been excluded because such persons may be deemed to be affiliates. The number of shares of the Registrant’s common stock outstanding as of December 31, 2004 was 78,132,000. Portions of the Proxy Statement for the 2005 Annual Meeting of stockholders to be held on May 24, 2005, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I
Item 1	Business		3
Item 2	Properties		20
Item 3	Legal Proceedings		20
Item 4	Submission of Matters to a Vote of Securities Holders		23
PART II
Item 5	Market for the Registrant’s Common Stock and Related Stockholder Matters		23
Item 6	Selected Financial Data		24
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A	Quantitative and Qualitative Disclosures of Market Risk		65
Item 8	Financial Statements and Supplementary Data		66
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		66
Item 9A	Controls and Procedures		66
Item 9B	Other Information		67
PART III
Item 10	Directors and Executive Officers of the Registrant		67
Item 11	Executive Compensation		68
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		68
Item 13	Certain Relationships and Related Transactions		68
Item 14	Principal Accountant Fees and Services		68
PART IV
Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		68
Signatures			103
Index to Exhibits Filed Together with this Annual Report			104
EXHIBIT 10.27
EXHIBIT 10.29
EXHIBIT 10.30
EXHIBIT 10.31
EXHIBIT 10.33
EXHIBIT 10.34
EXHIBIT 10.35
EXHIBIT 10.36
EXHIBIT 10.37
EXHIBIT 23.01
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 and 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 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 Silicon Image, Inc. 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.

PART I

Item 1. Business

      Silicon Image is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. The Company’s mission is to be the leader in defining the architectures, intellectual property (IP) and semiconductor technology required to build secure digital content delivery systems. 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.

      Silicon Image’s strategy entails establishing industry-standard, high-speed digital interfaces and building market momentum and leadership through its first-to-market, standards-based IC products. Further leveraging its IP portfolio, the company broadens market adoption of the Digital Visual Interface (DVI), High-Definition Multimedia Interface^tm (HDMI^tm) and Serial ATA (SATA) interfaces by licensing its proven IP cores to companies providing advanced system-on-a-chip solutions incorporating these interfaces. Licensing, in addition to creating revenue and return on engineering investment in market segments we choose not to address, creates products complementary and in some cases competitive to our own that expand the markets for our products and help to improve industry wide interoperability.

      Silicon Image is a leader in the global PC and digital display arena with its 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. Silicon Image’s PanelLink technology serves as the basis for both the DVI standard as well as for the popular HDMI standard, designed for CE applications. Silicon Image’s PanelLink DVI and HDMI solutions are the most popular DVI and HDMI implementation in the market, with more than 80 million units shipped to date.

      In 2000, in order to decrease our dependence on the PC business, we embarked upon a plan to diversify into the CE and storage markets. Products sold into the PC market have been declining as a percentage of our total revenues and generated 23.8% of our revenue in 2004, 32.0% of our revenue in 2003, and 58.1% of our revenues in 2002. If we include licensing revenues, these percentages would be 24.0%, 34.9%, and 62.6% for the years ended December 31, 2004, 2003, and 2002, respectively.

      Leveraging our core technology and standards-setting expertise, Silicon Image is a leading force in advancing the adoption of HDMI, the digital audio and video interface standard for the consumer electronics market. Introduced in 2002 by founders Hitachi Ltd. (Hitachi), Matsushita Electric Industrial Co. (MEI or

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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, Silicon Image’s HDMI technology is also marketed under the PanelLink brand and includes High-bandwidth Digital Content Protection (HDCP), which is supported by Hollywood studios as the technology of choice for the secure distribution of premium content over uncompressed digital connections. Silicon Image shipped the first HDMI-compliant silicon to the market and currently remains the market leader for HDMI functionality.

      Products sold into the CE market have been increasing as a percentage of our total revenues and generated 41.2%, 24.9% and 11.0% of our total revenues for the years ended December 31, 2004, 2003 and 2002, respectively. If we include licensing revenues, these numbers would be 48.8%, 32.2%, and 11.1% for the years ended December 31, 2004, 2003, and 2002, respectively. 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. Demand for our products will be driven primarily by the adoption rate of the HDMI standard within these product categories.

      In the storage market, Silicon Image has assumed a leadership role in SATA, the new 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. Silicon Image is a leading supplier of discrete SATA devices with multiple motherboard and add-in-card design wins. Silicon Image’s SATALink^tm branded solutions are fully SATA-compliant and offer advanced features and capabilities such as Native Command Queuing, port multiplier capability and ATAPI support. Silicon Image also supplies high-performance, low-power Fibre Channel Serializer/ Deserializer (SerDes) to leading switch manufacturers.

      In September 2004, Silicon Image introduced its first products based on its SteelVine^tm storage architecture that is expected to serve the storage needs of the Small to Medium Business (SMB) and consumer electronics markets with a system-on-a-chip implementation that includes a high-speed five-port switch, two micro-processors, firmware and the SATA interface, among other features. There have not been any volume shipments on these products. Products sold into the storage market, as a percentage of our total revenues, generated 23.0%, 29.4%, and 22.7% of our revenue for the years ended December 31, 2004, 2003, and 2002, respectively. If we include licensing revenues, these numbers were 27.1%, 32.9%, and 26.3%, for the years ended December 31, 2004, 2003, and 2002, 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.

      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, 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.

      During 2002, we achieved double-digit sequential revenue growth in each fiscal quarter, resulting in annual revenue of $81.5 million, which was a 57% increase from 2001 revenue levels. We also began to see the benefits of our diversification strategy, which resulted in establishing a presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $6.7 million

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of development, licensing and royalty revenue. We also focused on improving our profitability and reducing our cash usage.

      During 2003, we achieved solid revenue growth, resulting in annual revenue of $103.5 million, representing a 27% increase compared to 2002. This growth was the result of our diversification strategy and the continued expansion of our presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $14.2 million of development, licensing and royalty revenue.

      During 2004, we achieved strong growth, resulting in annual revenue of $173.2 million, representing a 67.3% increase compared to 2003. We continued to take advantage of our diversification strategy and successfully expanded our presence in the growing CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $20.8 million of development, licensing and royalty revenue.

      In the storage market, we had a number of new and advanced product offerings during 2004. We were able to achieve numerous design wins with our SATALink products. In particular, there was widespread market acceptance of the PCI to four-port SATA solutions for the PC and server markets and a number of major manufacturers incorporated our products into their motherboards. We believe we are well positioned to benefit from the continuing transition to SATA technology. Furthermore we expect to leverage our storage expertise in the new and rapidly growing area for CE storage devices through our SteelVine^tm achitecture. 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 2004 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.

      In the PC market, during 2004, our business was favorably impacted by the better than expected ramp in Intel’s Grantsdale platform, a new Intel integrated graphics chipset (IGC) in desktop computers supporting Intel’s new PCI Express bus interface technology. As PC manufacturers transitioned to PCI Express technology, they also transitioned to new DVI transmitters compatible with PCI Express IGCs. In addition, our business in the PC market was favorably impacted by strong demand for our integrated panel controllers that are incorporated into LCD panels used in all-digital LCD monitors.

      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.

      DVI-based solutions also found their way into CE applications during 2003 and 2004. Revenue for these solutions is included in our CE revenues. We expect the majority of these DVI CE applications to migrate to HDMI during 2005. The PC market saw DVI adoption expand significantly in 2004 to reach an estimated 46% on PC hosts with 82% on graphics cards. 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 expect to introduce our next generation of panel controllers during 2005.

      Generally, our transmitter products continued to experience competitive pressure, primarily from integration by the graphics chip suppliers such as ATI Technologies and nVidia. Thine Electronics and Texas Instruments also remain competitors. Because of this increased competition there were lower average selling prices for these products during 2004. 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

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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 interface market.

      In 2004, we launched PanelLink Cinema Partners^tm, LLC; a wholly-owned subsidiary of Silicon Image, Inc. PanelLink Cinema Partners is chartered with the growth and proliferation of the PanelLink Cinema Partners initiative, and is currently supported by Hitachi, LG, Mitsubishi, Sanyo, Samsung, Sony, Sunplus, and others. The PanelLink Cinema Partners program is aimed at providing consumers with a simple means to identify HDTV’s and other consumer electronic devices as being content ready devices — that is, the PLC content ready logo identifies them as having been tested for HDCP functionality, and interoperability with other PanelLink branded consumer devices. We believe that the consumer electronics industry is in the early stages of a transition to high-definition all-digital content. Our goal is to provide leadership in defining a secure content delivery infrastructure that will help power this transition.

      In 2005, we entered a three-year joint development, marketing and manufacturing relationship with Sunplus, a long time customer. In this relationship, Sunplus will license certain digital video processor technology to us, and we will collaborate on product development. In addition, we agreed to invest $380,000 for a minority interest in a new Taiwan-based joint venture with Sunplus which would provide product engineering and other services, and arrange for manufacturing of certain digital video processor products. We have agreed to place orders for specified volumes of products with this joint venture through 2007, so long as the joint venture meets our requirements for quality, timeliness, and competitive pricing.

Markets and Customers

      We focus our sales and marketing efforts on achieving design wins with leading original equipment manufacturers (OEMs) of PC, CE and storage products. In most cases, these OEMs outsource manufacturing functions to third parties. Therefore, 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 47%, 41%, and 41%, of our revenue in 2004, 2003 and 2002, respectively. The increase in 2004 from 2003 and 2002 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 45% in 2004, compared to 42% in both 2003 and 2002. 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; as a result we are subject to foreign business, political and economic risks. Nearly all our products are manufactured in Taiwan or elsewhere in Asia and for the years ended December 31, 2004, 2003, and 2002, 72%, 74%, and 72% of our revenue, respectively, was generated from customers and distributors located outside the United States, primarily in Asia.

Products

      Silicon Image, Inc. is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. 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 and that incorporate new or enhanced features. Silicon Image markets

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products to the CE, PC and displays, 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.

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.

      Silicon Image’s 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 Cinema 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 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 9031		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. Our digital video processor products include:

Digital Video Processors
	HDMI
Product	Inputs		Key Features	Target Applications
SiI 8100		1	HDMI & component video inputs, 3-D motion adaptive deinterlacer, scaling, frame rate conversion, 2:2 & 3:2 inverse pull-down, PIP	HD-ready TVs, multi-function monitors
SiI 504		0	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 de facto 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 60 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 transmitter products include:

PanelLink DVI Transmitters
	Maximum	Maximum
Product	Resolution	Bandwidth		Target Applications
SiI 1362	UXGA (1600 x 1200 pixels)		5 Gbps	PC motherboards, notebook PCs
SiI 1364	UXGA (1600 x 1200 pixels)		5 Gbps	Intel SDVO ADD2 cards
SiI 1160	UXGA (1600 x 1200 pixels)		5 Gbps	Internal display interfaces, embedded/ specialty applications
SiI 1172	QXGA (2048 x1536 pixels)		6.8 Gbps	Desktop PC motherboards and add-in boards, notebook PCs
SiI 1162	UXGA (1600 x 1200 pixels)		5 Gbps	Desktop PC motherboards and add-in boards, notebook PCs
SiI 178	QXGA (dual link) (2048 x 1536 pixels)		10 Gbps	Desktop PC motherboards and add-in boards that support Dual-Link DVI
SiI 164	UXGA (1600 x 1200 pixels)		5 Gbps	Desktop PC motherboards and add-in boards, notebook PCs

      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 x 1200 pixels)		5 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 1171	QXGA (2048 x1536 pixels)		6.8 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 1161	UXGA (1600 x 1200 pixels)		5 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 1151	SXGA (1280 x 1024 pixels)		3.36 Gbps	LCD monitors, data, video and multimedia projectors, plasma displays
SiI 163B	QXGA (2048 x 1536 pixels)		10 Gbps	Desktop monitors that support Dual-Link DVI
SiI 141B	High-refresh XGA (1024 x768 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 x 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 x 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 x 1050 pixels)	3.36 Gbps	HDCP, scaling, on- screen display, power management, gamma correction, dithering	LCD microdisplays

      Intelligent Panel Controllers. Our Intelligent Panel Controller products are programmable controllers with integrated timing controllers that reside on the LCD display module. These products receive digital input,

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restore the video data format and directly interface with the LCD module electronics. Our Intelligent Panel Controller products include:

Intelligent Panel Controllers
	Maximum	Maximum
Product	Resolution	Bandwidth		Key Features	Target Applications
SiI 1257	WUXGA		165MHz	PanelLink receiver TTL LCD timing controller	LCDs for flat panel displays
SiI 263	UXGA		140 MHz	PanelLink receiver RSDS LCD 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 x 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, is our SteelVine product line, which is designed to integrate RAID-type functionality into a single chip and significantly lower the cost of highly reliable storage solutions for the SMB and CE markets.

      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 home, SMB, and enterprise markets.

      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 SMB 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, 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.

      SteelVine Storage Systems. The products in our in SteelVine storage systems family include a 5-drive SATA array and a two and four-external port host bus adapter that maximize the performance of the SV2000. Our storage systems products include:

SteelVine Storage Systems
	Key Features	Target Applications
SV2000	5-drive external SATA array with SteelVine processor includes proprietary firmware at time of manufacturing	SMB data storage applications
SV-HBA-3124-2(4)	2 & 4-external port PCI-X-to-SATA II host bus adapter	SMB data storage applications

      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 semiconductor products are branded under the SATALink product family and lead

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the market with more than seven million SATA-based units shipped into host bus adapter and device-side storage applications.

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, x1 PCI-to-SATA II host controller, SATARAIDtmsoftware, 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
SiI 3124-2		2	Single chip, dual-channel, PCI-X-to-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-SATA host controller, SATARAIDtmsoftware, 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-SATA host controller, SATARAIDtmsoftware, 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 3112 ATAPI		2	Single-chip, dual-channel, low pin-count PCI-to-SATA host controller, SATARAIDtm software, hot plug, applications	PC motherboards, PC add-in-cards, server motherboards, host bus adapters, RAID subsystems, embedded
SiI 3112		2	Single chip, dual-channel, PCI-to-SATA host controller, SATARAIDtmsoftware, hot plug, ATAPI support	PC motherboards, RAID or non- RAID disk controller add-in cards, storage and embedded systems

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SATALink Serial ATA Controllers and Device Bridges
	Number of
Product	Ports		Key Features	Target Applications
SiI 3811		1	Serial ATA-to-Parallel ATA device bridge, ATAPI support	Notebook and PC motherboards, ATAPI devices
SiI 3611		1	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

      Fibre Channel SerDes. Our Fibre ChannelSerializer/ 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. The HDMI 1.1 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 NB 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 over time. As an HDMI Founder, Silicon Image has 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 STB and for use in DVD players. This is discussed in more detail below.

      As of December 31, 2004, one hundred and sixty two companies had signed HDMI Adopters Agreements, under which adopters are granted a standard license to the HDMI specification and necessary patents. We expect HDMI to become a standard digital interface for consumer electronics products that carry digital audio and video signals.

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      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 an HDMI ATC that tests manufacturer products for conformance to the HDMI specification. Our 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 October 2003, the FCC published its proposed rules for the compatibility between cable systems and consumer electronics devices. In November 2003 and March 2004, these rules known as the Plug & Play Final Rules (Plug & Play Rules), became effective. The Plug & Play Rules in setting forth the most recent rules governing the U.S. transition to digital television state that by July 1, 2005, all high-definition STBs distributed by cable operators must include either an HDMI/ HDCP or DVI/ HDCP interface. Further, the Plug & Play Rules state that in order for a consumer electronics product, such as a television, to be marketed or labeled “digital cable ready” it must include either an HDMI/ HDCP or DVI/ HDCP interface. 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.

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 PC’s, 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.

      In November 2003, the FCC published its proposed rules for the protection of digital broadcast content. In January 2004, these rules known as the Broadcast Flag Final Rules (Broadcast Flag Rules) became effective. The Broadcast Flag Rules state that high-definition television broadcast can only be transferred digitally between consumer electronics devices if an authorized digital output technology is utilized. HDCP is listed as one of the authorized digital output protection technologies and DVI and HDMI are listed as two of the approved transport mechanisms. 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.

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.

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      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 has determined that by July 1, 2005 all high-definition STBs distributed by cable operators must include either an HDMI/ HDCP or DVI/ HDCP interface. Furthermore, the Plug & Play Rules state that in order for a consumer electronics product to be marketed or labeled “digital cable ready” it must include either an HDMI/ HDCP or DVI/ HDCP interface. 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.

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 and 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 90 companies including its current board members, Dell, Intel, Maxtor, Seagate and Vitesse.

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

CE-ATA Working Group:

      In December 2004, Silicon Image joined the CE-ATA Working Group. This organization is a new initiative to define a storage interface tailored to the needs of the handheld and consumer electronics (CE) market segments. The Promoter companies for the CE-ATA Working Group are Hitachi, Intel, Marvell, Nokia, Seagate, and Toshiba. The objective of the initiative is to define a standard interface for small form factor disk drives that addresses the requirements of the handheld and CE market segments, including low pin count, low voltage, power efficiency, cost effectiveness, and integration efficiency. Silicon Image is a contributor to the CE-ATA Working Group.

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

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Silicon Image Technology

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

      We invented technology upon which the HDMI and DVI 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 HDMI 1.1, DVI 1.0, 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 methods 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 high-fidelity digital audio and can protect 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 1.1 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 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.

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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 PC, CE 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) were approximately $61.5 million in 2004, $43.4 million in 2003, and $40.2 million in 2002. Excluding non-cash stock compensation expense, our research and development expenses were approximately $44.9 million in 2004, $36.5 million in 2003, and $32.8 million in 2002.

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, and 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 PC, CE, SATA and Fibre Channel products. We 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 any of these foundries 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 .18 micron, which 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

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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) 9000 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 other methods, to protect our proprietary technologies. As of December 31, 2004, we have been issued over 61 United States patents and have in excess of 122 United States patent applications pending. Our issued patents expire in 2016 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.

      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

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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. Through June 5, 2005, we will retain all of the royalties paid by HDMI adopters in accordance with the terms of the Founders Agreement. Thereafter, HDMI Licensing, LLC will distribute the royalties to the HDMI founders (and any third parties that successfully petition the HDMI founders) based on each party’s respective intellectual property contribution to the HDMI specification. 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 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.

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      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, Connexant, 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 or without HDCP support. Companies that have announced or are shipping competing DVI-HDCP solutions include Analog Devices, Texas Instruments, Thine, Broadcom, 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 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, we expect increased competition for HDMI products beginning in 2005, from the other HDMI founders and adopters, including Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba.

      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.

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      Our serial ATA products compete with similar products from Marvell Technology, VIA Technologies, Silicon Integrated Systems 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 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, 2004, we had a total of 337 employees, including 27 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 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 91,000 square feet of space in Irvine, California, which is leased through November 2005, and approximately 8,000 square feet of space in Milpitas, California, which we currently do not occupy and which is leased through January 2006. We currently sublease to third parties, under three separate arrangements, approximately 33,500 square feet of our space in Irvine, California, on conventional terms, and are attempting to sublease additional space at this facility and at our Milpitas facility. In Taiwan, effective January 2004, we leased office space consisting of approximately 6,500 square feet for a period of three years. We also entered into a lease in December 2003 for office space in Japan, and under the terms of this agreement, lease approximately 1,700 square feet in Tokyo. This lease extends through December 2005. In March 2004, we entered into a lease for office space in Korea. This lease extends through March 2005 and the lease area is approximately 1,700 square feet. We believe that our facilities are adequate to meet our operational requirements at least through the end of 2005.

Item 3. Legal Proceedings

      On April 24, 2001, we filed 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 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the Federal Suit). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the importation of articles infringing

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our patent (the ITC investigation). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a Memorandum of Understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made and continues to make cash payments to the Court, it may not have made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal. On August 26, 2004, the parties completed the filing of their respective appeal briefs. On October 26, 2004, the Court of Appeals for the Federal Circuit issued an order setting the oral arguments for the appeal on December 7, 2004. The hearing took place as scheduled. At the end of the hearing, the panel of Federal Circuit judges hearing the case stated that they believed that no final order had been issued by the trial court, and that therefore the Federal Circuit did not have jurisdiction to hear the appeal. The Federal Circuit issued its opinion on January 28, 2005 and, as expected, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the parties’ agreement to settle the case, as embodied in the MOU that was found by the lower court to be valid and enforceable, requires that Genesis pay us a portion of the settlement as a condition to dismissing the case. Because the lower court allowed Genesis to pay the amount into escrow instead of directly to us, the Federal Circuit held that the underlying claims asserted below remain pending, and therefore the judgment below is not “final” and is appealable.

      To date, we have not received any cash payments nor have we recognized any revenue associated with the matter. If the MOU is upheld in its present form after all appeals have been exhausted, Genesis will be granted a royalty-bearing license for the right to use certain non-necessary patent claims referred to in the DVI Adopters Agreement. In addition, upon Genesis’s becoming a signatory to the HDMI Adopters Agreement, Genesis will be granted a royalty-bearing license for the right to use these claims as part of its HDMI implementation. Genesis will also be granted a royalty-bearing license to expand use of certain DVI-related patent claims to the consumer electronics marketplace. We expect Genesis to transfer ownership of the funds in escrow to us in the next few months. Recognition of these funds as revenue will depend on the final resolution of this case. We expect that Genesis will refile its appeal. Through December 31, 2004, we have spent approximately $10.9 million on this matter and expect to continue to incur significant legal costs until the matter is resolved.

      Silicon Image, certain officers and directors, and Silicon Image’s 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

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that all defendants were part of a scheme to manipulate the price of Silicon Image’s stock in the aftermarket following Silicon Image’s 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. In the event that the settlement is not finally approved, we could not accurately predict the outcome the litigation, but we intend to defend this matter vigorously.

      In May 2003, Silicon Image, certain officers and directors, and Silicon Image’s underwriters were named as defendants in a securities class action lawsuit captioned Liu v. Credit Suisse First Boston Corp., et al., No. 03-20459 (S.D. Fla. 2003) and filed in Federal District Court for the Southern District of Florida. The action was filed on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The initial complaint alleged that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. Silicon Image was never served with a copy of the complaint. In June 2003, the action was transferred to the Federal District Court for the Southern District of New York. The plaintiff in this matter filed an amended complaint shortly thereafter, from which Silicon Image, and the named officers, were dropped as defendants. Plaintiffs have not amended their complaint or otherwise indicated that they intend to name Silicon Image or its officers or directors as defendants in the action since that time. We believe that these claims were without merit and, if revived, we would defend this matter vigorously.

      Certain officers and directors of Silicon Image were named as defendants in consolidated shareholder derivative litigation, captioned “In re Silicon Image, Inc. Derivative Litigation, No. 1:03CV010302”, commenced on December 4, 2003 and pending in the Superior Court of California, County of Santa Clara. The plaintiffs purported to sue the individual defendants on behalf of Silicon Image. The lawsuit alleged that as a result of the recently completed examination conducted by the Audit Committee of Silicon Image’s Board of Directors, Silicon Image will be required to restate its financial results for 2002 and 2003. The Audit Committee of Silicon Image’s Board of Directors subsequently announced that it had completed its examination and that it had concluded that no changes to Silicon Image’s previously announced financial results were required. On June 22, 2004, the plaintiffs dismissed the lawsuit.

      Silicon Image and certain of its officers were named as defendants in consolidated securities class action litigation captioned “In re Silicon Image, Inc. Securities Litigation, No. C-03-5579 JW PVT”, commenced on December 11, 2003 and pending in the United States District Court for the Northern District of California. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between April 15, 2002 and November 15, 2003. The lawsuit alleges that Silicon Image had materially overstated its licensing revenue, net income and financial results during this time period, and that Silicon Image was being forced to restate its financial results. Following the announcement by the Audit Committee of Silicon Image’s Board of Directors that it had completed its examination and concluded that no changes to Silicon Image’s previously announced financial results were required, the plaintiffs dismissed the lawsuit in March 2004.

      Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of California. 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 alleges that the Company and certain of its 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. The Company intends to defend itself vigorously in this matter.

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      On January 14, 2005 the Company received a notification that the Securities & Exchange Commission had commenced a formal, private investigation involving trading in the Company’s securities. Neither the Company nor any Company personnel are currently identified as subjects of the investigation. The Company is cooperating with the investigation.

      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 or financial position.

      The amount of legal fees we incur with respect to the litigation matters described above will depend on the duration of our litigation matters, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur in 2005 with respect to the litigation matters described above; however, we do expect to incur substantial amounts until the matters are resolved.

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

      None

PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters

      Our common shares have been traded on the NASDAQ Stock Market since our initial public offering on October 6, 1999. Our common shares traded 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
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
2003
Fourth Quarter	$	9.05	$	4.28
Third Quarter		6.65		4.50
Second Quarter		6.18		4.17
First Quarter		7.65		3.98

      As February 28, 2005, we had approximately 165 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 connection with our acquisition of Zillion Technologies, LLC, we were obligated under an exchange agreement to periodically issue to the two founders of Zillion shares of our common stock as consideration for their membership interests in Zillion which we acquired and services provided pursuant to their employment agreements with us. The Zillion founders were granted registration rights with respect to the shares to be issued under this exchange agreement. These issuances of shares were made in reliance on an exemption from registration under Section 4(2) of the Securities Act. On March 31, 2004, we issued 9,375 shares of our common stock to one Zillion founder pursuant to the exchange agreement. The issuance of shares was made without general solicitation or advertising and was only made to one individual.

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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,
		2004			2003			2002			2001			2000
		(In thousands, except footnotes, employees and per share data)
Statements of Operations Data:
Net Sales		$	173,159		$	103,525		$	81,539		$	51,966		$	50,035
Gross Margin			104,545			56,333			42,240			26,624			30,644
Cost of revenue:
	Dollars(1)	$	68,614		$	47,192		$	39,299		$	25,342		$	19,391
	% of revenue		39.6	%		45.6	%		48.2	%		48.8	%		38.8	%
Research and development:
	Dollars(2)	$	61,459		$	43,386		$	40,205		$	34,816		$	23,022
	% of revenue		35.5	%		41.9	%		49.3	%		67.0	%		46.0	%
Selling, general and administrative:
	Dollars(3)	$	42,183		$	20,943		$	19,976		$	21,541		$	21,714
	% of revenue		24.4	%		20.2	%		24.5	%		41.5	%		43.4	%
Loss from operations		$	(961	)	$	(17,719	)	$	(40,850	)	$	(78,530	)	$	(26,858	)
Net loss		$	(324	)	$	(12,810	)	$	(40,092	)	$	(76,108	)	$	(23,243	)
Net loss per share:
	Basic and diluted	$	(0.00	)	$	(0.18	)	$	(0.62	)	$	(1.32	)	$	(0.47	)
	Weighted average shares		75,081			69,412			64,283			57,790			49,720
Consolidated Balance Sheet and Other Data as of Year End:
Cash, cash equivalents and short-term investments		$	93,520		$	37,254		$	35,833		$	41,218		$	60,189
Working capital		$	97,107		$	37,674		$	27,787		$	36,179		$	56,713
Total assets		$	154,908		$	87,742		$	77,616		$	90,162		$	99,499
Tangible assets		$	140,204		$	71,693		$	64,595		$	68,534		$	78,146
Long-term debt obligations		$	—		$	—		$	—		$	819		$	1,030
Total stockholders’ equity		$	122,079		$	62,393		$	48,170		$	67,324		$	83,197
Tangible net book value		$	107,375		$	46,344		$	35,149		$	45,696		$	61,844
Regular full-time employees			337			250			249			266			150

(1)	Includes non-cash stock compensation expense of $2.8 million, $583,000, $1.2 million, $279,000, and $593,000, for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, respectively.
(2)	Includes non-cash stock compensation expense of $16.6 million, $6.9 million, $7.4 million, $9.3 million, and $10.2 million, for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, respectively.
(3)	Includes non-cash stock compensation expense of $13.4 million, $2.5 million, $2.5 million, $2.8 million, and $2.8 million for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, respectively.

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

Overview

      Silicon Image is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. The company’s mission is to be the leader in defining the architectures, intellectual property (IP) and semiconductor technology required to build secure digital content delivery

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systems. To ensure that rich digital content is available across devices, CE, PC and storage devices must be architected for content compatibility and interoperability.

      Silicon Image’s strategy entails establishing industry-standard, high-speed digital interfaces and building market momentum and leadership through its first-to-market, standards-based IC products. Further leveraging its IP portfolio, the company broadens market adoption of the Digital Visual Interface (DVI), High-Definition Multimedia Interface^tm (HDMI^tm) and Serial ATA (SATA) interfaces by licensing its proven IP cores to companies providing advanced system-on-a-chip solutions incorporating these interfaces. Licensing, in addition to creating revenue and return on engineering investment in market segments we choose not to address, creates products complementary and in some cases competitive to our own that expand the markets for our products and help to improve industry wide interoperability.

      Silicon Image is a leader in the global PC and digital display arena with its innovative PanelLink®- branded digital interconnect technology, which enables an all-digital connection between PC host systems, such as PC motherboards, graphics add-in boards, notebook PCs and digital displays such as LCD monitors, plasma displays and projectors. Silicon Image’s PanelLink technology serves as the basis for both the DVI standard as well as for the popular HDMI standard, designed for CE applications. Together, Silicon Image’s PanelLink DVI and HDMI solutions are the most popular DVI and HDMI implementation in the market with more than 80 million units shipped to date.

      In 2000, in order to decrease our dependence on the PC business, we embarked upon a plan to diversify into the CE and storage markets. Products sold into the PC market have been declining as a percentage of our total revenues and generated 23.8% of our revenue in 2004, 32.0% of our revenue in 2003, and 58.1% of our revenues in 2002, (if we include licensing revenues, these percentages would be 24.0%, 34.9%, and 62.6% for the years ended December 31, 2004, 2003, and 2002, respectively).

      Leveraging our core technology and standards-setting expertise, Silicon Image is a leading force in advancing the adoption of HDMI, the digital audio and video interface standard for the consumer electronics market. Introduced in 2002 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, Silicon Image’s HDMI technology is also marketed under the PanelLink brand and includes High-bandwidth Digital Content Protection (HDCP), which is supported by Hollywood studios as the technology of choice for the secure distribution of premium content over uncompressed digital connections. Silicon Image shipped the first HDMI-compliant silicon to the market and currently remains the market leader for HDMI functionality.

      Products sold into the CE market have been increasing as a percentage of our total revenues and generated 41.2%, 24.9% and 11.0% of our total revenues for the years ended December 31, 2004, 2003 and 2002, respectively If we include licensing revenues, these numbers would be 48.8%, 32.2%, and 11.1% for the years ended December 31, 2004, 2003, and 2002, respectively. 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, STBs, and DVD players. Demand for our products will be driven primarily by the adoption rate of the HDMI standard within these product categories.

      In the storage market, Silicon Image has assumed a leadership role in SATA, the new 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. Silicon Image is a leading supplier of discrete SATA devices with multiple motherboard and add-in-card design wins. Silicon Image’s SATALink^tm-branded solutions are fully SATA-compliant and offer advanced features and capabilities such as Native Command Queuing, port multiplier capability and ATAPI support. Silicon Image also supplies high-performance, low-power Fibre Channel Serializer/ Deserializer (SerDes) to leading switch manufacturers.

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      In September 2004, Silicon Image introduced its first products based on its SteelVine^tm storage architecture that is expected to serve the storage needs of the SMB and consumer electronics markets with a system-on-a-chip implementation that includes a high-speed five-port switch, two micro-processors, firmware and the SATA interface, among other features. Products sold into the storage market, as a percentage of our total revenues, generated 23.0%, 29.4%, and 22.7% of our revenue for the years ended December 31, 2004, 2003, and 2002, respectively If we include licensing revenues, these numbers were 27.1%, 32.9%, and 26.3%, for the years ended December 31, 2004, 2003, and 2002, 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^tm 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 the first quarter of 2005, we anticipate our legacy storage semiconductor business, Fibre Channel, and parallel ATA revenues to decrease and our Serial ATA and SteelVine revenues to increase.

      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 cash is received if collection is not reasonably assured at the time of delivery. 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 approximately 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 base of receiving royalties from a specific customer 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 payments are received. Development revenue is recognized when project milestones have been completed and acknowledged 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.

      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 12.0%, 13.7%, and 8.2% of our revenues for the years ended December 31, 2004, 2003, and 2002, 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 October 1999, we raised approximately $48 million in our initial public offering. We have incurred losses in all but two quarterly periods since our inception and, as of December 31, 2004, we had an accumulated deficit of $173.0 million.

      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, we began focusing our resources on entering two new markets, storage and CE, 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 Zillion, a developer of high-speed transmission technology for data storage applications, and DVDO, a provider of digital video processing systems for the CE market.

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      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.

      During 2002, we achieved double-digit sequential revenue growth in each fiscal quarter, resulting in annual revenue of $81.5 million, which was a 57% increase from 2001 revenue levels. We also began to see the benefits of our diversification strategy, which resulted in establishing a presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $6.7 million of development, licensing and royalty revenue. We also focused on improving our profitability and reducing our cash usage.

      During 2003, we achieved solid revenue growth, resulting in annual revenue of $103.5 million, representing a 27% increase compared to 2002. This growth was the result of our diversification strategy and the continued expansion of our presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $14.2 million of development, licensing and royalty revenue.

Year 2004

      During 2004, we achieved strong growth, resulting in annual revenue of $173.2 million, representing a 67.3% increase compared to 2003. We continued to take advantage of our diversification strategy and successfully expanded our presence in the CE and storage markets. Additionally, we were able to successfully leverage our intellectual property to generate $20.8 million of development, licensing and royalty revenue.

      In 2003, we introduced our first HDMI products for the CE market. HDMI is a new standard for digital video and audio transmission for consumer devices. During 2004, HDMI continued to gain momentum with nearly 400 devices announced or shipping that incorporate HDMI, and we continue to be the HDMI market leader. In the storage market, we had a number of new and advanced product offerings during 2004. We were able to achieve numerous design wins with our SATALink products. In particular, there was widespread market acceptance of the PCI to four-port SATA solutions for the PC and server markets and a number of major manufacturers incorporated our products into their motherboards. We believe we are well positioned to benefit from the continuing transition to SATA technology. Furthermore 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 2004 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.

      In the PC market, during 2004, our business was favorably impacted by the better than expected ramp in Intel’s Grantsdale platform, a new Intel integrated graphics chipset (IGC) in desktop computers supporting Intel’s new PCI Express bus interface technology. As PC manufacturers transitioned to PCI Express technology, they also transitioned to new DVI transmitters compatible with PCI Express IGCs. In addition, our business in the PC market was favorably impacted by strong demand for our integrated panel controllers that are incorporated into LCD panels used in digital LCD monitors.

      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.

      DVI-based solutions also found their way into CE applications during 2003 and 2004. Revenue for these solutions is included in our CE revenues. We expect the majority of these DVI CE applications to migrate to HDMI during 2005. The PC market saw DVI adoption expand significantly in 2004 to reach an estimated

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46% on PC hosts with 82% on graphics cards. 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 expect to introduce our next generation of panel controllers during 2005.

      Generally, our transmitter products continued to experience competitive pressure, primarily from integration by the graphics chip suppliers such as ATI Technologies and nVidia. Thine Electronics and Texas Instruments also remain competitors. Because of this increased competition there were lower average selling prices for these products during 2004. 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 interface market.

      In 2004, we launched PanelLink Cinema Partners^tm, LLC; a wholly -owned subsidiary of Silicon Image, Inc. PanelLink Cinema Partners is chartered with the growth and proliferation of the PanelLink Cinema Partners initiative, and is currently supported by Hitachi, LG, Mitsubishi, Sanyo, Samsung, Sony, Sunplus, and others. The PanelLink Cinema Partners program is aimed at providing consumers with a simple means to identify HDTV’s and other consumer electronic devices as being content ready devices — that is, the PLC content ready logo identifies them as having been tested for HDCP functionality, and interoperability with other PanelLink branded consumer devices. We believe that the consumer electronics industry is in the early stages of a transition to high-definition all-digital content. Our goal is to provide leadership in defining a secure content delivery infrastructure that will help power this transition.

      During 2004, we also focused on improving the company’s profitability and improving our cash flows. Our cash and short-term investments increased by $56.3 million in 2004, versus an increase of $1.4 million in 2003. Our net loss for the year ended December 31, 2004, was $324,000 compared to a net loss of $12.8 million for the year ended December 31, 2003.

2005 Outlook

      The current semiconductor industry forecast, according to the SIA (Semiconductor Industry Association) January 31, 2005 report, is projecting overall semiconductor sales to decline 4-6% for the first quarter and to be flat for the remainder of the year. Silicon Image’s growth profile for the year is more optimistic because it is driven by the adoption of emerging technologies that will fuel growth even if the associated market is not growing. Looking at the growth drivers for each of our product areas we see the following by product line.

      First, our PC growth will be driven by DVI adoption rates which are expected to continue to increase and would help increase demand for Silicon Image DVI transmitters to work primarily with Intel-based graphics chipsets. Second, we anticipate growth in sales of digital only LCD monitors, which will provide opportunities for Silicon Image-based panel controllers or DVI receivers. And finally, we see some notebook computers incorporating DVI as a way to connect to an external monitor and even to drive the internal screen that is usually run by LVDS.

      Our second product line is related to the CE market. Here we expect to leverage our leadership position in HDMI to enable us to capitalize on the consumer electronics industry’s forecasted strong adoption of HDMI into additional devices during 2005. External forecasts such as that developed by In-Stat (in their August 2004 report) show unit growth for CE products utilizing either DVI or HDMI to have growth greater than 100% in 2005 over 2004. Silicon Image will benefit from this high-unit growth but will see its market share erode due to increased competition, declining average selling prices (ASPs), and possible product mix shifts to lower-priced solutions.

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      Our third product area is storage. Our storage products are comprised of three groupings of products. Our legacy products (parallel ATA, and Fibre Channel) are expected to decline sharply. This decline should roughly be offset by growth in our SATA product revenues. The remaining storage area is our SteelVine product offerings that we expect will have significant growth in the second half of the year. Our overall storage growth will likely be tied to the growth and success of our SteelVine product line.

      And finally, for the full year 2005 we expect our licensing revenues to be 10-15% of total revenues.

      Looking at the first quarter of 2005 we see our overall revenues declining sequentially primarily because of seasonally weaker shipments in our CE business and the overall general softness of the semiconductor market as forecasted by the SIA. We expect our gross margin percentage to improve during the first quarter of 2005, compared to the fourth quarter of 2004, driven primarily by lower manufacturing costs. We expect that our gross margin rates will decline over the remainder of the year due to increased competition that results in declining average-selling prices faster than we can achieve offsetting cost improvements.

      Excluding non-cash charges for stock compensation expense, we expect the dollar amount of our R&D expense to increase approximately 7-11% during the first quarter of 2005 relative to the fourth quarter of 2004. R&D expense will be incurred for enhancements to existing products and for further development of technology related to personal computer, consumer electronics and storage applications. Additionally salary increases and seasonal benefit expenses will contribute to the projected increase in expense dollars.

      Excluding non-cash charges for stock compensation expense, we expect the dollar amount of our SG&A expense to increase approximately 11-16% in the first quarter of 2005, compared to the fourth quarter 2004 levels, primarily as a result of a combination of factors including, increased headcount, seasonal employee benefit expenses, salary increases, project expenses etc.

      We cannot predict the actual R&D or SG&A expenses including the non-cash charges for stock compensation expense, which will fluctuate with changes in our stock price and volatility. In fact, we expect to incur potentially substantial non-cash stock compensation expense in 2005, and future periods as a result of previous stock option repricings, stock options assumed in connection with our prior acquisitions, the issuance of stock options to consultants, modifications to stock options and the impact of the adoption of SFAS 123R “Share Based Payment.” We may also incur non-cash stock compensation expense in connection with future acquisitions.

      During 2005 and future periods, we may also incur non-cash expenses for the impairment or amortization of intangible assets.

      We will also incur legal fees in 2005, in conjunction with our patent infringement lawsuit against Genesis, and other outstanding or new litigation or investigations by regulatory agencies. The amount of legal fees incurred will depend on the duration of the litigation, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur with respect to this matter; however, we do expect to incur substantial amounts through at least the fourth quarter of 2005.

      We recorded a provision for income taxes amounting to $1,007,000 for the year ended December 31, 2004 primarily related to U.S. alternative minimum taxes and foreign taxes. No income tax provision was recorded for the years ended December 31, 2003 and 2002, due to taxable losses. Our tax provisions in future periods will fluctuate over time and may increase if we achieve profitable operations.

      The factors that may cause our actual results to differ materially from those anticipated by our assumptions include the rate at which the PC market adopts DVI, continued success of the Grantsdale platform, acceptance of all-digital solutions in the PC market, CE market acceptance of our DVI with HDCP and HDMI products, and the rate at which the storage market transitions to four port 2 Gb Fibre Channel switches and serial ATA technology, market acceptance of our SteelVine architecture and products, the overall consumer demand in the PC and CE markets, the availability of serial ATA-enabled hard drives and other peripherals, whether and how quickly competitors are able to integrate our technology or solutions into competing and alternative solutions, our ability to leverage our intellectual property into licensing revenue, and the ability of our semiconductor foundry vendors to manufacture our products in commercial volumes at an

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acceptable cost and in a timely manner. In addition, our revenue remains subject to seasonality, competition and general economic and market conditions, none of which can be accurately predicted.

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 47%, 41%, and 41% of our revenue in 2004, 2003, and 2002, respectively. The increase in 2004 from 2003 and 2002 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 2004, 45% of revenue was generated through distributors, compared to 42% in 2003 and 42% in 2002. 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 67%, 69%, and 64% of our revenue in 2004, 2003, and 2002, 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.

      In September 1998, we entered into an agreement with Intel to develop and promote the adoption of a digital display interface specification. In connection with this agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $1.75 per share. Under the same agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $0.18 per share upon achievement of a specified milestone that was reached during the first quarter of 1999. Both of these warrants were exercised in May 2001. Additionally, if a second specified milestone is achieved, which we do not believe is likely, we would be required to grant Intel a third warrant to purchase 285,714 shares of our common stock at $0.18 per share. The estimated fair value of the warrant at December 31, 2004, would be $4.7 million. This warrant would expire in September 2008.

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. Accordingly, we recognize revenue upon shipment and title transfer if we believe collection is reasonably assured. Reserves for sales returns and allowances 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.

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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. 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 cash is received if collection is not reasonably assured at the time of delivery. 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 base 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 payments are received. Development revenue is recognized when project milestones have been completed and acknowledged 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. Our license revenue recognition depends upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these factors require significant judgments, and if our judgment is in error it could lead to inaccurate reporting of our revenues and income.

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, 2004, we had $20.2 million of gross accounts receivable and an allowance for doubtful accounts of $745,000. 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

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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. 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.

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 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. If we were required to record an impairment charge in the future, it would negatively impact our operating results.

Goodwill and intangible assets

      We adopted the Statement of Financial Accounting Standard No. 142 (SFAS 142), “Goodwill and Other Intangible Assets” on January 1, 2002. 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 judgment at many points during the analysis. 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 2004, we concluded that there was no impairment of goodwill in fiscal 2004. 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 recurring losses we have provided a 100% valuation allowance against all of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment.

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

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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, 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 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46-R). FIN 46-R provides a deferral of FIN 46 for certain entities until after March 15, 2004. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of this standard did not have a material impact on our consolidated financial statements.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity.” The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and further requires that an issuer classify as a liability (or an asset in some circumstances) financial instruments that fall within its scope because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on our financial position or results of our operations.

      In December 2004, the FASB issued SFAS 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” The Statement clarified the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as previously stated in Paragraph 5 of ARB No. 43, Chapter 43. In addition, the Statement requires that allocation of fixed

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production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 on a prospective basis. We believe that the adoption of this standard will not have a material impact on our financial statements.

      In December 2004, the FASB issued SFAS 123R (revised 2004), “Share Based Payment.” The Statement is a revision of FASB 123 and supersedes APB No. 25. The Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for good or services or incurs liabilities in exchange of goods or services that are based on the fair value of the entity’s equity instruments. It focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires an entity 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 over the period during which an employee is required to provide service for the award. The grant-date fair value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same of similar instruments are available. In addition, the Statement requires a public entity measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value and that the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of this Statement for the Company is for the first interim or annual period after June 15, 2005. While we have not determined the impact of this Statement on our financial statements at this time, we believe it will be material.

      In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets.” The Statement is an amendment of APB Opinion No. 29 to eliminate 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. We believe that the adoption of this standard will not have a material impact on our financial statements.

      In March 2004, the FASB issued EITF Issue No. 03-01 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provided new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

      In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two — Class Method under FAS 128”. EITF Issue 03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of the two-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of APB Opinion 25 and FAS 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported EPS. The adoption of EITF Issue 03-6 did not have a material impact on our financial statements.

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Annual Results of Operations

REVENUE

			2004			Change			2003			Change			2002
			(Dollars in thousands)
Personal Computers			$	41,223			24.3	%	$	33,163			(30.0	)%	$	47,405
Consumer Electronics				71,377			177.1	%		25,762			186.5	%		8,993
Storage Products				39,750			30.7	%		30,410			64.5	%		18,486
	Product revenue		$	152,350			70.5	%	$	89,335			19.3	%	$	74,884
		Percentage of total revenue		88.0	%		1.7	pts		86.3	%		(5.5	)pts		91.8	%
Development, licensing and royalties			$	20,809			46.6	%	$	14,190			113.2	%	$	6,655
		Percentage of total revenue		12.0	%		(1.7	)pts		13.7	%		5.5	pts		8.2	%
Total revenue			$	173,159			67.3	%	$	103,525			27.0	%	$	81,539

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

	2004		Change			2003		Change			2002
	(Dollars in thousands)
Personal Computers	$	41,585		15.2	%	$	36,108		(29.2	)%	$	51,017
Consumer Electronics		84,604		153.8	%		33,326		267.8	%		9,061
Storage Products		46,970		37.8	%		34,091		58.9	%		21,461
Total revenue	$	173,159		67.3	%	$	103,525		27.0	%	$	81,539

      Overall revenues for the 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 CE and storage products are primarily attributable to our new product offerings, adoption of our technologies, as well as the continued overall growth of these markets, resulting in increased volumes. The growth in 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 revenue 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. 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 product sales and do not directly compete with our direct product offerings. The increase in licensing revenues during 2004, relative to 2003, was attributable primarily to licensing revenues associated with HDMI.

      The increase in revenue during 2003 relative to 2002, was primarily due to increased sales of CE products, which contributed an additional $16.8 million of revenue, increased sales of storage products, which contributed an additional $11.9 million in revenue, and increased licensing activity, which contributed an additional $7.5 million of revenue, partially offset by decreased sales of PC products. The increases in the CE and storage products are primarily attributable to our new product offerings, as well as the overall growth in these markets, resulting in increased volumes. The decrease in demand for our PC products is attributable to loss of market share due primarily to integration and an overall weakness in the PC market. The net increase in our storage products business includes the effect of decreased revenue from our storage systems products, resulting from our decision to phase out this product line. The growth in development, licensing and royalty revenues as a component of total revenues was primarily due to our ability to successfully leverage and create a market for our intellectual property and enter into new licensing agreements and as a result of an increase in our royalty stream, primarily due to a larger licensing base.

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COST OF REVENUE AND GROSS MARGIN

		2004			Change			2003			Change			2002
		(Dollars in thousands)
Product gross margin (excluding licensing revenue)		$	83,736			98.7	%	$	42,143			18.4	%	$	35,585
	Percentage of product revenue		55.0	%		7.8	pts		47.2	%		(0.3	)pts		47.5	%
Total gross margin		$	104,545			85.6	%	$	56,333			33.4	%	$	42,240
	Percentage of total revenue		60.4	%		6.0	pts		54.4	%		2.6	pts		51.8	%
Stock compensation expense		$	2,777			376.3	%	$	583			(51.0	)%	$	1,190
Product gross margin (excluding stock compensation expense and licensing revenue)		$	86,513			102.5	%	$	42,726			16.2	%	$	36,775
	Percentage of product revenue		56.8	%		9.0	pts		47.8	%		(1.3	)pts		49.1	%
Total gross margin (excluding stock compensation expense)		$	107,322			88.6	%	$	56,916			31.1	%	$	43,430
	Percentage of total revenue		62.0	%		7.0	pts		55.0	%		1.7	pts		53.3	%

      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 60.4%, 54.4%, and 51.8% for 2004, 2003 and 2002, respectively. Gross margin, excluding non-cash stock compensation expense, was 62.0% for 2004, 55% for 2003, and 53.3% for 2002. The increase in gross margin from 2003 to 2004 and from 2002 to 2003 is 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. Non-cash stock compensation expense associated with cost of revenue was $2.8 million, $583,000, and $1.2 million for 2004, 2003 and 2002 respectively.

OPERATING EXPENSES

		2004			Change			2003			Change			2002
		(Dollars in thousands)
Research and development(1)		$	44,812			22.7	%	$	36,523			11.3	%	$	32,809
	Percentage of total revenue		25.9	%		(9.4	)pts		35.3	%		(4.9	)pts		40.2	%
Selling, general and administrative(2)		$	28,824			56.6	%	$	18,401			5.4	%	$	17,454
	Percentage of total revenue		16.6	%		(1.2	)pts		17.8	%		(3.6	)pts		21.4	%
Total stock compensation expense (incl. amount from COGS)		$	32,783			228.2	%	$	9,988			(10.1	)%	$	11,107
	Percentage of total revenue		18.9	%		9.3	pts		9.6	%		(4.0	)pts		13.6	%
Amortization of goodwill and intangible assets		$	1,345			21.9	%	$	1,103			(68.3	)%	$	3,482
Patent assertion and acquisition integration costs		$	519			(75.9	)%	$	2,152			(69.4	)%	$	7,034
Restructuring		$	—			(100.0	)%	$	986			(86.3	)%	$	7,193
In-process research and development		$	—			(100.0	)%	$	5,482			100.0	%	$	—
Gain on escrow settlement, net		$	—			(100.0	)%	$	4,618			100.0	%	$	—
Interest income and other, net		$	718			146.7	%	$	291			(61.6	)%	$	758
Gain on derivative investment security			926			100.0	%		—			*			—

(1)	Excludes non-cash stock compensation expense of $16.6 million, $6.9 million, and $7.4 for 2004, 2003, and 2002, respectively
(2)	Excludes non-cash stock compensation expense of $13.4 million, $2.5 million, and $2.5 million for 2004, 2003, and 2002, respectively

*  — Not Meaningful

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      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, excluding non-cash stock compensation expense, was $44.8 million, or 25.9% of revenue, for 2004, compared to $36.5 million, or 35.3% of revenue, for 2003, and $32.8 million, or 40.2% of revenue, for 2002. The increase in 2004 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 the Company from TransWarp Networks. Additional costs are also attributable to the increasing level of complexity in our new products. The increase in 2003, relative to 2002, was primarily due to an increase in the number of R&D projects, as well as additional personnel, including approximately nine months expense relating to personnel who joined the Company from TransWarp Networks. These increases were partially offset by an additional one-week shutdown in 2002. R&D excludes non-cash stock compensation expense of $16.6 million, $6.9 million, and $7.4 million for 2004, 2003, and 2002, respectively. Including stock compensation expense, R&D expense would have been $61.5 million, $43.4 million, and $40.2 million, or 35.5%, 41.9%, and 49.3% of revenue for 2004, 2003, and 2002, respectively.

      Selling, General and Administrative. SG&A expense consists primarily of employee compensation and benefits, sales commissions, and marketing and promotional expenses. Excluding non-cash stock compensation expense, SG&A expense was $28.8 million, or 16.6% of revenue for 2004, $18.4 million, or 17.8% of revenue for 2003, and $17.5 million, or 21.4% of revenue for 2002. The increase in spending for 2004 can be attributed to increased headcount to support the increased rate of growth of the Company, 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. The increase during 2003, as compared to 2002, can be attributed to increased headcount in the second half of 2003 to support the increased rate of growth of the Company, and approximately $1.1 million incurred during the fourth quarter of 2003 relating to the costs associated with the Audit Committee examination. SG&A excludes non-cash stock compensation expense of $13.4 million for 2004, $2.5 million for 2003 and 2002. Including stock compensation expense, SG&A expense would have been $42.2 million, $20.9 million and $20.0 million, or 24.4%, 20.2% and 24.5% of revenue for 2004, 2003, and 2002, respectively.

      Stock Compensation. Stock compensation expense was $32.8 million or 18.9% of revenue for 2004, $10.0 million or 9.6% of revenue for 2003, and $11.1 million or 13.6% of revenue for 2002. The increase in the stock compensation expense in 2004 as compared to 2003 is attributable primarily to an increase in the price of the company’s stock during 2004. The average stock price for 2004 was $12.13 as compared to $5.77 for 2003. The decrease in total stock compensation expense from 2002 to 2003 can be attributed primarily to a decrease in the expense associated with the options granted to employees and assumed in connection with acquisitions, offset by an increase in expense relating to repriced options. A lower average stock price during 2003, and a decline in the number of options subject to variable accounting, as certain older options become fully expensed, contributed to a decrease, which was offset by an increase in our repricing expense as a result of an increase in our stock price in the fourth quarter of 2003.

      We may continue to incur substantial non-cash stock compensation expense in future periods as a result of (1) the issuance of, or modifications to, restricted stock awards and stock option grants to employees and consultants, (2) the stock option repricing programs we implemented in 2001 and 2000, (3) amortization of our existing unearned compensation balance, and (d) the impact of the adoption of SFAS 123R. Since the expense associated with our stock option repricings and stock options issued to consultants is dependent on our stock price and volatility, stock compensation expense may fluctuate significantly from period to period. To date we have recognized over $32.0 million of expense in connection with our stock option repricings, and this may become an even more significant component of our stock compensation expense in future periods depending on our weighted average stock price and the number of such repriced options that continue to remain outstanding. Approximately 1.7 million stock options were outstanding as of December 31, 2004 that were repriced in 2001 and 2000. For these re-priced options, the Company will continue to mark-to-market options that are vested and outstanding, until they are exercised, cancelled or are forfeited unexercised. In future periods, to the extent that the market price of our stock exceeds or is lower than the market price as of

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December 31, 2004, we would incur a charge or a credit, respectively, pertaining to these outstanding options and an incremental charge for options that vest and become outstanding in those periods.

      Amortization of Goodwill and Intangible Assets. During 2004, we recorded $1.3 million of amortization of intangible assets, compared to $1.1 million and $3.5 million of expense for the amortization of goodwill and intangible assets, for 2003 and 2002, respectively. The amortization recorded during 2004 relates to intangible assets acquired in connection with the acquisition of Transwarp Networks. The increase in 2004 is due to a full years’ amortization during 2004, compared to nine months during 2003. The decrease from 2002 to 2003 is attributable to the lower balance of amortizable intangibles during 2003.

      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.

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. Revenue for Polaris commenced in 2004, and is expected to extend through 2007. 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 is appropriate based on the risk associated with technology that is 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 $3,250,000. Shipments of this product commenced during 2004.

      Impairment of Goodwill and Intangible Assets. In 2002, we recorded $5.2 million of expense for the impairment of goodwill and intangible assets recorded in connection with the acquisition of CMD in 2001. These assets became impaired as a result of our decision in the second quarter of 2002, to transition to a licensing model for our storage subsystem board products, whereby instead of developing, manufacturing and selling board products, we decided to develop and license board designs in exchange for license fees and royalties. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

      Based on our annual impairment test performed for 2004, in accordance with SFAS No. 142, we concluded that there was no impairment of our goodwill and intangible assets in fiscal 2004. The impairment analysis was based on our estimates of forecasted discounted cash flows as well as our market capitalization at that time.

      Restructuring. During the third quarter of 2001, we began a program to focus our business on products and technology, including those obtained through acquisitions, in which we have, or believe we can achieve, a market leadership position. As part of this program, we decided to cancel numerous products under development, to remove certain projects from our development plan, to phase out or de-emphasize certain existing products and to integrate the operations of two acquired companies — CMD and SCL.

      In connection with this program, we reduced our workforce in the fourth quarter of 2001 by approximately 60 people, or 20%. In the first quarter of 2002, we implemented a second workforce reduction in connection with the program discussed above, eliminating an additional 35 positions, or 13% of our workforce. Positions were eliminated from all functional areas. This reduction resulted from the continued integration of acquired companies, as well as continued execution of our product and technology strategy, whereby we

38

decided to phase out the legacy storage subsystem board products we acquired from CMD and to develop new board products only if we believed it would facilitate or accelerate the use of our storage semiconductor products. In connection with this workforce reduction, we recorded a restructuring expense of $2.2 million in the first quarter of 2002, consisting of cash severance-related costs of $198,000, non-cash severance-related costs of $318,000 representing the intrinsic value of modified stock options, an expected loss on leased facilities of $1.2 million and fixed asset write-downs of $500,000 for assets to be disposed of. In addition, we reversed $76,000 of unearned compensation, a component of stockholders’ equity, for unvested stock options that were cancelled in connection with employee terminations.

      In April 2002, we decided to transition to a licensing model for our storage subsystem board products, whereby instead of developing, manufacturing and selling board products to facilitate or accelerate the use of our storage semiconductor products, we would develop and license board designs in exchange for license fees, royalties and the use of our semiconductor products. In connection with this decision, we implemented a third workforce reduction, eliminating 14 positions, or 5% of our workforce, and recorded a restructuring expense of $3.5 million, consisting of cash severance-related costs of $450,000, non-cash severance-related costs of $1.6 million representing the intrinsic value of modified stock options and fixed asset write-downs of $1.5 million for assets to be disposed of. We also reversed $302,000 of unearned compensation, a component of stockholders’ equity, for unvested stock options that were cancelled in connection with employee terminations.

      In connection with our decision to stop selling board products and to transition to a licensing model, we assessed recoverability of our intangible assets subject to amortization in accordance with SFAS No. 144. During the quarter ended September 30, 2002, an impairment expense of $749,000 was recognized for acquired technology and $60,000 was recognized for patent and other intangible assets, based upon our projection of significantly reduced future cash flows. Additionally, we reduced our estimate of the useful lives of the remaining intangible assets subject to amortization such that these assets were fully amortized by the end of 2002. We also tested the carrying value of goodwill for impairment in accordance with SFAS No. 142. As a result of our impairment test, a goodwill impairment expense of $4.4 million was recognized during the second quarter of 2002. To determine the amount of the impairment, we estimated the fair value of our storage systems business based primarily on expected future cash flows. We then reduced this amount by the fair value of identifiable tangible and intangible assets other than goodwill (also based primarily on expected future cash flows), and compared the unallocated fair value of the business to the carrying value of goodwill. To the extent goodwill exceeded the unallocated fair value of the business, an impairment expense was recognized.

      In December 2002, we revised our estimate of the loss we expect to incur on subleased facilities and recorded a restructuring expense of $1.5 million. Real estate market conditions deteriorated in the fourth quarter of 2002, causing us to reassess the length of time it would take to find tenants and the fair value lease rate of our available space. In March 2003, we reorganized parts of the marketing and product engineering activities of the company into lines of business for PC, CE and storage products to enable us to better manage our long-term growth potential. The central engineering, sales, manufacturing, and general and administrative activities were not organized into the line of business structure. 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. The expected loss on leased facilities resulted from our plan to consolidate our remaining workforce to the extent practicable and sublease any excess space. To determine the expected loss, we compared our lease and operating costs for the space to our estimate of the net amount we would be able to recover by subleasing the space. This estimate was based on a number of assumptions, including the length of time it will take to secure a tenant, the sublease rate per square foot, the cost of necessary improvements or modifications and real estate broker commissions. The

39

fixed asset write-downs in 2001 and 2002 were determined based on the estimated fair value of assets, primarily computer hardware and software that would no longer be utilized after the employees’ termination dates.

      Severance and benefits payments are substantially complete. Lease payments will be made in the form of cash substantially through the end of November 2005. The following table presents restructuring activity for 2002 through December 31, 2004 (in thousands):

	Severance			Leased
	and Benefits			Facilities			Fixed Assets			Total
Balance as of December 31, 2001	$	408		$	385		$	50		$	843
2002 provision		2,547			2,633			2,013			7,193
Cash payments		(865	)		(420	)		—			(1,285	)
Non-cash activity		(1,952	)		—			(2,063	)		(4,015	)
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

      Patent assertion and acquisition integration costs. Patent assertion and acquisition integration costs were $519,000, $2.2 million, and $7.0 million for 2004, 2003, and 2002, respectively. Patent assertion costs are related to the lawsuit we filed against Genesis in April 2001, and acquisition integration costs represent costs incurred to integrate CMD and SCL. The decreases in 2004 and 2003 were due to lower levels of activity relating to the Genesis litigation. We expect to incur significant Patent assertion costs through at least the fourth quarter of 2005. The amount of legal fees incurred in 2005 will depend on the duration of the litigation, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur.

      Interest Income. Interest income was $945,000, $498,000, and $998,000 for 2004, 2003, and 2002, respectively. The increase in interest income for 2004 is attributable primarily to the significantly increased cash and investment balances and the effect of investing a larger proportion of the portfolio in short-term investments. The declines in 2003 can be attributed primarily to lower interest rates.

      Interest Expense and Other Net. Net interest expense and other was $227,000, $207,000, and $240,000 for 2004, 2003, and 2002, respectively. The change in 2004 can be attributed to lower interest expense due to lower debt balances offset by increased bank charges and other expenses. The change in 2003 compared to 2002 can be attributed to decreasing average outstanding debt balances during 2003 and 2002.

      Gain on derivative investment security. During 2004, we recorded a net gain of $926,000 from a derivative investment security. This relates to common stock warrants acquired in connection with a transaction with Leadis Technology Inc. (as described in Note 12 to the accompanying consolidated audited financial statements for the year ended December 31, 2004). On September 16, 2004, we exercised the common stock warrants. Our equity investment in Leadis has been and will continue to be included in our short-term investments on our consolidated balance sheet, until our holding of the 374,397 shares are sold. Our typical practice is not to hold shares for investment purposes. Subsequent to year-end, through February 28, 2005, we have sold approximately 23,600 shares.

      Provision for Income Taxes. For the year ended December 31, 2004, we recorded a provision of $1,007,000 for income tax expense. This amount includes approximately $302,000 relating to foreign withholding taxes payable in connection with our licensing contracts. The remaining $705,000 of our income

40

tax provision amount relates primarily to taxes in certain foreign jurisdictions where we have recently commenced operations and estimated provision for U.S. alternative minimum taxes for the fiscal year ended December 31, 2004. Due to our losses in 2003 and 2002, no provision for income taxes was recorded in any of those years. At December 31, 2004, we had a net operating loss carryforward for federal income tax purposes of approximately $99.7 million that expires in various years through 2024. These future tax benefits have not been recognized as an asset on our consolidated balance sheet due to sufficient uncertainties surrounding our ability to generate sufficient taxable income in future periods to realize these tax benefits. A portion of these NOLs relate to prior acquisitions. The Tax Reform Act of 1986, places limitations on how fast these acquisition-related NOLs can be consumed. As such, the amounts of, and benefits from, net operating loss carryforwards may or could be restricted or limited under certain circumstances. We currently do not expect to be subject to these restrictions or limitations for 2005.

      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.

Liquidity and Capital Resources

		2004			Change			2003			Change			2002
		(Dollars in thousands)
Cash and cash equivalents		$	23,280		$	5,346		$	17,934		$	3,021		$	14,913
Short term investments			70,240			50,920			19,320			(1,600	)		20,920
	Total cash, cash equivalents and short term investments	$	93,520					$	37,254					$	35,833
	Percentage of total assets		60.4	%		17.9	pts		42.5	%		(3.7	)pts		46.2	%
Total current assets		$	129,936			66,913		$	63,023		$	5,790		$	57,233
Total current liabilities			(32,829	)		(7,480	)		(25,349	)		4,097			(29,446	)
	Working capital	$	97,107			59,433		$	37,674			9,887		$	27,787
Cash (used in) operating activities			36,446			39,339			(2,893	)		5,985			(8,878	)
Cash provided by (used in) investing activities			(53,140	)		(49,793	)		(3,347	)		(7,896	)		4,549
Cash provided by financing activities			22,040			12,779			9,261			2,065			7,196
Net increase (decrease) in cash and cash equivalents			5,346			2,325			3,021			154			2,867

      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, 2004, we had $97.1 million of working capital and $93.5 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 $36.4 million of cash during 2004. For 2004, our net income excluding depreciation, stock compensation expense, amortization of goodwill and intangible assets, provision for doubtful accounts, gain on derivative investment security, and tax benefit from employee stock plans was $38.5 million. 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 $2.1 million in cash.

      Net accounts receivable increased to $19.4 million at December 31, 2004 from $12.8 million at December 31, 2003. The increase is primarily due to increased sales volume. The days of sales outstanding (DSO) was 38 days at December 31, 2004, compared to 38 days at the end of December 31, 2003. DSO has remained unchanged although revenue and the net accounts receivable balances have increased significantly

41

due primarily to improved collections. We expect DSO to fluctuate during the year, but likely will remain in the 38-48 days range for the remainder of the year.

      Inventories increased to $13.9 million at December 31, 2004 from $10.3 million at December 31, 2003. The increase is attributable primarily to increased business volume during the year 2004 and to support future projected revenue activity. Our inventory turn rate decreased to 4.8 as at December 31, 2004 from 5.1 as at December 31, 2003. 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. Our inventory turns decreased primarily due to higher inventory balances as at December 31, 2003. We expect our inventory turns to range between 5.0 and 6.0 over the course of the year.

      Accounts payable and accrued liabilities increased to $6.8 million and $13.4 million, respectively, at December 31, 2004 from $6.4 million and $8.7 million, respectively, at December 31, 2003. The increase in accounts payable was due to the timing of when payables became due, and the increase in accrued liabilities is primarily due to an accrual for employee bonus of $3.2 million.

      Deferred margin on sales to distributors increased to $10.0 million at December 31, 2004 from $7.3 million at December 31, 2003. The increase is principally due to the effect of increased distributor related shipments at December 31, 2004 as compared to December 31, 2003.

Investing and financing activities

      We used $53.1 million of cash in our investing activities in 2004. We used $5.9 million towards the purchase of property and equipment and used $47.2 million towards the net purchases of short-term investments. We used $3.3 million of cash from investing activities in 2003 and generated $4.5 million of cash from investing activities in 2002. We provided $1.6 million and $8.3 million in net proceeds from sales and purchases of short-term investments in 2003 and 2002, respectively.

      We generated $22.0 million from financing activities in 2004. This primarily included $23.7 million in proceeds received from issuances of common stock from stock option exercises and ESPP purchases, offset by $1.7 million representing repayment of debt. We generated $9.3 million of cash from financing activities in 2003 and $7.2 million of cash from financing activities in 2002. During 2003, we received $11.5 million of proceeds from issuances of common stock through our stock option and stock purchase plans, and our net borrowing activities, including releases of security deposits and debt repayments, used $2.4 million. Cash generated from financing activities in 2002 was $7.8 million from proceeds received from the issuances of common stock, $3.6 million being proceeds from borrowings and approximately $4.2 million paid for security deposits on lease financing and debt payments.

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 in 2004. During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment. This term loan bears interest at 5% and requires monthly payments through its maturity in February 2005. As of December 31, 2004, $48,000 was outstanding under these term loans.

      During the period ended March 31, 2004, we entered into an agreement to extend this debt facility by way of a revolving line of credit with an availability of up to $10.0 million, and an equipment line of credit of up to $3.0 million. Borrowings under the revolving line are limited to the lesser of $10.0 million or 80% of eligible accounts receivable as defined in the loan agreement. This revolving line of credit is secured by the Company’s equipment, eligible accounts receivable and inventory. This revolving line of credit expires in March 2005, and bears interest at prime plus 0.25% or LIBOR plus 2.75%, at our option. No amounts have been drawn down under this line of credit as of December 31, 2004. Equipment advances pursuant to the equipment line of credit were available to us through August 2004, however no amounts were drawn down against this line and it expired in accordance with its terms. Our credit facilities contain quarterly and annual

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financial covenants. As of December 31, 2004, we were in compliance with all covenants. In November 2004, we leased certain capital equipment and as of December 31, 2004, the future capital lease obligations were approximately $441,000.

      In October 2002, we financed a $351,000 insurance premium at an interest rate of 5.75%. Monthly payments of $40,000 were due through June 2003. This was repaid in full during 2003.

      We leased certain software and equipment under lease agreements accounted for as capital leases. All such leases matured during 2003.

      In October 1999, we entered into a non-cancelable operating lease through July 2003 for our principal operating facility. This lease requires average monthly rental payments of approximately $133,000 and was secured by a certificate of deposit in the amount of $283,000, which was included in prepaid expenses and other current assets on our 2002 consolidated balance sheet. Under the terms of the original lease agreement, this security requirement was not required after July 2003; therefore we no longer maintain a certificate of deposit. 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 the Company leased approximately 28,000 square feet of additional space (for a total leased area of approximately 110,000 square feet). The revised agreement provides for a rent free period for the additional space and thereafter an initial monthly base rental of $107,607 and provides for annual increases of 3% thereafter.

      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 have subleased parts of this facility to three separate third parties. Two of these sublease agreements are coterminous leases and extend through November 2005, while the other sublease is on a month-to-month basis. These subleases collectively generate monthly sublease income of approximately $40,000 to offset our payment obligations. 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. We do not occupy the Milpitas facility and are attempting to sublease the space. We also lease office space in Taiwan, Korea, United Kingdom and Japan.

      Rent expense totaled $1,771,000, $1,902,000 and $2,529,000 in 2004, 2003 and 2002, 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, debt and capital lease obligations and inventory related purchase obligations outstanding at December 31, 2004 are as follows (in thousands):

			Payments Due in
			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Debt and capital lease obligations	$	528	$	288	$	240	$	—	$	—
Operating lease obligations		9,746		3,155		2,818		2,900		873
Inventory purchase commitments		3,534		3,534		—		—		—
Total	$	13,808	$	6,977	$	3,058	$	2,900	$	873

      We plan to spend approximately $5-10 million during the next 12 months for equipment, furniture and software.

      Based on our estimated cash flows for 2005, we believe our existing cash 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

43

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.

Factors Affecting Future Results

      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 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. In addition, the preliminary serial ATA specification was first published in August 2001 and the High Definition Multimedia Interface (HDMI) specification was first released in December 2002. 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 become profitable.

      We have incurred net losses in each fiscal year since our inception, including net losses of $0.3 million, $12.8 million and $40.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. We may continue to incur net losses for the foreseeable future. Accordingly, we may not achieve and sustain profitability.

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

      Our 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;

•  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;

•  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 functionality offered by our products, and 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;

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•  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 class action lawsuits against us that were 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.

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

      Our 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 all other things 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 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 Company’s technology to companies that address markets in which we do not want to directly participate. We have limited experience marketing and selling our technology on a licensing basis. In conjunction with the business strategy we adopted in late 2001, we signed our first license contract in December 2001, and have signed others since then. 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 revenues could fluctuate

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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. Because of their high margin content, licensing revenues can have a disproportionate impact on gross margins 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. In addition, in any period, our expectation of licensing revenue is or may be dependent on one or a few licenses being completed. Licensing that occurs in the course of 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.

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

      The PC, CE 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. Our display products face competition from a number of sources, including analog solutions, DVI-based solutions, dual (analog and DVI based) solutions and other digital interface solutions. We expect competition in the display market to increase. For example, Analog Devices, ATI, Broadcom, Chrontel, Genesis Microchip, Explore Tech, National Semiconductor, Novatek, nVidia, Philips, Pixelworks, SIS, Smart ASIC, ST Microelectronics, Sunplus, Texas Instruments, Thine, and Weltrend, are shipping products or have announced intentions to introduce products and/or other digital interface solutions that we expect will compete with our PanelLink products. Other companies have announced DVI-based solutions and we expect that additional companies are likely to enter the market. Current or potential customers, including our own licensees, may also develop solutions that could compete with us, directly or indirectly, such as the integration of a DVI transmitter into a graphics processing chip or integration of a DVI receiver into a panel monitor controller.

      In the CE market, our digital interface products are used to connect cable set-top boxes, satellite set-top boxes and DVD players to digital televisions. These products incorporate DVI and High-bandwidth Digital Content Protection (HDCP), or HDMI with or without HDCP support. Companies that have announced or are shipping DVI-HDCP solutions include Texas Instruments (TI), Toshiba, Panasonic, Mstar, Thine, Broadcom and Genesis Microchip (Genesis). In addition, our video processing products face competition from products sold by AV Science, Broadcom, Focus Enhancements, Genesis, Mediamatics, Micronas Semiconductor, Oplus, Philips, Pixelworks, Zoran, ATI and Trident. We also compete, in some instances, against in-house developed solutions designed by large original equipment manufacturers and or customers with captive in-house semiconductor capabilities. We expect competition for HDMI products from the other HDMI founders and adopters, including Hitachi, Matsushita, Philips, Sony, Thomson, Toshiba, MStar, and Analog Devices. Toshiba and Matsushita have working HDMI solutions.

      Silicon Image has worked to develop a unique strategy that involves both the creation of partnerships as well as the licensing of our intellectual property to accelerate the adoption of new standards such as Serial — ATA and HDMI. This strategy allows Silicon Image to be recognized as the de-facto inter-operability leader in the industry. As an example, Silicon Image has entered into a strategic licensing deal with MediaTek (a major supplier of DVD player chipsets). Silicon Image recognized that the DVD player market is fiercely competitive and the emerging HDMI technology would likely be integrated into existing “system on a chip” solutions. Based on this recognition, Silicon Image proactively licensed our HDMI transmitter technology to MediaTek for incorporation in their chipsets that we hope will begin shipping during 2005. This arrangement involved fees paid to Silicon Image upon delivery of the solution and possible payments per unit dependent upon the volume of units shipped by Mediatek. This deal was strategic to Silicon Image in that Silicon Image agreed to give MediaTek a reduction on payments if MediaTek achieved certain aggressive milestones (units shipped) during 2005. Silicon Image was willing to agree to this provision with the belief that this was not a

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sustainable market for our discrete solutions, and to the extent more source devices were enabled with HDMI, we felt this would create additional opportunities for Silicon Image’s HDMI receiver products. This arrangement makes MediaTek a competitor in the sense they will win a portion of the market but also makes them a partner in helping fuel sales on the receiver side.

      Another example is our strategic relationship with Sunplus. Silicon Image has licensing arrangements as well as agreements involving joint product development and the manufacture and supply of products. These agreements make Sunplus a strategic partner in that Silicon Image has access to technology and manufacturing facilities not previously available and also garners an ongoing royalty when Sunplus makes a chip sale that integrates HDMI or SATA.

      Silicon Image has several other licensees and smaller partnerships of a similar nature. The effect of these “partnerships” over time should accelerate growth and lower research and development expenses. While the products developed in these partnerships may return lower gross margins for Silicon Image, they will fuel higher revenues with less investment in development expenses; thus these products are expected to contribute to the bottom line in a similar fashion to the contribution we receive from higher gross margin, non-partnership related products.

      In the storage market, our Fibre Channel products face competition from companies selling similar discrete products, including PMC Sierra, ServerWorks and Vitesse, from other Fibre Channel Serializer-Deserializer (SerDes) providers who license their core technology, such as LSI Logic, and from companies that sell Host Bus Adapters (HBA) controllers with integrated SerDes, such as QLogic and Agilent. In the future, our current or potential customers may also develop their own proprietary solutions that may include integration of SerDes.

      Our SATA products compete with similar products from Marvell and Promise. In addition, other companies such as Adaptec, APT, ATI, Intel, LSI Logic, ServerWorks and Vitesse have developed or announced intentions to develop SATA controllers. We also compete against Intel and other motherboard chipset makers that have integrated SATA functionality into their chipsets.

      Our parallel ATA products compete with similar products from Promise and Highpoint.

      Our SteelVine products compete with similar products from Adaptec, IQStor and Xyratex.

      Some of these 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. In addition, some of our competitors could merge (for example, Genesis and Pixelworks announced, and then terminated, such a merger), which may enhance their market presence. As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements, or devote more resources to the promotion and sale of their products. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and increase our losses.

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 and version 1.1 of the specification was published for adoption in May 2004. 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

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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 Federal Communications Commission (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 requiring that after July 2005 high-definition STBs distributed by cable operators include a DVI or HDMI interface and that as of certain phase-in dates televisions marketed or labeled as “digital cable ready” include a DVI or HDMI interface. However, we cannot predict whether these rules will be amended prior to phase in or that their phase-in dates will not be pushed back or otherwise delayed. In the event that the phase-in dates are postponed or otherwise delayed the demand for our products could be reduced, which would adversely affect our business. In the event that mandatory use of a DVI or HDMI interface in STBs distributed by cable operators were to be delayed beyond the currently anticipated time frame or not required at all, that could reduce the demand for our CE products, which would adversely affect our business. 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.

      We believe that the adoption of HDMI may be affected by the availability of high-quality digital content to devices equipped with HDMI or DVI interfaces. Typically high quality digital content is made available to devices equipped with HDMI or DVI interfaces through high-definition television or digital television distribution channels. To the extent that the availability of such content is delayed or not made available by the content owners or broadcasters and distributors of such content then demand for HDMI products could be delayed or reduced.

      Transmissions of audio and video from source to sink devices 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.

Growth of the market for our PC products depends on the widespread adoption and use of the DVI specification.

      Our success is largely dependent upon the rapid and widespread adoption of the DVI specification, which defines a high-speed data communication link between computers and digital displays. We cannot predict the rate at which manufacturers of computers and digital displays will adopt the DVI specification. The adoption of DVI has been slower than we originally anticipated. The DVI adoption rate in the PC market was reported to be approximately 25% and 12% in 2003 and 2002, respectively. Reportedly, the 2004 DVI adoption rate in the PC market is approximately in the range of 45-50%. Adoption of the DVI specification may be affected by

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the availability of computer components able to communicate DVI-compliant signals, such as transmitters, receivers, connectors and cables necessary to implement the specification. Other specifications may also emerge that could adversely affect the acceptance of the DVI specification. For example, a number of companies have promoted alternatives to the DVI specification using other interface technologies, such as low voltage differential signaling, or LVDS. Further delays in the widespread adoption of the DVI specification could reduce acceptance of our products, limit or reduce our revenue growth and increase our losses.

Our success depends on the growth of the digital display market.

      Our PC business depends on the growth of the digital display market. The potential size of the digital display market and its rate of development are uncertain and will depend on many factors, including:

•  the number of digital-ready computers that are being produced and consumer demand for these computers;

•  the rate at which display manufacturers replace analog or non-compliant DVI interfaces with fully DVI-compliant interfaces;

•  the availability of cost-effective semiconductors that implement a fully DVI-compliant interface; and

•  improvements to analog technology, which may decrease consumer demand for our digital display products.

      In order for the digital display market to grow, digital displays must be widely available and affordable to consumers. In the past, the supply of digital displays, such as flat panels, has been cyclical and consumers have been very price sensitive. Also, some manufacturers have implemented DVI interfaces that are not fully DVI-compliant. These interfaces often interfere with the operability of our products which function best with a fully DVI-compliant interface. Our ability to sustain or increase our revenue may be limited should there not be an adequate supply of, or demand for, affordable digital displays with DVI-compliant interfaces.

A significant amount of our revenue is associated with the adoption of new or emerging technologies within the PC industry. The PC industry has slowed and the adoption of these new technologies may not occur as planned.

      A large portion of our revenue is directly or indirectly related to the PC industry and the adoption of new or emerging technologies within the PC industry. Accordingly, we are highly dependent on the adoption of new or emerging technologies within the PC industry, which experienced a slowdown in growth during the second half of 2000 that has continued into 2004. We cannot predict the duration or severity of the downturn in the PC and display market, or in the general economy, or its effect on our revenue and operating results, including the adoption of these new or emerging technologies. If the market for PCs and PC-related displays continues to grow at a slow rate or contracts whether due to reduced demand from end users, macroeconomic conditions or other factors, our business and results of operations could be negatively affected.

      Although we have broadened our product offerings to include more products in the consumer electronics and storage markets, there can be no guarantee that we will achieve long-term success in these markets. To date, we have achieved reasonable success, but if we fail to consistently achieve design wins in the consumer electronics and storage markets, we would become more dependent on our PC related products for the PC industry.

      In general, the demand for our products in the PC market is highly dependent upon Intel’s continued integration of SDVO and PCI-Express into its PC chipset platforms. Although Intel has included SDVO and PCI-Express in its Grantsdale platform, there is no assurance that Intel will continue to include DVI support in its future platforms. Our revenue generated from sales of DVI transmitters and SATA host controllers is highly dependent upon the ability of such transmitters to work with existing Intel PC chipset platforms. If Intel fails to integrate SDVO and PCI-Express or some other convenient method to interface to our products in its future PC chipset platforms, then the demand for our DVI transmitters could be adversely affected. Demand for our DVI receiver products is also highly dependent upon Intel’s integration of serial interfaces

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into its PC chipset platform because of Intel’s dominant market share in the PC business. If Intel were to discontinue support for serial interfaces, then the number of available PCs with a DVI port could significantly decrease, thus reducing demand for our DVI receivers.

Our success depends in part on new strategic relationships.

      We have recently entered into several strategic partnerships and joint ventures with third parties. Examples include our licensing arrangements with MediaTek, under which we licensed our HDMI transmitter technology to MediaTek for incorporation into their DVD player chipsets, and our licensing and joint venture arrangements with Sunplus, under which Sunplus licenses our technology and we and Sunplus jointly develop products for manufacture and supply by a joint venture entity. We have several other smaller licenses and partnerships of a similar nature. While these arrangements 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 arrangements will be successful. Negotiating and performing under these arrangements involves significant time and expense, we may not realize anticipated increases in revenues, standards adoption or cost savings, and these arrangements may make it easier for the third parties to compete with us, any of which may have a negative affect our business and results of operations.

Our success depends on the development and growth of markets for products based on new and emerging storage technologies.

      Our product development efforts in the storage market are focused on the development of products using new interface technologies such as Fibre Channel and SATA. The markets for these new interface technologies are at an early stage of development, and there can be no assurance that they will replace other storage interfaces that are now widely used, such as parallel ATA and SCSI. The potential size and rate of development of these markets are uncertain and will depend on many factors, including:

•  the rate at which manufacturers of storage subsystems adopt new interface technologies, which may be more costly to implement than existing interface technologies until volumes are sufficient to bring costs to competitive levels;

•  the availability of cost-effective semiconductors and components for storage subsystems, such as SATA-enabled hard drives and SATA-enabled optical drives (CD and DVD) that implement new interface technologies for the storage market;

•  whether and to the degree Intel or other motherboard manufacturers integrate the functionality of our products, such as SATA, into their chips and chipsets; and

•  improvement to existing storage interface technologies such as parallel ATA and SCSI, or the introduction of other new storage interface technologies, either of which may decrease consumer demand for our storage products.

      In particular, the rate of implementation of the SATA interface will depend on how quickly drive (optical and hard disk) manufacturers, motherboard and PC providers and chipmakers are able to resolve technical communication and functionality issues to enable a “plug and play” environment in which a computer system is automatically able to recognize and configure storage devices. Resolution of these issues could be time-consuming, and will depend in good measure on the ability of chipmakers to incorporate the required high-speed serial data transfer capabilities into their semiconductors without sacrificing manufacturing yields.

      Any delay in acceptance of new interface technologies, or a reduction in the growth or size of the market for systems based on SATA or Fibre Channel technologies, would limit sales of our storage products and reduce our revenue. Any delay in the availability of serial ATA compatible drives or acceleration of serial ATA or Fibre Channel SerDes integration efforts by motherboard or storage controller manufacturers may also reduce our revenue.

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      We have promulgated a SATALite specification to which we have invited key industry members to participate. This program includes certain licenses to our technology that we hope will increase market acceptance of our serial ATA products. There can be no assurance that this program will succeed, or that SATALite participants will not use our technology to compete against us.

      To date, we have achieved a number of design wins for our serial ATA and Fibre Channel storage products. Even after we have achieved a design win from an Original Equipment Manufacturer (OEM), we may not realize any revenue, or significant revenue, from that OEM since a design win is not a binding commitment to purchase our products and the OEM may not achieve market acceptance for their product. Further delay in serial ATA-enabled drive availability may lead OEMs to re-open their designs and designs we have won may be subject to being lost, which could reduce our revenue and increase our operating expenses in competing to re-win designs.

      With respect to our product offerings based upon the SteelVine architecture, there can be no assurance such product offerings will achieve the desired level of market acceptance in the anticipated timeframes or that such product offerings will be successful. Furthermore, there can be no assurance that we will be able to introduce these products into the marketplace on a timely basis or that we will be successful in achieving the necessary partners and channels to be successful in the marketplace. Our inability to be timely in product introductions and or have adequate partners and channels may adversely impact our ability to be successful with this line of products and would adversely affect our business. It is anticipated that the products based upon the 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.

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 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 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 or at all. As a result, we would have excess inventory, which would increase our losses. Additionally, if we underestimate customer demand or if sufficient manufacturing capacity is unavailable, we will 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, 2004, shipments to World Peace International, an Asian

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distributor, generated 15% of our revenue and shipments to Microtek, a distributor, generated 12% of our revenue. For the year ended December 31, 2003, shipments to World Peace International, generated 15% of our revenue, and shipments to Weikeng, a distributor, generated 8% 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 45% of our revenue for the year ended December 31, 2004, 42% of our revenue for the year ended December 31, 2003, and 42% of our revenue for the year ended December 31, 2002. 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;

•  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 electronics and small and 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

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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; and

•  market acceptance of new products.

      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 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 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;

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•  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.

      In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. For example, demand in the semiconductor industry rose to record levels in 1999, and then declined until beginning to show signs of recovery during 2003 and 2004. The industry has also experienced significant fluctuations in anticipation of changes in general economic conditions. 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 Taiwan Semiconductor Manufacturing Company (TSMC), an outside foundry, to produce the vast majority all of our semiconductor products. We also rely on Kawasaki, UMC and Atmel, for outside foundry services, and on Amkor and ASE to test certain 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;

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

•  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 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

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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, 2004, 2003 and 2002 72%, 74%, and 72% of our revenue respectively was generated from customers and distributors located outside of the United States, primarily in Asia. 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;

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•  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.

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.

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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 has been an investor of ours;

•  Intel and we have been parties to a business cooperation agreement;

•  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 original founders of the Digital Display Working Group (DDWG);

•  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 DVI and 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 the 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;

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•  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 have entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the grantor’s patents, 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 are 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 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 merit less, 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. 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, together with certain investment banks and their current or former employees, were named as defendants in a securities class action suit filed against us on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The lawsuit alleges that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. The plaintiff in this matter has filed an amended complaint in which Silicon Image, and the named officers, was dropped as defendants. We believe that the settlement described above, if approved, would encompass the claims in this case. We believe that these claims were without merit and, if revived, and not subject to the settlement, we intend to defend vigorously against them.

      Certain of our officers and directors were named as defendants in consolidated shareholder derivative litigation. The lawsuit alleged that as a result of the examination conducted by our Audit Committee, we would have been required to restate our financial results for 2002 and 2003. The lawsuit further alleges that such a restatement would be due to breaches by the individual defendants of their fiduciary duties to us, that certain of the individual defendants are liable to us for insider trading under California law, and that the

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individual defendants are liable to us for mismanagement, abuse of control, and waste. We and certain of our officers were also named as defendants in consolidated securities class action litigation. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased our stock between April 15, 2002 and November 15, 2003. The lawsuit alleges that we had materially overstated our licensing revenue, net income and financial results during this time period, and that were being forced to restate our financial results. With the announcement by the Audit Committee of Silicon Image’s Board of Directors that it has completed its examination and that it has concluded that no changes to Silicon Image’s previously announced financial results are required, both the securities class action litigation and the shareholder derivative litigation have been dismissed.

      Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of California. 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 alleges that the Company and certain of its 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. The Company intends to defend itself vigorously in this matter.

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 April 2001, we filed suit against Genesis Microchip (Genesis) for infringement of one of our U.S. patents. At that time, we also filed a complaint against Genesis for unlawful trade practices related to the importation of articles infringing our patent. In February 2002, our motion to dismiss the unlawful trade practices complaint was granted and we filed an amended complaint against Genesis alleging infringement of two of our U.S. patents. These patents relate to our DVI receiver products, which generate a significant portion of our revenue. The amended complaint seeks a declaration that Genesis has infringed our patents, that Genesis’ behavior is not licensed, an injunction to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our patents, and monetary damages. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. We filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis

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re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims. In August 2002, the Court granted our motion and dismissed Genesis’s re-filed counterclaims with prejudice. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment order based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made and continues to make cash payments to the Court, it may not have made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. On January 16, 2004, Genesis filed a notice of appeal. On August 26, 2004, the parties completed the filing of their respective appeal briefs. On October 26, 2004, the Court of Appeals for the Federal Circuit issued an order setting the oral arguments for the appeal on December 7, 2004. The hearing took place as scheduled. At the end of the hearing, the panel of Federal Circuit judges hearing the case stated that they believed that no final order had been issued by the trial court, and that therefore the Federal Circuit did not have jurisdiction to hear the appeal. The Federal Circuit issued its opinion on January 28, 2005 and, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the parties’ agreement to settle the case, as embodied in the Memorandum of Understanding (MOU) that was found by the lower court to be valid and enforceable, requires that Genesis pay us a portion of the settlement as a condition to dismissing the case. Because the lower court allowed Genesis to pay the amount into escrow instead of directly to us, the Federal Circuit held that the underlying claims asserted below remain pending, and therefore the judgment below is not “final” and is appealable.

      There can be no assurance that Genesis will not undertake further efforts to avoid its obligations under the MOU, and that further proceedings (lawsuits, contempt citations, etc.) against Genesis, and certain of its executives, its counsel, and others may not be required to obtain compliance or to obtain redress for non-compliance. There can be no assurance that an appellate court will uphold the Court’s rulings or the MOU. There can be no assurance that further delays or noncompliance will not occur. The Court’s rulings of July 15, 2003 and December 19, 2003 indicate that Genesis violated certain provisions of the MOU, and of the protective order in the case, including disclosure of confidential information to Pixelworks. On August 5, 2003, Genesis and Pixelworks issued a joint press release terminating their proposed merger. In that press release, Genesis and Pixelworks jointly stated, “Pixelworks has confirmed that prior to signing the merger agreement, it reviewed the Memorandum of Understanding that purported to settle the lawsuit between Genesis Microchip and Silicon Image, Inc.” While this litigation, including the appeal or any possible derivative proceedings, is pending, Genesis may use the technology covered by these patents to develop products that might compete with ours. If we are unsuccessful in this litigation, we could be unable to prevent Genesis or others from using the technology covered by these patents. Even if we prevail in this litigation, uncertainties regarding the outcome prior to that time may reduce demand for our products, or Genesis’s use of our technology in products that compete with our products may reduce demand or pricing for our products. In addition, even if the MOU is upheld on appeal, future disputes may occur, including those regarding whether and what intellectual property licenses were granted and the scope of any such licenses and the royalty rates and payment terms for such licenses, whether the MOU was breached, whether consent was fraudulently obtained, and whether a merger partner may succeed to the rights and/or the obligations under the MOU. These disputes may result in additional costly and time-consuming litigation or the license of additional elements of our intellectual property for free.

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      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 face additional risks and costs as a result of the delayed filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2003 and our recent Audit Committee examination.

      As a result of the delayed filing of our Form 10-Q for the quarter ended September 30, 2003, and the Audit Committee’s examination, we have experienced additional risks and costs. The Audit Committee’s examination has been time-consuming, required us to incur additional expenses and affected management’s attention and resources. Further, the measures to strengthen internal controls already implemented or being implemented have and may continue to require greater management time and company resources to implement and monitor. We incurred approximately $1.1 million of costs associated with the Audit Committee examination in the fourth quarter of 2003 and an additional $1.0 million in 2004. These costs included payments made by us pursuant to indemnity agreements between certain individuals and us.

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

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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, new regulations adopted by The NASDAQ National Market requiring shareholder approval for all stock option plans, as well as new 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. There have been several proposals on whether and/or how to account for stock options. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash 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 the company, 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 the company 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 management transitions 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 and executive officers in recent quarters, including the following:

•  In April 2004, Steve Tirado moved from the position of president to division president of storage group, Jaime Garcia-Meza moved from the position of vice president of worldwide sales to vice president of sales and marketing for storage platforms, Rob Valiton was appointed as vice president of worldwide sales, and Chris Paisley was appointed to the board of directors

•  In August 2004, the company announced that Robert Gargus planned to retire from the position of chief financial officer and Dale Brown, the controller of the company, was appointed as chief accounting officer. Although an executive search is underway, the timing of appointment of a successor to Mr. Gargus is uncertain.

•  In September 2004, Parviz Khodi, the vice president, PC/display products of the company, passed away unexpectedly and his duties were subsequently assumed by John LeMoncheck, the vice president, CE products and Patrick Reutens was appointed as chief legal officer of the company.

•  In November 2004, David Lee resigned from the positions of chief executive officer and president, Steve Laub was appointed as chief executive officer and president and to the board of directors as well, and Andrew Rappaport and Douglas Spreng resigned from the board of directors.

•  In January 2005, Steve Laub 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.

      Past and future transitions with respect to our board and executives may result in disruptions in our management and operations and 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;

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•  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 and UMC, the outside foundries that produce the majority of our semiconductor products, are 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, 2004, 2003, and 2002 customers and distributors located in Taiwan generated 25%, 34%, and 34% of our revenue, respectively, and customers and distributors located in Japan generated 20%, 15%, and 12% 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 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.

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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.

      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,

64

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 have recently established offices in Japan, Republic of Korea (South Korea), and the United Kingdom

      We have recently established offices in Japan and South Korea. Accordingly, we are subject to risks, including, but not limited to:

•  being subject to Japanese, South Korean, and United Kingdom tax laws and potentially liable for paying taxes in Japan, South Korea, and the United Kingdom;

•  profits, if any, earned in Japan, South Korea , and the United Kingdom will be subject to local tax laws and may not be repatriable to the United States;

•  we have and will enter into employment agreements in connection with hiring personnel for the Japanese and South Korean offices and are governed by the provisions of the Japanese, South Korean, and United Kingdom labor laws; and

•  the operations of the local office are and will be subject to the provisions of other local laws and regulations.

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.

Item 7A. Quantitative and Qualitative Disclosures of Market Risk

Equity Investments

      We are exposed to equity price risk on our portfolio of marketable equity securities. As of December 31, 2004, the market value of our equity investment was approximately $4.0 million compared to $5.0 million as of June 30, 2004, a decrease of 20%. We believe that it is reasonably possible that the fair values of these securities could adversely change in the near term. We have a policy in place 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 in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related write-down in our consolidated statements of operations.

Fixed Income Investments

      As of December 31, 2004, we had an investment portfolio of fixed income securities as reported in short-term investments, including those classified as cash equivalents of approximately $93.5 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, 2004. This sensitivity analysis was based on a modeling technique that measures the

65

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%
$	288	$	576	$	863

      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.

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

      (a) 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, Chief Financial Officer, and Chief Accounting Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that all material information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 has been made known to them on a timely basis and that such information has been properly recorded, processed, summarized and reported, as required.

66

      (b) Changes in Internal Control Over Financial Reporting. There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the fourth quarter of our 2004 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Definition of Disclosure Controls

      Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO, CFO and CAO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls 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, they are included in the scope of our quarterly controls evaluation.

Management’s Report on Internal Control over Financial Reporting

      Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 2004 based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2004, the Company’s internal control over financial reporting was effective.

      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

      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.

Item 9B. Other Information

      None

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 2005 Annual Meeting of Stockholders, is incorporated herein by reference.

67

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 2005 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 2005 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 2005 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 2005 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 2005 Annual Meeting of Stockholders, is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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

      1. Financial Statements:

	Page
Consolidated Statements of Operations for the three years ended December 31, 2004		70
Consolidated Balance Sheets at December 31, 2004 and December 31, 2003		71
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2004		72
Consolidated Statements of Cash Flows for the three years ended December 31, 2004		73
Notes to Consolidated Financial Statements		74
Report of Independent Registered Public Accounting Firm		101

      2. Financial Statement Schedules

      Financial statement schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes to those financial statements.

      3. Exhibits.

      The exhibits listed in the Index to Exhibits are filed as a part of this Report on Form 10-K.

68

      (b) Reports on Form 8-K:

      We filed or furnished six reports on Form 8-K during our fourth quarter ended December 31, 2004. Information regarding the items reported on is as follows:

Date Filed
or Furnished		Item No.		Description
	October 1, 2004		Items 1.01 and 9.01	On October 1, 2004, we reported the unexpected death of an executive officer and the related payment arrangement and amendment of vesting terms authorized by our compensation committee for the benefit of the executive officer’s estate.
	October 25, 2004		Items 2.02 and 9.01	On October 25, 2004, we reported our earnings release and conference call transcript for the quarter ended September 30, 2004 (Consolidated Financial Statements for this period were furnished with this report).
	October 28, 2004		Item 1.01	On October 28, 2004, we announced the appointment of a new executive officer effective October 22, 2004.
	November 10, 2004		Item 8.01	On November 10, 2004, we filed a current report on Form 8-K regarding planned stock sales by one of our executives.
	November 15, 2004		Items 1.01 and 5.02	On November 15, 2004, we announced the appointment of a new board member and chief executive officer effective November 11, 2004.
	November 18, 2004		Item 5.02	On November 17, 2004, we reported the resignation of two of our board members on November 16, 2004.

69

SILICON IMAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2004			2003			2002
		(In thousands, except per share
		amounts)
Revenue:
	Product	$	152,350		$	89,335		$	74,884
	Development, licensing and royalties		20,809			14,190			6,655
Total revenue			173,159			103,525			81,539
Cost of revenue and operating expenses:
	Cost of revenue(1)		68,614			47,192			39,299
	Research and development(2)		61,459			43,386			40,205
	Selling, general and administrative(3)		42,183			20,943			19,976
	Amortization of intangible assets		1,345			1,103			3,482
	In-process research and development		—			5,482			—
	Impairment of goodwill and intangible assets		—			—			5,200
	Restructuring		—			986			7,193
	Patent assertion and acquisition integration costs		519			2,152			7,034
Total cost of revenue and operating expenses			174,120			121,244			122,389
Loss from operations			(961	)		(17,719	)		(40,850	)
Gain on escrow settlement, net			—			4,618			—
Interest income			945			498			998
Interest expense and other, net			(227	)		(207	)		(240	)
Gain on derivative investment security			926			—			—
Income (loss) before provision for income taxes			683			(12,810	)		(40,092	)
Provision for income taxes			1,007			—			—
Net loss		$	(324	)	$	(12,810	)	$	(40,092	)
Net loss per share:
	Basic and diluted	$	(0.00	)	$	(0.18	)	$	(0.62	)
	Weighted average shares		75,081			69,412			64,283

(1)	Includes non-cash stock compensation expense of $2.8 million, $583,000, and $1.2 million for 2004, 2003 and 2002, respectively.
(2)	Includes non-cash stock compensation expense of $16.6 million, $6.9 million, and $7.4 million for 2004, 2003, and 2002, respectively.
(3)	Includes non-cash stock compensation expense of $13.4 million, $2.5 million, and $2.5 million for 2004, 2003 and 2002, respectively.

See accompanying Notes to Consolidated Financial Statements.

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SILICON IMAGE, INC.

CONSOLIDATED BALANCE SHEETS

			December 31,
			2004			2003
			(In thousands, except share
			and per share amounts)
ASSETS
Current Assets:
	Cash and cash equivalents		$	23,280		$	17,934
	Short-term investments			70,240			19,320
	Accounts receivable, net of allowances for doubtful accounts of $745 in 2004 and $670 in 2003			19,417			12,754
	Inventories			13,926			10,312
	Prepaid expenses and other current assets			3,073			2,703
		Total current assets		129,936			63,023
Property and equipment, net				9,494			7,411
Goodwill				13,021			13,021
Intangible assets, net				1,683			3,028
Other assets				774			1,259
		Total assets	$	154,908		$	87,742
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	6,833		$	6,442
	Accrued liabilities			13,418			8,726
	Deferred license revenue			2,127			1,175
	Debt obligations and capital leases			489			1,732
	Deferred margin on sales to distributors			9,962			7,274
		Total current liabilities		32,829			25,349
Commitments and contingencies (Notes 7 and 11)
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: 78,131,604 — 2004 and 72,367,129 — 2003			78			72
	Additional paid-in capital			299,744			243,171
	Unearned compensation			(7,632	)		(8,196	)
	Accumulated deficit			(172,978	)		(172,654	)
	Accumulated other comprehensive income			2,867			—
		Total stockholders’ equity		122,079			62,393
		Total liabilities and stockholders’ equity	$	154,908		$	87,742

See accompanying Notes to Consolidated Financial Statements.

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SILICON IMAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

									Notes									Accumulated
	Common Stock					Additional			Receivable									Other
						Paid-In			from			Unearned			Accumulated			Comprehensive
	Shares			Amount		Capital			Stockholders			Compensation			Deficit			Income		Total
	(In thousands)
Balance at December 31, 2001		63,516		$	64	$	194,280		$	(167	)	$	(7,101	)	$	(119,752	)	$	—	$	67,324
Net loss		—			—		—			—			—			(40,092	)		—		(40,092	)
Net issuances of common stock		2,456			2		5,693			—			—			—			—		5,695
Common stock issued for ESPP		593			1		2,125			—			—			—			—		2,126
Common stock issued for acquisitions (Note 2)		75			—		—			—			—			—			—		—
Compensation expense for option modification		—			—		1,952			—			—			—			—		1,952
Repayments of note receivable		—			—		—			70			—			—			—		70
Interest on notes receivable		—			—		—			(12	)		—			—			—		(12	)
Unearned compensation		—			—		(459	)		—			459			—			—		—
Stock compensation expense		—			—		10,868			—			239			—			—		11,107
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

See accompanying Notes to Consolidated Financial Statements.

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SILICON IMAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Year Ended December 31,
			2004			2003			2002
			(In thousands)
Cash flows from operating activities:
Net loss			$	(324	)	$	(12,810	)	$	(40,092	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
	Depreciation and amortization			4,903			4,734			3,731
	Provision for doubtful accounts			75			151			69
	Stock compensation expense			32,783			9,988			11,107
	Amortization of intangible assets			1,345			1,103			3,482
	In-process research and development			—			5,482			—
	Impairment of goodwill and intangible assets			—			—			5,200
	Non-cash restructuring			—			646			3,965
	Non-cash gain on escrow settlement, before cash costs			—			(4,692	)		—
	Gain on derivative investment security			(926	)		—			—
	Tax benefit from employee stock plans			636			—			—
	Changes in assets and liabilities, net of amounts acquired:
		Accounts receivable		(6,738	)		(1,316	)		(4,183	)
		Inventories		(3,614	)		(3,011	)		(765	)
		Prepaid expenses and other assets		115			(851	)		382
		Accounts payable		391			(3,904	)		5,149
		Accrued liabilities and deferred license revenue		5,112			(1,554	)		2,346
		Deferred margin on sales to distributors		2,688			3,141			731
		Cash provided by (used in) operating activities		36,446			(2,893	)		(8,878	)
Cash flows from investing activities:
	Purchases of short-term investments			(75,109	)		(23,000	)		(15,815	)
	Proceeds from sales of short-term investments			27,932			24,600			24,067
	Purchases of property and equipment			(5,963	)		(5,096	)		(3,703	)
	Cash acquired in business combination, net of acquisition costs			—			149			—
		Cash provided by (used in) investing activities		(53,140	)		(3,347	)		4,549
Cash flows from financing activities:
	Proceeds from issuances of common stock			23,724			11,489			7,821
	Net repayments of stockholders’ notes receivable			—			109			58
	Borrowings			—			—			3,596
	Repayments of debt and capital lease obligations			(1,684	)		(2,467	)		(5,289	)
	Refund of security deposits on leasing arrangements			—			130			1,010
		Cash provided by financing activities		22,040			9,261			7,196
Net increase (decrease) in cash and cash equivalents				5,346			3,021			2,867
Cash and cash equivalents — beginning of period				17,934			14,913			12,046
Cash and cash equivalents — end of period			$	23,280		$	17,934		$	14,913
Supplemental cash flow information:
	Acquisitions of property and equipment under capital lease arrangements		$	441		$	383		$	—
	Cash payments for interest		$	54		$	140		$	208
	Stock and options issued with the TransWarp acquisition		$	—		$	14,371		$	—
	Cash payments for taxes		$	310		$	—		$	—
	Unrealized net gain on available-for-sale securities		$	3,743		$	—		$	—
	Reimbursable tenant improvements		$	582		$	—		$	—

See accompanying Notes to Consolidated Financial Statements.

73

SILICON IMAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

      Silicon Image is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. Silicon Image establishes industry-standard, high-speed digital interfaces and builds market momentum and leadership through its first-to-market, 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

      Certain amounts in fiscal 2003 and 2002 in our consolidated statements of operations and consolidated statements of cash flows and certain amounts in our fiscal 2003 consolidated balance sheet have been reclassified to conform to the current year presentation. These reclassifications had no impact on reported net loss in any of the periods presented. Specifically, the Company has reclassified certain auction rate securities, for which interest rates reset in less than 90 days, but for which the maturity date is longer than 90 days, from cash and cash equivalents to short-term investments. This resulted in a reclassification from cash and cash equivalents to short-term investments of approximately $6.1 million on the December 31, 2003 consolidated balance sheet. Similar reclassifications were made in prior years which resulted in a reclassification from cash and cash equivalents to short-term investments of approximately $11.4 and $6.9 million on the Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001, respectively.

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 and allowances 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

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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 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 actual 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 cash is received if collection is not reasonably assured at the time of delivery. 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 base 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 payments are received. Development revenue is recognized when project milestones have been completed and acknowledged 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. Our license revenue recognition depends upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these factors require significant judgments, and if our judgments are in error it could lead to inaccurate reporting of our revenues and income.

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

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of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency. Write-offs to date have been minimal.

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. 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. This treatment is in accordance with Accounting Research Bulletin No. 43 and Staff Accounting Bulletin No. 100.

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 five years. As of December 31, 2004 and 2003, we had $24.2 million and $23.5 million, respectively in long-lived assets, substantially all of which are located in the United States. Depreciation and amortization expense was $4.9 million, $4.7 million, and $3.7 million, and depreciation and amortization expense, including the amortization of intangibles, was $6.2 million, $5.8 million, and $7.2 million, for the years ended December 31, 2004, 2003 and 2002, 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 142). SFAS 142 requires

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goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.

      SFAS 142 was effective for fiscal years beginning after December 15, 2001. We adopted the accounting standard effective January 1, 2002. We completed the first step of the transitional goodwill impairment test as of the beginning of fiscal 2002, and the results of that test indicated that our goodwill and intangible assets were not impaired at January 1, 2002 (See Note 3 for discussion of 2002 goodwill and impairment expenses). As at January 1, 2002 we also identified $1.8 million of net identifiable intangible assets (acquired workforce) to be reclassified to goodwill pursuant to the new definition of intangible assets. Based on the annual impairment test performed for 2004 and 2003 in accordance with SFAS No. 142, there was no impairment of goodwill or intangible assets at December 31, 2004 and December 31, 2003. 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. Amortization is computed over the estimated useful lives of the respective assets, generally 18 to 48 months.

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

		December 31, 2004					December 31, 2003
		Gross Carrying		Accumulated			Gross Carrying		Accumulated
		Amount		Amortization			Amount		Amortization
Intangible assets subject to amortization:
	Acquired technology	$	1,780	$	(863	)	$	1,780	$	(375	)
	Non-compete agreement		1,849		(1,083	)		1,849		(472	)
	Assembled workforce		502		(502	)		502		(256	)
		$	4,131	$	(2,448	)	$	4,131	$	(1,103	)
Intangible assets not subject to amortization:
	Goodwill	$	13,021	$	—		$	13,021	$	—

      Amortization of intangible assets was $1.3 million, $1.1 million and $3.5 million, for the years ended December 31, 2004, 2003 and 2002, respectively.

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

	Amortization
	Expense
2005	$	1,097
2006		508
2007		78
	$	1,683

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. A valuation allowance is established to

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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. Predicting future taxable income is difficult, and requires the use of significant judgment. At December 31, 2004, we had a net operating loss carry-forward for federal income tax purposes of approximately $99.7 million, against which a full valuation allowance has been provided.

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. Actual amounts could differ materially from these estimates.

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,
	2004			2003
	(In thousands)
Balance at January 1	$	271		$	223
Provision for warranties issued during the period		300			630
Reduction to pre-existing warranties		—			—
Cash and other settlements made during the period		(220	)		(582	)
Balance at December 31	$	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 Statement of Financial Accounting Standard No. 148 (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 Standards Board Interpretation No. 28.

      The Company is required under SFAS 148 to disclose pro forma information regarding option grants made to its employees based on specified valuation techniques that produce estimated compensation charges.

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We provide pro forma net income (loss) and pro forma net income (loss) per share disclosures for stock-based awards made during fiscal 2004, 2003 and 2002, as if the fair-value-based method defined in SFAS 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. 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 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 123, our net income (loss) would have been as follows (in thousands):

	Year Ended December 31,
	2004			2003			2002
Net loss-as reported	$	(324	)	$	(12,810	)	$	(40,092	)
Less: Stock-based employee compensation expense determined using fair value method		(22,769	)		(21,019	)		(24,766	)
Add: Stock-based employee compensation cost included in the determination of net loss as reported		27,218			7,078			8,803
Pro forma net income (loss)	$	4,125		$	(26,751	)	$	(56,055	)
Basic and diluted net income (loss) per share — pro forma	$	0.05		$	(0.39	)	$	(0.87	)
Basic and diluted net loss per share — as reported	$	(0.00	)	$	(0.18	)	$	(0.62	)

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.

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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		Gains		Losses			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 12. 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 $3,061,000 is included in accumulated other comprehensive income.

      Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2003:

Cash and cash equivalents:
	Cash			$	2,741
	Cash equivalents:
		Money market funds			8,225
		Commercial paper			6,968
			Total cash equivalents		15,193
	Total cash and cash equivalents				17,934
	Short-term investments:
		Corporate notes and bonds			4,987
		United States government agencies			3,317
		Market auction preferred securities			6,125
		Commercial paper			4,891
			Total short-term investments		19,320
Total cash and cash equivalents and short-term investments				$	37,254

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      As of December 31, 2003, the estimated fair value of our investments approximated amortized cost and unrealized gains/losses were immaterial.

      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.

      In accordance with EITF 03-1, the following table summarizes the estimated fair values and gross unrealized losses relating to our individual investments in debt securities, aggregated by investment category. The securities as stated below have been in a continuous unrealized loss position for a period of less than 12 months as of December 31, 2004.

	Estimated		Gross
	Fair		Unrealized
	Value		Losses
United States government agencies	$	8,775	$	(38	)
Corporate notes and bonds		3,129		(7	)
Total	$	11,904	$	(45	)

      As of December 31, 2004, the average maturity period of our debt securities was approximately 269 days.

      In allocating the maturity dates, asset-backed securities have been allocated based on their effective maturity dates.

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, 2004, 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 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 expenses for all periods covered by this report were immaterial.

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Comprehensive income

      The components of comprehensive income for the year ended December 31, 2004, were as follows (in thousands):

Net loss for the year	$	(324	)
Other comprehensive income:
Unrealized net gains on available-for-sale investments		2,867
Comprehensive income	$	2,543

      For the years ended December 31, 2003 and 2002, comprehensive loss approximated reported net loss. Cumulative translation adjustments are immaterial for all periods presented.

Net loss per share

      Basic net loss per share is based on weighted average common shares outstanding, excluding shares subject to repurchase, and diluted net 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 loss per share (in thousands, except per share amounts):

		Year Ended December 31,
		2004			2003			2002
Numerator:
	Net loss	$	(324	)	$	(12,810	)	$	(40,092	)
Denominator:
	Weighted average shares		75,733			70,042			64,758
	Less: unvested common shares subject to repurchase		(652	)		(630	)		(475	)
			75,081			69,412			64,283
Net loss per share:
	Basic and diluted net loss per share	$	(0.00	)	$	(0.18	)	$	(0.62	)

      Had we generated net income for the years ended December 31, 2004, 2003, and 2002, the number of additional weighted average shares for purposes of calculating diluted earnings per share would have been (in thousands):

	Year Ended December 31,
	2004		2003		2002
Unvested common shares subject to repurchase		671		609		414
Dilutive stock options under the treasury stock method		10,205		6,533		8,687
		10,876		7,142		9,101

      As a result of our losses for the years ended December 31, 2004, 2003 and 2002, 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, 20,028,000 and 21,074,000, for the years ended December 31, 2004, 2003 and 2002, respectively.

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Recent accounting pronouncements

      In December 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46-R). FIN 46-R provides a deferral of FIN 46 for certain entities until after March 15, 2004. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of this standard did not have a material impact on our consolidated financial statements.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity.” The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and further requires that an issuer classify as a liability (or an asset in some circumstances) financial instruments that fall within its scope because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on our financial position or results of our operations.

      In December 2004, the FASB issued SFAS 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” The Statement clarified the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal” as previously stated in Paragraph 5 of ARB No. 43, Chapter 43. In addition, the Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 on a prospective basis. We believe that the adoption of this standard will have no material impact on our financial statements.

      In December 2004, the FASB issued SFAS 123R (revised 2004), “Share Based Payment.” The Statement is a revision of FASB 123 and supersedes APB No. 25. The Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for good or services or incurs liabilities in exchange of goods or services that are based on the fair value of the entity’s equity instruments. It focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires an entity 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 over the period during which an employee is required to provide service for the award. The grant-date fair value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same of similar instruments are available. In addition, the Statement requires a public entity measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value and that the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of this Statement for the Company is for the first interim or annual period after June 15, 2005. While we have not determined the impact of this Statement on our financial statements at this time, we believe it will be material.

      In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets.” The Statement is an amendment of APB Opinion No. 29 to eliminate 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. We believe that the adoption of this standard will have no material impact on our financial statements.

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      In March 2004, the FASB issued EITF Issue No. 03-01 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provided new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

      In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two — Class Method under FAS 128”. EITF Issue 03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of the two-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of Opinion 25 and FAS 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported EPS. The adoption of EITF Issue 03-6 did not have a material impact on our financial statements.

NOTE 2 — BUSINESS COMBINATIONS

Transwarp Networks, Inc (TWN)

      In April 2003, we acquired TransWarp Networks, Inc. (TWN), a development stage enterprise. Through this transaction, we acquired certain intellectual property and engineering expertise to enable us to broaden our storage product offerings and to develop more advanced storage products. TWN was acquired by means of a merger, pursuant to which all outstanding shares of TWN’s capital stock were exchanged for shares of Silicon Image’s common stock. In addition, all outstanding options to purchase TWN common stock were converted into options to purchase Silicon Image’s common stock. In accordance with EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business”, this transaction was accounted for as a purchase of assets.

      The total purchase price was approximately $14.5 million, consisting of the issuance of approximately 2.5 million shares of Silicon Image common stock, valued at $11.4 million, 0.8 million shares of Silicon Image common stock issuable upon exercise of options, valued at $3.0 million, and transaction costs of $0.1 million. The purchase price was allocated as follows (in thousands):

Assembled workforce	$	502
Core technology		1,251
Developed technology		529
In-process research and development		5,482
Non-compete agreement		1,849
Net tangible assets acquired		93
Unearned compensation		4,819
Total	$	14,525

      The total purchase price was revised from $14.7 million to $14.5 million during the quarter ended September 30, 2003, to reflect actual expenses relating to legal fees incurred in connection with the acquisition of TWN.

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      The assembled workforce will be amortized over 18 months. Developed technology and the non-compete agreement will be amortized over a period of three years (the length of the non-compete agreement), and core technology will be amortized over a period of four years. Unearned compensation will be amortized over the remaining employee vesting period, which ranges from 27 months to 57 months.

      The value allocated to in-process research and development (IPR&D) was calculated using established valuation techniques accepted in the high technology industry. These techniques give consideration to relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by us and by our competitors, individual product sales cycles, and the estimated lives of each of the product’s underlying technology. The value of IPR&D reflects the relative value and contribution of the acquired research and development. In determining the value assigned to IPR&D, we considered the R&D’s stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the projected cost to complete the project. A discount rate of 30% was used to determine the net present value of estimated cash flows for this project.

      The values assigned to core technology and developed technology were based upon discounted cash flows related to the existing product’s projected income stream. Elements of the projected income stream includes revenue, cost of sales, SG&A expenses and R&D expenses. The discount rates used in the present value calculations range from 20% to 25% and were generally derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle. Such risks include the useful life of the technology, profitability levels of the technology, and the uncertainty of the technology advances that are known at the date of the acquisition. Based on our annual impairment test performed for 2004, we concluded that there was no impairment in fiscal 2004. However there can be no assurance that we will not incur charges for impairment in the future.

      Assembled workforce was valued based on the estimated costs to replace the existing staff, including recruiting, hiring and training costs for employees in all categories, and to fully deploy a work force of similar size and skill to the same level of productivity as the existing work force.

      The value of the non-compete agreement was based on the income approach, which measures the difference between cash flows generated assuming the existence of the non-compete agreement (assuming no competition exists for the individuals covered by the non-compete) and the cash flows assuming competition. The resulting net cash flows were discounted using a discount rate of 25%.

CMD Technology (CMD)

      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, file #74 Y 117 01399 02 GAP, 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.

      Upon closing the CMD acquisition, we refinanced $3.1 million of CMD’s outstanding bank debt. The loan matured in April 2002 and was subsequently refinanced (see Note 7).

NOTE 3 — ASSET IMPAIRMENT AND RESTRUCTURING ACTIVITIES

      During the third quarter of 2001, we began a program to focus our business on products and technology, including those obtained through acquisitions, in which we have, or believe we can achieve, a market leadership position. As part of this program, we decided to cancel numerous products under development, to remove certain projects from our development plan, to phase out or de-emphasize certain existing products and to integrate the operations of two acquired companies — CMD Technology (CMD) and Silicon Communication Lab (SCL).

      In connection with this program, we reduced our workforce in the fourth quarter of 2001 by approximately 60 people, or 20%. This workforce reduction was the initial step in eliminating duplicate positions that resulted from our acquisitions, and also represented the elimination of other positions based on our new product and technology focus. Positions were eliminated from all functional areas — operations, R&D and SG&A. Because of this workforce reduction, we recorded a restructuring expense of $1.5 million in the fourth quarter of 2001, consisting of cash severance-related costs of $599,000, non-cash severance-related costs of $303,000 representing the intrinsic value of modified stock options, an expected loss on leased facilities of $500,000 and fixed asset write-downs of $50,000. In addition, we reversed $286,000 of unearned compensation, a component of stockholders’ equity, for unvested stock options that were cancelled in connection with employee terminations.

      For 2001, we recorded $29.9 million of expense for the impairment of goodwill and intangible assets recorded in connection with the acquisitions of DVDO and CMD. DVDO goodwill and intangible assets became impaired primarily as a result of our decision to phase out or de-emphasize certain existing digital video processing products and to cease funding of certain digital video processing development projects. Additionally, prevailing economic and industry conditions and the departure of certain key DVDO employees during the quarter ended September 30, 2001 also contributed to the impairment expense of $13.9 million. We recorded impairment expense of $16.0 million in the fourth quarter of 2001 related to goodwill and intangible assets recorded in connection with our CMD acquisition. This impairment resulted from a decrease in our initial estimate of future revenue from CMD’s products.

      In the first quarter of 2002, we implemented a second workforce reduction in connection with the program discussed above, eliminating an additional 35 positions, or 13% of our workforce. Positions were eliminated from all functional areas. This reduction resulted from the continued integration of acquired companies, as well as continued execution of our product and technology strategy, whereby we decided to phase out the legacy storage subsystem board products we acquired from CMD and to develop new board products only if we believed it would facilitate or accelerate the use of our storage semiconductor products. In connection with this workforce reduction, we recorded a restructuring expense of $2.2 million in the first quarter of 2002, consisting of cash severance-related costs of $198,000, non-cash severance-related costs of $318,000 representing the intrinsic value of modified stock options, an expected loss on leased facilities of $1.2 million and fixed asset write-downs of $500,000 for assets to be disposed of. In addition, we reversed $76,000 of unearned compensation, a component of stockholders’ equity, for unvested stock options that were cancelled in connection with employee terminations.

      In April 2002, we decided to transition to a licensing model for our storage subsystem board products, whereby instead of developing, manufacturing and selling board products to facilitate or accelerate the use of our storage semiconductor products, we would develop and license board designs in exchange for license fees,

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royalties and the use of our semiconductor products. In connection with this decision, we implemented a third workforce reduction, eliminating 14 positions, or 5% of our workforce, and recorded a restructuring expense of $3.5 million, consisting of cash severance-related costs of $450,000, non-cash severance-related costs of $1.6 million representing the intrinsic value of modified stock options and fixed asset write-downs of $1.5 million for assets to be disposed of. We also reversed $302,000 of unearned compensation, a component of stockholders’ equity, for unvested stock options that were cancelled in connection with employee terminations.

      In connection with our decision to stop selling board products and to transition to a licensing model, we assessed recoverability of our intangible assets subject to amortization in accordance with SFAS No. 144. During the quarter ended September 30, 2002, an impairment expense of $749,000 was recognized for acquired technology and $60,000 was recognized for patent and other intangible assets, based upon our projection of significantly reduced future cash flows. Additionally, we reduced our estimate of the useful lives of the remaining intangible assets subject to amortization such that these assets were fully amortized by the end of 2002. We also tested the carrying value of goodwill for impairment in accordance with SFAS No. 142. As a result of our impairment test, a goodwill impairment expense of $4.4 million was recognized during the second quarter of 2002. To determine the amount of the impairment, we estimated the fair value of our storage systems business based primarily on expected future cash flows. We then reduced this amount by the fair value of identifiable tangible and intangible assets other than goodwill (also based primarily on expected future cash flows), and compared the unallocated fair value of the business to the carrying value of goodwill. To the extent goodwill exceeded the unallocated fair value of the business, an impairment expense was recognized.

      In December 2002, we revised our estimate of the loss we expect to incur on subleased facilities and recorded a restructuring expense of $1.5 million. Real estate market conditions deteriorated in the fourth quarter of 2002, causing us to reassess the length of time it would take to find tenants and the fair value lease rate of our available space. 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 The central engineering, sales, manufacturing, and general and administrative activities were not organized into the line of business structure. 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. The expected loss on leased facilities resulted from our plan to consolidate our remaining workforce to the extent practicable and sublease any excess space. To determine the expected loss, we compared our lease and operating costs for the space to our estimate of the net amount we would be able to recover by subleasing the space. This estimate was based on a number of assumptions, including the length of time it will take to secure a tenant, the sublease rate per square foot, the cost of necessary improvements or modifications and real estate broker commissions. The fixed asset write-downs in 2001 and 2002 were determined based on the estimated fair value of assets, primarily computer hardware and software that would no longer be utilized after the employees’ termination dates.

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      Severance and benefits payments are substantially complete. Lease payments in the form of cash will be substantially completed through November 2005. The following table presents restructuring activity from 2002 through December 31, 2004 (in thousands):

	Severance			Leased
	and Benefits			Facilities			Fixed Assets			Total
Balance as of December 31, 2001	$	408		$	385		$	50		$	843
2002 provision		2,547			2,633			2,013			7,193
Cash payments		(865	)		(420	)		—			(1,285	)
Non-cash activity		(1,952	)		—			(2,063	)		(4,015	)
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 (included in accrued liabilities)	$	32		$	1,004		$	—		$	1,036

NOTE 4 — RELATED PARTY TRANSACTIONS

      In 1999, we issued 1,485,000 shares of Common Stock to several of our officers in exchange for notes receivable totaling $1,385,000. The notes outstanding at December 31, 2002 bore interest at rates ranging from 5.30% to 5.98% per annum, and were due in June and September 2004. Principal and interest payments totaling $70,000 and $1,293,000 were received in 2002 and 2000, respectively. The outstanding principal and interest under these notes at December 31, 2002 was $109,000, all of which was owed by a single officer. All the notes were paid in full during 2003.

NOTE 5 — CONSOLIDATED BALANCE SHEET COMPONENTS

			December 31,
			2004			2003
			(In thousands)
Inventories:
	Raw materials		$	3,089		$	3,128
	Work in process			2,372			2,532
	Finished goods			8,465			4,652
			$	13,926		$	10,312
Property and equipment:
	Computers and software		$	14,641		$	12,829
	Equipment			12,820			8,574
	Furniture and fixtures			2,178			1,250
				29,639			22,653
		Less: accumulated depreciation		(20,145	)		(15,242	)
			$	9,494		$	7,411

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      Property and equipment as of December 31, 2004, includes approximately $582,000 relating to leasehold improvements that were reimbursable by the landlord. This amount is also included in deferred rent which is a component of other accrued liabilities. Property and equipment as of December 31, 2004, also include equipment acquired under a capital lease arrangement. As of December 31, 2004, the principal payment outstanding on this capital lease was approximately $441,000. Amortization relating to assets acquired under capital lease arrangements is included in depreciation expense.

		December 31,
		2004		2003
		(In thousands)
Accrued liabilities:
	Accrued payroll and related expenses	$	6,473	$	2,533
	Restructuring accrual (see Note 3)		1,036		1,875
	Accrued legal fees		910		1,137
	Warranty accrual		351		271
	Bonus accrual		3,122		—
	Other accrued liabilities		1,526		2,910
		$	13,418	$	8,726

NOTE 6 — INCOME TAXES

      We recorded a provision for income taxes (all current) amounting to $1,007,000 for the year ended December 31, 2004. No provision for income taxes was recorded for the years ended December 31, 2003 and 2002 since we generated both book and tax losses. Our effective tax rate differs from the federal statutory tax rate due to the following (in thousands):

	Years Ended December 31,
	2004			2003			2002
Tax provision (benefit) at federal statutory rate	$	239		$	(4,355	)	$	(14,032	)
Nondeductible expenses		471			3,690			6,926
Tax losses not benefited		(710	)		665			7,106
Alternative minimum taxes		636			—			—
Foreign taxes		371			—			—
Tax provision	$	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,
	2004			2003
Net operating loss carryforwards	$	35,099		$	29,129
Stock based compensation		13,386			—
Tax credits		11,482			7,976
Inventory valuation		2,833			4,301
Capitalized research and development		5,117			3,651
Other items not currently deductible		3,687			2,274
		71,604			47,331
Less: valuation allowance		(71,604	)		(47,331	)
	$	—		$	—

      Tax benefits from employee stock transactions of $19.0 million, $4.0 million, and $6.0 million were generated in 2004, 2003 and 2002, respectively. If realized, such benefits will be recorded as a reduction of income taxes payable, with a corresponding increase to stockholders’ equity. Therefore, these benefits will not have the effect of reducing any future income tax provision.

      As of December 31, 2004, the Company has research credit carryforwards of approximately $5.0 million and $6.1 million for federal and state tax purposes, respectively. The federal credit carryforwards expire through 2024. The California credit can be carried forward indefinitely. As of December 31, 2004, the Company has state manufacturer investment tax credits (MIC) of $388,000, which expires through 2011.

      Management believes that available objective evidence creates sufficient uncertainty regarding the realizability of the Company’s 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.

      At December 31, 2004, we had a net operating loss carryforward for federal income tax purposes of approximately $99.7 million that expires through 2024. In the event of a cumulative ownership change of greater than 50%, the availability of net operating losses to offset future taxable income may be limited.

NOTE 7 — 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 2005. As of December 31, 2004, $48,000 was outstanding under these term loans.

      During the period ended March 31, 2004, we entered into an agreement to extend this debt facility by way of a revolving line of credit with an availability of up to $10.0 million, and an equipment line of credit of up to $3.0 million. Borrowings under the revolving line are limited to the lesser of $10.0 million or 80% of

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eligible accounts receivable as defined in the loan agreement. This revolving line of credit is secured by the Company’s equipment, eligible accounts receivable, and inventory. This revolving line of credit expires in March 2005 and bears interest at prime plus 0.25% or LIBOR plus 2.75%, at our option. No amounts have been drawn down under this line of credit as of December 31, 2004. Equipment advances pursuant to the equipment line of credit were available to us through August 2004, however no amounts were drawn down against this line and it expired in accordance with its terms. Our credit facilities contain quarterly and annual financial covenants. As of December 31, 2004, we were in compliance with all covenants.

      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, 2004 was approximately $441,000.

      In October 1999, we entered into a non-cancelable operating lease through July 2003 for our principal operating facility. This lease requires average monthly rental payments of approximately $133,000 and was secured by a certificate of deposit in the amount of $283,000, which was included in prepaid expenses and other current assets on our 2002 consolidated balance sheet. Under the terms of the original lease agreement, this security requirement was not required after July 2003 and therefore we no longer maintain a certificate of deposit. 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 the Company 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 an initial monthly base rental of $107,607 and provides for annual increases of 3% thereafter.

      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 have a renewal option for this facility. We have subleased parts of this facility to three separate third parties. Two of these sublease agreements are coterminous leases and extend through November 2005, while the other sublease is on a month-to-month basis. These subleases collectively generate monthly sublease income of approximately $40,000 to offset our payment obligations. The aggregate sublease rental income, relating to non-cancelable sublease arrangements over the remaining term of the lease is approximately $324,000. 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. We do not occupy the Milpitas facility and are attempting to sublease the space. We also lease office space in Taiwan, Korea, United Kingdom and Japan. Rent expense totaled $1,771,000, $1,902,000, and $2,529,000 in 2004, 2003 and 2002, 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 debt and capital lease obligations outstanding at December 31, 2004 are as follows (in thousands):

			Payments Due in
			Less Than						More Than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Debt and capital lease obligations	$	528	$	288	$	240	$	—	$	—
Operating lease obligations		9,746		3,155		2,818		2,900		873
Total	$	10,274	$	3,443	$	3,058	$	2,900	$	873

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      As of December 31, 2004, the future minimum rental payments on our capital leases was $480,000 and this includes approximately $39,000, representing interest. The entire amount of debt and capital lease obligations have been presented as current liabilities on the face of the consolidated balance sheet.

NOTE 8 — STOCKHOLDERS’ EQUITY

Stock warrants

      In September 1998, we entered into an agreement with Intel to develop and promote the adoption of a digital display interface specification. In connection with this agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $1.75 per share. This warrant was immediately exercisable. Under the same agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $0.18 per share upon achievement of a specified milestone. This warrant became exercisable during the quarter ended March 31, 1999 when the milestone was achieved. Both of these warrants were exercised in May 2001. We recorded expense of $595,000 in 1999 associated with these warrants. Additionally, if a second specified milestone is achieved, which we do not believe is likely, we will grant Intel another warrant to purchase 285,714 shares of our common stock at $0.18 per share. Upon achievement of the milestone, we will record an expense equal to the fair value of the warrant at the time of issuance. The estimated fair value of the warrant at December 31, 2004 was $4.7 million. This warrant expires in September 2008.

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 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 2003, 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 options granted in 2002. 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

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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.

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):

		Options Available for Future Issuance												Number of Option Shares Outstanding
					Non-Stockholder
					Approved Plans From												Non-Stockholder						Weighted
					Acquisitions												Approved						Average
		1995 and												Stockholder									Exercise
		1999			CMD			SCL			TWN			Approved			Plans From			Non-			Price per
		Plans			Plan			Plan			Plan			Plan			Acquisitions			Plan*			Share
At December 31, 2001			63			216			105			—			10,961			7,541			2,003		$	3.56
	Authorized		3,176			—			—			—			—			—			—			—
	Granted		(3,053	)		(580	)		(101	)		—			3,053			681			—			5.15
	Canceled		1,000			632			73			—			(1,032	)		(710	)		(27	)		2.26
	Exercised		—			—			—			—			(898	)		(1,599	)		(72	)		4.33
At December 31, 2002			1,186			268			77			—			12,084			5,913			1,904			3.96
	Authorized		3,332			—			—			—			—			—			—			—
	Assumed		—			—			—			162			—			632			—			1.27
	Granted		(3,596	)		(787	)		(167	)		(64	)		3,596			1,147			625			5.86
	Canceled		1,058			670			239			—			(1,058	)		(957	)		(234	)		3.73
	Exercised		—			—			—			—			(1,399	)		(1,752	)		(340	)		2.64
At December 31, 2003			1,980			151			149			98			13,223			4,983			1,955			4.63
	Authorized		3,618			—			—			—			—			—			—			—
	Granted		(5,264	)		(189	)		(264	)		(43	)		5,264			496			1,700			12.85
	Canceled		1,145			124			169			—			(1,145	)		(293	)		—			5.67
	Exercised		—			—			—			—			(3,255	)		(1,162	)		(719	)		4.09
At December 31, 2004			1,479			86			54			55			14,087			4,024			2,936		$	7.61

*  primarily used as inducements for new officers

      At December 31, 2004, 7,651,000 options were vested and 251,000 unvested shares had been exercised and remain subject to our repurchase rights. Of the options outstanding at December 31, 2004, and in the absence of acceleration of vesting or cancellations, approximately 5,208,000 shares will vest in 2005, 3,759,000 in 2006, 2,784,000 in 2007, 1,490,000 in 2008, and 155,000 in 2009 and thereafter.

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      Information with respect to options outstanding at December 31, 2004 is as follows:

	Options Outstanding						Options Exercisable
			Weighted		Weighted				Weighted
			Average		Average				Average
	Number of		Exercise		Remaining		Number of		Exercise
Range of Exercise Prices	Shares		Price		Contractual Life		Shares		Price
	(In thousands)				(In Years)		(In thousands)
$ 0.06 — $ 2.63		3,173	$	1.24		6.65		2,083	$	1.23
$ 2.73 — $ 4.44		3,445		3.80		6.74		1,691		3.47
$ 4.45 — $ 5.90		3,007		5.51		4.28		2,188		5.55
$ 5.93 — $ 6.58		3,167		6.21		8.11		890		6.22
$ 6.68 — $11.69		3,034		9.65		8.69		525		9.44
$11.75 — $15.20		3,544		13.87		9.75		63		12.77
$15.91 — $26.50		1,677		16.99		8.14		607		17.08
		21,047	$	7.61		7.48		8,047	$	5.25

      The weighted average grant-date fair value of options granted was $9.29, $4.23, and $3.72 per option during 2004, 2003, and 2002, respectively. The grant-date fair value was estimated using the Black-Scholes pricing model with the following assumptions:

	Year Ended
	December 31,
	2004			2003			2002
Expected life (years)		5.0			5.0			5.0
Risk-free interest rate		3.4	%		3.3	%		3.5	%
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 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 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. These options are substantially vested, and as of December 31, 2004, 1.7 million options remain outstanding.

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. 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 2004, 2003, and 2002, 616,000, 613,000, and 593,000 shares of common stock,

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respectively, were sold under the Purchase Plan at average prices of $4.43, $3.69, and $3.59 per share, respectively. A total of 1,220,000 shares were reserved for future issuance at December 31, 2004. 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 2004, 2003 and 2002 was $2.69, $2.60 and $2.64, respectively, per share. The grant date fair value was estimated using the Black-Scholes pricing model with the following assumptions:

	Year Ended
	December 31,
	2004			2003			2002
Expected life (years)		1.32			1.42			1.49
Risk-free interest rate		1.2	%		1.5	%		1.7	%
Dividend yield		—			—			—
Expected volatility		85	%		90	%		90	%

Option Grants to Non-employees

      During 2004, 2003, and 2002, we granted non-employees options to purchase 362,000, 454,000, and 305,000 shares of our stock at weighted average exercise prices of $10.09, $5.28, and $4.35 per share, respectively in return for engineering, administration and consultancy services.

NOTE 9 — BENEFIT PLANS

      Effective January 1, 1995, we adopted a 401(k) Savings Plan that allows all employees age 21 or older to make salary deferral contributions ranging from 1% to 20% of their eligible earnings. We were permitted to make discretionary contributions to the 401(k) Savings Plan upon approval by the Board of Directors; however, we made no contributions to the Plan.

      Effective June 7, 2001, we assumed the CMD Technology 401(k) Profit Sharing Plan that allows all employees age 18 or older to make salary deferral contributions ranging from 1% to 20% of their eligible earnings. We have made no contributions to this Plan.

      On March 1, 2002, these two Plans were merged to form the Silicon Image 401(k) Savings Plan. This Plan allows all employees age 18 or older to make salary deferral contributions ranging from 1% to 20% of their eligible earnings. We may make discretionary contributions to the 401(k) Savings Plan upon approval by the Board of Directors; however, we have made no contributions to date.

NOTE 10 — 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.

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

	Year Ended December 31,
	2004		2003		2002
Taiwan	$	42,715	$	35,534	$	27,540
Japan		34,620		15,980		9,585
United States		48,391		27,259		22,992
Hong Kong		5,243		6,025		8,853
Korea		8,015		4,871		6,386
Other		34,175		13,856		6,183
	$	173,159	$	103,525	$	81,539

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

	Year Ended December 31,
	2004		2003		2002
PC	$	41,223	$	33,163	$	47,405
Consumer Electronics		71,377		25,762		8,993
Storage products		39,750		30,410		18,486
Development, licensing and royalties		20,809		14,190		6,655
	$	173,159	$	103,525	$	81,539

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

	Year Ended December 31,
	2004		2003		2002
PC	$	41,585	$	36,108	$	51,017
Consumer Electronics		84,604		33,326		9,061
Storage products		46,970		34,091		21,461
	$	173,159	$	103,525	$	81,539

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

      In 2004, two customers generated 15.0% and 12.0% of our total revenue and at December 31, 2004 one customer represented 10.4% of gross accounts receivable. In 2003, one customer generated 15% of total revenue and at December 31, 2003, three customers represented 17%, 12% and 10% of gross accounts receivable. In 2002, two customers generated 15% and 11% of total revenue, and at December 31, 2002, two customers represented 13% and 10% of gross accounts receivable. Our top five customers, including distributors, generated 47%, 41%, and 41% of our revenue in 2004, 2003 and 2002, respectively.

NOTE 11 — LEGAL PROCEEDINGS

      On April 24, 2001, we filed 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 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the “Federal Suit”). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the importation of articles infringing our patent (the “ITC investigation”). The actions sought injunctions to halt the importation, sale, manufac-

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ture and use of Genesis DVI receiver chips that infringe our patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July  15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made and continues to make cash payments to the Court, it may not have made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal. On August 26, 2004, the parties completed the filing of their respective appeal briefs. On October 26, 2004, the Court of Appeals for the Federal Circuit issued an order setting the oral arguments for the appeal on December 7, 2004. The hearing took place as scheduled. At the end of the hearing, the panel of Federal Circuit judges hearing the case stated that they believed that no final order had been issued by the trial court, and that therefore the Federal Circuit did not have jurisdiction to hear the appeal. The Federal Circuit issued its opinion on January 28, 2005 and, a s expected, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the parties’ agreement to settle the case, as embodied in the MOU that was found by the lower court to be valid and enforceable, requires that Genesis pay us a portion of the settlement as a condition to dismissing the case. Because the lower court allowed Genesis to pay the amount into escrow instead of directly to us, the Federal Circuit held that the underlying claims asserted below remain pending, and therefore the judgment below is not “final” and is appealable.

      To date, we have not received any cash payments nor have we recognized any revenue associated with the matter. If the MOU is upheld in its present form after all appeals have been exhausted, Genesis will be granted a royalty-bearing license for the right to use certain non-necessary patent claims referred to in the DVI Adopters Agreement. In addition, upon Genesis’s becoming a signatory to the HDMI Adopters Agreement, Genesis will be granted a royalty-bearing license for the right to use these claims as part of their HDMI implementation. Genesis will also be granted a royalty-bearing license to expand use of certain DVI-related patent claims to the consumer electronics marketplace. We expect Genesis to transfer ownership of the funds in escrow to us in the next few months. Recognition of these funds as revenue will depend on the final resolution of this case. We expect that Genesis will refile its appeal. Through December 31, 2004, we have spent approximately $10.9 million on this matter and expect to continue to incur significant legal costs until the matter is resolved.

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      Silicon Image, certain officers and directors, and Silicon Image’s 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 Silicon Image’s 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. In the event that the settlement is not finally approved, we could not accurately predict the outcome the litigation, but we intend to defend this matter vigorously.

      In May 2003, Silicon Image, certain officers and directors, and Silicon Image’s underwriters were named as defendants in a securities class action lawsuit captioned Liu v. Credit Suisse First Boston Corp., et al., No. 03-20459 (S.D. Fla. 2003) and filed in Federal District Court for the Southern District of Florida. The action was filed on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The initial complaint alleged that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. Silicon Image was never served with a copy of the complaint. In June 2003, the action was transferred to the Federal District Court for the Southern District of New York. The plaintiff in this matter filed an amended complaint shortly thereafter, from which Silicon Image, and the named officers, were dropped as defendants. Plaintiffs have not amended their complaint or otherwise indicated that they intend to name Silicon Image or its officers or directors as defendants in the action since that time. We believe that these claims were without merit and, if revived, we would defend this matter vigorously.

      Certain officers and directors of Silicon Image were named as defendants in consolidated shareholder derivative litigation, captioned “In re Silicon Image, Inc. Derivative Litigation, No. 1:03CV010302”, commenced on December 4, 2003 and pending in the Superior Court of California, County of Santa Clara. The plaintiffs purported to sue the individual defendants on behalf of Silicon Image. The lawsuit alleged that as a result of the recently completed examination conducted by the Audit Committee of Silicon Image’s Board of Directors, Silicon Image will be required to restate its financial results for 2002 and 2003. On June 22, 2004, the plaintiffs dismissed the lawsuit.

      Silicon Image and certain of its officers were named as defendants in consolidated securities class action litigation captioned “In re Silicon Image, Inc. Securities Litigation, No. C-03-5579 JW PVT”, commenced on December 11, 2003 and pending in the United States District Court for the Northern District of California. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between April 15, 2002 and November 15, 2003. The lawsuit alleges that Silicon Image had materially overstated its licensing revenue, net income and financial results during this time period, and that Silicon Image was being forced to restate its financial results. Following the announcement by the Audit Committee of Silicon Image’s Board of Directors that it has completed its examination and that it has concluded that no changes to Silicon Image’s previously announced financial results are required, the plaintiffs dismissed the lawsuit in March 2004.

      Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of

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California. 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 alleges that the Company and certain of its 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. The Company intends to defend itself vigorously in this matter.

      On January 14, 2005 the Company received a notification that the Securities & Exchange Commission had commenced a formal, private investigation involving trading in the Company’s securities. Neither the Company nor any Company personnel are currently identified as subjects of the investigation. The Company is cooperating with the investigation.

      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 or financial position.

NOTE 12 — UNREALIZED GAIN ON EQUITY INVESTMENTS

      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 the Company’s 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 are subject to a lock-up agreement whereby we are 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 are 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. On September 16, 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 will be 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’s closing market price ($10.65) at that date. This amount is classified as short-term investments. Subsequent to year-end we sold approximately 23,600 shares at a price range from $7.40 to $7.50. As of February 28, 2005, the market price of the Leadis stock declined and consequently, the value of our investment holding as of that date declined to approximately $2.3 million.

NOTE 13 — SUBSEQUENT EVENT

      In 2005, we entered a three-year joint development, marketing and manufacturing relationship with Sunplus, a long time customer. In this relationship, Sunplus will license certain digital video processor technology to us, and we will collaborate on product development. In addition, we agreed to invest $380,000 for a minority interest in a new Taiwan-based joint venture with Sunplus which would provide product engineering and other services, and arrange for manufacturing of certain digital video processor products. We

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have agreed to place orders for specified volumes of products with this joint venture through 2007, so long as the joint venture meets our requirements for quality, timeliness, and competitive pricing. Certain terms related to the joint venture agreement as well as our supply arrangement with the joint venture are still being finalized. However, the Company believes that FIN 46, “Consolidation of Variable Interest Entities” will apply to the joint venture. The impact of applying FIN 46 to this arrangement will be determined in the first quarter of 2005.

UNAUDITED QUARTERLY FINANCIAL DATA

	Three Months Ended
	Mar 31			Jun 30			Sep 30			Dec 31
	(In thousands, except footnotes and per share
	amounts)
2004
Total revenue	$	35,858		$	43,361		$	47,868		$	46,072
Gross margin(1)		21,343			25,666			29,664			27,872
Income (loss) from operations		(7,627	)		(1,101	)		8,099			(332	)
Net income (loss)		(7,860	)		(262	)		7,877			(79	)
Net income (loss) per share — basic	$	(0.11	)	$	(0.00	)	$	0.11		$	(0.00	)
Net income (loss) per share — diluted	$	(0.11	)	$	(0.00	)	$	0.09		$	(0.00	)
Weighted average shares — basic		72,328			73,352			74,976			76,774
Weighted average shares — diluted		72,328			73,352			85,890			76,774
2003
Total revenue	$	24,676		$	24,332		$	24,190		$	30,327
Gross margin(2)		13,621			13,603			12,703			16,406
Loss from operations(3)		(1,496	)		(8,733	)		(2,135	)		(5,355	)
Net income (loss)(4)		3,231			(8,666	)		(2,095	)		(5,280	)
Net income (loss) per share — basic	$	0.05		$	(0.13	)	$	(0.03	)	$	(0.07	)
Net income (loss) per share — diluted	$	0.04		$	(0.13	)	$	(0.03	)	$	(0.07	)
Weighted average shares — basic		66,828			69,012			69,803			70,638
Weighted average shares — diluted		73,696			69,012			69,803			70,638

(1)	Includes stock compensation expense (benefit) of $1.2 million, $849,000, $(110,000) and $886,000 for the three months ended March 31, June 30, September 30 and December 31, 2004, respectively.
(2)	Includes stock compensation expense (benefit) of $(135,000), $78,000, $(14,000) and $654,000, for the three months ended March 31, June 30, September 30 and December 31, 2003, respectively.
(3)	Includes restructuring expense of $986,000 in the first quarter of 2003, and In-process research and development expense of $5.5 million in the second quarter of 2003.
(4)	Includes gain on escrow settlement of $4.6 million in the first quarter of 2003.

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REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

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

      We have completed an integrated audit of Silicon Image, Inc.’s (the Company’s) 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Silicon Image, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three 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 of financial statements 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.

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing on page 67 herein, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO. 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 opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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. An audit of internal control over financial reporting includes 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 consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized

101

acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

San Jose, California

March 14, 2005

102

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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 15, 2005

      Pursuant to the requirements of the Securities and 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/ Christopher Paisley Christopher Paisley	Chairman of the Board of Directors	March 15, 2005
/s/ Steve Tirado Steve Tirado	Director, President and Chief Executive Officer (Principal Executive Officer)	March 15, 2005
/s/ Robert G. Gargus Robert G. Gargus	Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer)	March 15, 2005
/s/ Dale Brown Dale Brown	Chief Accounting Officer (Principal Accounting Officer)	March 15, 2005
/s/ David Lee David Lee	Director	March 15, 2005
/s/ David A. Hodges David A. Hodges	Director	March 15, 2005
/s/ Keith McAuliffe Keith McAuliffe	Director	March 15, 2005
/s/ David Courtney David Courtney	Director	March 15, 2005

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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, and related forms of stock option agreements and stock option exercise agreements (Incorporated by reference from Exhibit 10.03 of the Form 10-K filed by the Registrant on March 15, 2004).
	10	.04**	1999 Employee Stock Purchase Plan and related enrollment form, notice of suspension and notice of withdrawal (Incorporated by reference from Exhibit 10.04 of the Form S-1).
	10	.05**	Employment Agreement with Parviz Khodi dated June 10, 1999 (Incorporated by reference from Exhibit 10.06 of the Form S-1).
	10	.06**	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	.07*	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	.08*	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	.09	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	.10**	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	.11**	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	.12**	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	.13**	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	.14**	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).

104

Number			Title
	10	.15**	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	.16**	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	.17**	Non-Plan Stock Option Agreement between Robert Gargus and the Registrant dated October 30, 2001. (Incorporated by reference from Exhibit 10.41 of the Form 10-K filed by the Registrant on March 29, 2002).
	10	.18**	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	.19	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	.20	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	.21**	Non-Plan Stock Option Agreement between John LeMoncheck and the Registrant dated January 6, 2003 (Incorporated by reference from Exhibit 4.08 of the Form S-8 filed by the Registrant on January 28, 2003).
	10	.22**	Letter Agreement between John LeMoncheck and the Registrant dated December 3, 2002 (Incorporated by reference from Exhibit 10.46 of the Form 10-K filed by the Registrant on March 27, 2003).
	10	.23**	Non-Plan Stock Option Agreement between Robert Bagheri and the Registrant dated February 20, 2003 (Incorporated by reference from Exhibit 10.47 of the Form 10-K filed by the Registrant on March 27, 2003).
	10	.24**	Letter Agreement between Robert Bagheri and the Registrant dated February 11, 2003 (Incorporated by reference from Exhibit 10.48 of the Form 10-K filed by the Registrant on March 27, 2003).
	10	.25**	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	.26**	Bonus Plan for Fiscal Year 2004 (Incorporated by reference from Exhibit 10.35 of the Form 10-Q filed by the Registrant on May 10, 2004).
	10	.27**	Employment Offer Letter between J. Duane Northcutt and the Registrant dated February 19, 2002.
	10	.28**	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	.29**	Employment Offer Letter between Dale Brown and the Registrant dated April 30, 2004.
	10	.30**	Amended and Restated Employment Agreement between Robert Gargus and the Registrant dated August 17, 2004.
	10	.31**	Consulting Agreement between Robert Gargus and the Registrant dated August 17, 2004.
	10	.32**	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	.33**	Letter to Kathy Khodi dated October 6, 2004.
	10	.34**	Employment Offer Letter between Steve Laub and the Registrant dated November 11, 2004.
	10	.35**	Non-Plan Stock Option Agreement between Steve Laub and the Registrant dated November 11, 2004.
	10	.36**	Employment Offer Letter between Steve Tirado and the Registrant dated January 24, 2005.
	10	.37**	Employment Offer Letter between Jaime Garcia-Meza and the Registrant dated February 8, 2005.

105

Number			Title
	23	.01	Consent of Independent Registered Public Accounting Firm.
	24	.01	Power of Attorney (included on signature page).
	31	.01	Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.02	Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.01	Certification by pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.02	Certification by 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.

106 EX-10.27 2 f06451exv10w27.htm EXHIBIT 10.27

Exhibit 10.27

February 19, 2002

To: J. Duane Northcutt

Dear Duane:

Silicon Image, Inc. (the “Company”) is pleased to confirm our offer to you with us. You will initially report to David D. Lee, CEO and President, in the position of Vice President of System Architecture Group. The terms of our offer and the benefits currently provided by the company are as follows:

1.	Your compensation will be $195,000 annual salary and will be subject to annual review. In addition, you will be eligible to participate in regular health insurance, vacation and other employee benefit plans established by the Company for its employees from time to time.
2.	As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. To protect the interest of the Company, you will need to sign the Company’s standard “Employee Inventions and Confidentiality Agreement” as a condition of your employment. A copy of the form of this agreement has been attached as Appendix A for your review. We wish to impress upon you that we do not wish you to bring any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employer.
3.	Management will recommend that the Board of Director approve a grant to you of stock options for 250,000 shares of the Company’s Common Stock. The exercise price of the options would be the fair market value as determined by the Board at the time of the grant. The vesting schedule for all options will be at a rate of 25% for the first 12 months, and thereafter, at 2.083% after each full succeeding month. However, the grant of such options by the Company is subject to the Board’s approval and this promise to recommend such approval is not a promise of compensation, and is not intended to create any obligation on the part of the Company. Further details on the Company’s Option Plan and any specific grant to you will be provided upon approval of such grant by the Board.
4.	This offer of employment is made to you in confidence, and its terms must not be disclosed by you to anyone outside your immediate family. If you do disclose any of its terms to such a family member, you must caution him or her that such information is confidential and must not be disclosed to anyone.

5.	While we look forward to a long and profitable relationship, should you decide to accept our offer, you will be an at-will employee of the Company, which means the employment relationship can be terminated by either of us for any reason at any time. Any statements or representations to the contrary (and, indeed, any statements contradicting any provision in this letter) should be regarded by you as ineffective. Further, your participation in any stock option or benefit program is not to be regarded as assuring you of continuing employment for any particular period of time. In the event any disputes arise out of the relation of the at-will employment, the matter will be resolved through arbitration in the Santa Clara County.
6.	Please note that because of employer regulations adopted in the Immigration Reform and Control Act of 1986, within three business days of starting your new position you will need to present documentation demonstrating that you have authorization to work in the United States. If you have questions about this requirement, which applies to U. S. citizens and non-U.S. citizens alike, you may contact our Human Resource department.
7.	This offer will remain valid until Thursday, February 28, 2002. If you decide to accept our offer please sign the enclosed copy of this letter in the space indicated and return it to the Human Resource department. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer and the attached documents. Should you have anything else that you wish to discuss, please do not hesitate to call.

     We look forward to the opportunity to welcome you to Silicon Image, Inc.

     Sincerely,

/s/ David D. Lee	/s/ Doris Y. Suh
David D. Lee	Doris Y. Suh
President & CEO	Sr. Dir., Human Resources

Attachments:
EI & CA

Acknowledged, Accepted and Agreed

/s/ J. Duane Northcutt	2/20/02	2/22/02
J. Duane Northcutt	Date	StartDate

This letter is simply for your information and is not to be construed as a contract of employment.

EX-10.27

exv10w27

EX-10.29

Exhibit 10.29

April 30, 2004

Dale Brown

Dear Dale:

Silicon Image, Inc. (the “Company”) is pleased to confirm our offer to you in the position of Corporate Controller reporting to Bob Gargus starting May 5, 2004. The terms of our offer and the benefits currently provided by the Company are as follows:

1.	Your starting base salary will be $185,000.00 per year and will be subject to annual review. In addition, you will be eligible to participate in the Silicon Image company-wide bonus program with an incentive target of 20% of base salary (pro-rated for completed service), as well as regular health insurance and other employee benefit plans established by the Company for its employees from time to time.
2.	As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. During the period that you render services to the Company, you agree to not engage in any employment, business or activity that is in any way competitive with the business or proposed business of the Company. You will disclose to the Company in writing any other gainful employment, business or activity that you are currently associated with or participate in that competes with the Company. To protect the interest of the Company, you will need to sign the Company’s standard “Employee Inventions and Confidentiality Agreement” as a condition of your employment. We wish to impress upon you that we do not wish you to bring any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employer. You represent that your signing of this offer letter, agreement(s) concerning stock options granted to you under the Plan (as defined below) and the Company’s Employee Invention Assignment and Confidentiality Agreement and your commencement of employment with the Company will not violate any agreement currently in place between yourself and current or past employers.
3.	Management will recommend that the Board of Directors approve a grant to you of stock options for 80,000 shares of the Company’s Common Stock. The vesting schedule for all options will be at a rate of 25% after the first 12 months of employment, and thereafter, at 2.083% after each full succeeding month you are employed by the Company. However, the grant of such options by the Company is subject to the Board’s approval and this promise to recommend such approval is not a promise of compensation, and is not intended to create any obligation on the part of the

	Company. Further details on the Company’s Option Plan and any specific grant to you will be provided upon approval of such grant by the Board.
4.	This offer of employment is made to you in confidence, and we ask that you not disclose its terms to anyone outside your immediate family. If you do disclose any of its terms to such a family member, please caution him or her that such information is confidential and must not be disclosed to anyone.
5.	While we look forward to a long and profitable relationship, should you decide to accept our offer, you will be an at-will employee of the Company, which means the employment relationship can be terminated by either of us for any reason or no reason, at any time and without notice. Any statements or representations to the contrary (and, indeed, any statements contradicting any provision in this letter) should be regarded by you as ineffective. Further, your participation in any stock option or benefit program is not to be regarded as assuring you of continuing employment for any particular period of time.
6.	Please note that because of employer regulations adopted in the Immigration Reform and Control Act of 1986, within three business days of starting your new position you will need to present documentation demonstrating that you have authorization to work in the United States. If you have questions about this requirement, which applies to U.S. citizens and non-U.S. citizens alike, you may contact our Human Resource department.
7.	Please also note that due to United States export control laws, the Company may need to make inquiries into your citizenship if you will have probable or actual contact with certain technology and/or source code. Should the Company determine that you will have probable or actual contact with certain technology and/or source code, and should you be a citizen of an embargoed country under United States export control laws, this may have a material effect on the terms and conditions of your employment with the Company.
8.	You and the Company agree to submit to mandatory and exclusive binding arbitration any controversy or claim arising out of, or relating to, this Agreement or any breach hereof, provided, however, that the parties retain their right to, and shall not be prohibited, limited or in any other way restricted from, seeking or obtaining equitable relief from a court having jurisdiction over the parties. Such arbitration shall be conducted through the American Arbitration Association in the State of California, Santa Clara County, before a single arbitrator, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association in effect at that time. The arbitrator must decide all disputes in accordance with California law and shall have power to decide all matters, including arbitrability. You will bear only those costs of arbitration you would otherwise bear had you brought a covered claim in court. When the arbitrator has issued a decision, judgment on that decision may be entered in any court having jurisdiction thereof. We each understand and agree that we are waiving a trial by jury.

9.   This offer will remain valid until Wednesday May 5, 2004. If you decide to accept our offer please sign the enclosed copy of this letter in the space indicated and return it to the Human Resource department. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer and the attached documents. Should you have anything else that you wish to discuss, please do not hesitate to call.

     We look forward to the opportunity to welcome you to Silicon Image, Inc.

     Sincerely,

     /s/ Bob Gargus

     Bob Gargus

     Chief Financial Officer

My signature below indicates acceptance of the terms and conditions of this offer and acknowledgement that I have read and understood the terms and conditions of this offer.

/s/ Dale Brown	5/3/04	5/5/04
Dale Brown	Date	Start Date

EX-10.30

Exhibit 10.30

1060 East. Arques Ave.
Sunnyvale, California 94085
Ph: (408) 616-4000

August 17, 2004

Robert G. Gargus

     Re: Amended and Restated Employment Agreement

Dear Bob:

     Silicon Image, Inc. (the “Company”) is pleased to confirm our offer of continued employment to you. This Amended and Restated Employment Agreement (this “Agreement”) supersedes the employment letter agreement between you and the Company, dated October 31, 2001 (“Letter Agreement”) and sets forth the current terms of your employment with the Company.

     1. Position: You will continue in the position of Chief Financial Officer and Vice President of Finance and Administration of the Company with the same duties, responsibilities and reporting requirements that are currently existing with this position. Your duties are to be performed in substantially the same manner as they have been performed to date including, but not limited to, your diligence in efforts and the amount of time you spend completing tasks related to the position.

     2. Salary: Your annual base salary will continue to be $250,000.08 per year and will be subject to annual review.

     3. Employment Benefits. You will continue to be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company applicable to other employees and key executives of the Company, including, without limitation, retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, stock purchase, incentive or other life, disability, health, accident and other insurance programs, and similar plans or programs. You will be eligible for the applicable number of days of paid PTO per year, per the PTO policy. In addition, you will continue to be eligible to participate in each bonus plan (“Bonus Plan”) that is in effect, if any, while you hold the position set forth in paragraph 1 above (the “Position”). Notwithstanding any provision in any Bonus Plan that requires that you be in the Position at the time that Payments (“Payments”) are made in order to be eligible for Payments, you will be eligible to receive any Payment that accrues under any Bonus Plan while you are remain in the

August 17, 2004
Page 2

Position even if you are not in the Position at the time that payments are made; provided, however, that any such Payments will be paid to you at the same time as Payments are made to other participants in such Bonus Plan and that such Payments will be prorated in relation to the amount of time that you are in the Position.

     4. Separation Date. Subject to the Company’s ability to and your ability to terminate your employment relationship with the Company for any reason at any time, your employment will be terminated effective as of the earlier of occurrence of either of the following (a) the commencement of employment with the Company of a new Chief Executive Officer and new Chief Financial Officer or (b) your voluntary termination of employment any time after June 30, 2005. “Separation Date” shall mean the earlier occurrence of either (a) or (b) in the sentence immediately prior.

     5. Separation Compensation. In exchange for your signing the severance agreement and release of claims attached hereto as Addendum A (the “Release”) and the Consulting Agreement (as defined below), the Company agrees that: (a) the Company will retain you as a consultant pursuant to the Consulting Agreement (as defined below) during the six month period following the Separation Date (the “Separation Period”); (b) during the Separation Period the Company will pay you monthly severance equal to your current salary level of $20,833.34 per month (the “Monthly Severance”), less applicable withholding taxes provided however, that the Company has no duty to continue to pay you the Monthly Severance in the event that you engage in New Employment (as defined below), provided the Company will pay you a prorated portion of any Monthly Severance up to the date of commencement of New Employment; and (c) on the Separation Date, the Company will accelerate the vesting of your outstanding options to purchase shares of the Company’s common stock such that you will become immediately vested in the number of shares that would have vested in the six months following the last date of the month in which the Separation Date occurs (“Accelerated Vesting”), but in no event for more than the number of shares subject to a particular option grant provided however, that you will not be entitled to further vesting or acceleration of your options to purchase shares of the Company’s common stock after the Accelerated Vesting on the Separation Date. You may exercise your options to purchase shares of the Company’s common stock that may have vested as of the Separation Date at any time before the ninetieth day following the Separation Date. For purposes of this Agreement “New Employment” shall mean being paid to work by an employer or firm other than the Company (whether as an employee or consultant) for 20 or more hours per week.

     In exchange, by signing below, you agree: (a) to, upon your termination, execute and not to revoke the Release; (b) to provide consulting services to the Company during the Separation Period pursuant to the Consulting Agreement dated August 17, 2004 by and between you and the Company (the “Consulting Agreement”); and (c) that, at any point in time following the end of your obligation to provide consulting services under the Consulting Agreement, you will assist the Company as reasonably necessary with any reviews, investigations or examinations of the Company’s financial and accounting results, policies, practices and other matters during your period of employment with the Company; and (d) acknowledge that you are receiving the separation compensation outlined in this section in consideration for waiving your right to claims referred to in this Agreement and in the Letter Agreement. In addition, except as expressly set forth in this paragraph and except your receipt of Payments described under the paragraph 3,

August 17, 2004
Page 3

following the Separation Date, you will no longer be eligible to participate in benefit plans and programs for the Company’s employees (including without limitation paid vacation, retirement plans, bonus plans, the employee stock purchase plan and other compensation plans).

     6. Voluntary Termination Prior to Separation Date. In the event of your voluntary termination prior to the Separation Date, you will not be entitled to receive any cash severance benefits, nor any acceleration of vesting of your options to purchase the Company’s shares nor other separation compensation (including that set forth in paragraph 5 hereof).

     7. Involuntary Termination Prior to Separation Date. In the event of your termination by the Company without Cause prior to the Separation Date, you will be entitled to the separation compensation set forth in Paragraph 5 hereof as the sole remedy for such termination. In the event of your termination by the Company for Cause (as defined below) prior to the Separation Date, you will not be entitled to any cash severance benefits, nor any acceleration of vesting of your options to purchase the Company’s shares nor any other separation compensation (including that set forth is Paragraph 5 hereof). “Cause” means (a) any material breach by you of this Agreement or the Confidentiality Agreement (as defined below) or any other written agreement between you and the Company, if such breach causes harm to the Company; (b) any negligence or willful misconduct by you in your performance of duties to the Company that causes harm to the Company, including (without limitation) repeated failure to follow the directions of the Board of Directors; (c) your repeated failure to diligently follow the lawful directions of the Board of Directors of the Company or your repeated failure to diligently perform your duties in a reasonable manner pursuant to this agreement; (d) your commission of a felony under the laws of the United States or and by state thereof; (e) your commission of any act of fraud, embezzlement or dishonesty or breach of fiduciary duties; (f) your abuse of alcohol or controlled substances that has a detrimental effect upon your performance of your duties under this agreement; or (g) a good faith determination by the Company’s Board of Directors that your performance is unsatisfactory; provided however, that in the case of (b), (c) and (g), the Company must provide you with written notice and give you fifteen (15) days to cure your performance, behavior or conduct. A termination without Cause shall mean a termination for any reason other than those listed in clauses (a)-(g) of the preceding sentence or death or disability.

     8. At-will Employment. You will continue to serve as an at-will employee of the Company, which means that your employment relationship with the Company can be terminated by you or the Company for any reason at any time. Further, your participation in any stock option or benefit program is not to be regarded as assuring you of continuing employment for any particular period of time.

     9. Non-Solicitation. For twelve months following your termination of employment with the Company, you agree that you shall not, directly or indirectly, either for your own benefit or for the benefit of any company, entity, or other person, solicit, recruit, encourage or induce any employees, directors, consultants, contractors or subcontractors of the Company to leave the employ of, cease performing work for, or perform work that competes with, the Company. “Employees” are those who were employees of the Company within twelve months preceding your termination of employment with the Company.

August 17, 2004
Page 4

     10. Attorneys’ Fees. If any action is brought to enforce the terms of this Agreement, the prevailing party will be entitled to recover its reasonable attorneys’ fees, costs and expenses from the other party, in addition to any other relief to which the prevailing party may be entitled.

     11. Confidentiality. You acknowledge that as an executive employee of the Company you had access to Company confidential and proprietary information, and that you are bound by law and the terms of your Employee Invention Assignment and Confidentiality Agreement (“Confidentiality Agreement”) with the Company to maintain the confidentiality of that information even after the termination of your employment, and may not use it, divulge it to others or allow others to use it. Any breach of this provision shall be deemed a material breach of this Agreement.

     12. Entire Agreement. This Agreement, the Release, the Consulting Agreement and the Confidentiality Agreement and any stock option agreements or stock option grant documents that currently exist between you and the Company constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to such subject matter, including without limitation the Letter Agreement. You acknowledge that neither the Company nor its agents or attorneys have made any promise, representation or warranty whatsoever, either express or implied, written or oral, which is not contained in this Agreement for the purpose of inducing you to execute the Agreement, and you acknowledge that you have executed this Agreement in reliance only upon such promises, representations and warranties as are contained herein.

     13. Modification. It is expressly agreed that this Agreement may not be altered, amended, modified, or otherwise changed in any respect except by another written agreement that specifically refers to this Agreement, executed by authorized representatives of each of the parties to this Agreement.

     14. Time to Consider and Voluntary Execution of this Agreement. We hereby advise you to consult with your own attorney concerning the terms of this Agreement and the Release. You agree that you are voluntarily entering into this Agreement and it will be effective upon your signing this document. The Release will be effective upon the execution of the Release and the expiration of the seven (7) day revocation period following such execution. You acknowledge that the separation compensation provided for in Section 5 of this Agreement will be paid only after the Release is effective.

     15. General. This Agreement will be governed by and construed in accordance with the laws of the State of California, excluding that body of law pertaining to conflict of laws. Any legal action or proceeding arising under this Agreement will be brought exclusively in the federal or state courts located in the Northern District of California and the parties hereby consent to the personal jurisdiction and venue therein. If any provision of this Agreement is determined by any court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto. If such provision cannot be so enforced, such provision shall be stricken from this Agreement

August 17, 2004
Page 5

and the remainder of this Agreement shall be enforced as if such invalid, illegal or unenforceable provision had (to the extent not enforceable) never been contained in the Agreement.

     If you agree to abide by the terms outlined in this Agreement, please sign the attached copy and return it to me. We look forward to the opportunity to continue working together.

Sincerely,
 

/s/ David Lee  

David Lee 

CEO and Chairman of the Board
Silicon Image, Inc. 

I have read, understand and agree to the terms set forth above:

/s/ Robert G. Gargus	Date:    8/17/04
Robert G. Gargus

EX-10.31

Exhibit 10.31

Consulting Agreement

     This Consulting Agreement (this “Agreement”) is being entered into on August 17, 2004 by and between Silicon Image, Inc., a Delaware corporation with its principal place of business at 1060 East Arques Avenue, Sunnyvale, California 94085 (“Company”) and Robert G. Gargus (“Consultant”) and in connection with that certain Amended and Restated Employment Agreement, dated August 17, 2004 by and between the Company and the Consultant (“Restated Employment Agreement”). This Agreement will become effective as of the Separation Date, as defined in the Restated Employment Agreement (the “Effective Date”). As used herein, “Party” or “Parties” will refer to Company, Consultant or both, as the case may be and Consultant includes the Consultant, and all employees and agents of the Consultant.

RECITALS

Whereas, Consultant and Company have entered into the Restated Employment Agreement, pursuant to which Consultant has agreed to provide the Company with certain consulting services as of the Effective Date; and

Whereas, Consultant desires to perform, and Company desires to have Consultant perform, consulting services as an independent contractor to Company.

NOW, THEREFORE, the Parties agree as follows:

1. Services

     1.1 Performance. Consultant will perform the following consulting “Services”: (a) provide transition assistance to the Company’s Chief Executive Officer and Chief Financial Officer and (b) at any point in time following the Separation Date, to assist as reasonably necessary the Company with any reviews, investigations or examinations of the Company’s financial and accounting results, policies, practices and other matters during your period of employment with the Company. In addition, Consultant agrees to use all diligent and reasonable efforts to perform the Services during the Period of Consultancy.

     1.2 Period of Consultancy. The “Period of Consultancy” will commence on the Effective Date and will terminate six (6) months following the Effective Date.

     1.3 Payment. The Company will, as sole compensation for the Consultant’s performance of the Services grant Consultant the Accelerated Vesting (as defined in the Restated Employment Agreement) upon the Separation Date (as defined in the Restated Employment Agreement). Company will also reimburse Consultant for his reasonable out-of-pocket expenses incurred in performing the Services that are approved in advance by Company’s Chief Executive Officer or Chief Financial Officer. Consultant will invoice Company on a monthly basis for such out-of-pocket expenses and Company will pay each such invoice no later than thirty (30) days after its receipt. Consultant will receive no other

1

compensation or remuneration in connection with or based upon the Services.

2. Relationship of the Parties

     2.1 Independent Contractor. Consultant is an independent contractor and is not an agent or employee of, and has no authority to bind, Company by contract or otherwise. Consultant will perform the Services under the general direction of Company, but Consultant will determine, in Consultant’s sole discretion, the manner and means by which the Services are accomplished, subject to the requirement that Consultant shall at all times comply with applicable law.

     2.2 Employment Benefits. Except as set forth in paragraph 3 of the Restated Employment Agreement, Consultant will not be entitled to receive any vacation or illness payments, or to participate in any plans, arrangements, or distributions by the Company pertaining to any bonus, stock option, profit sharing, insurance or similar benefits for Company’s employees.

3. Confidential Information Consultant acknowledges that Consultant will acquire information and materials from Company and knowledge about the business, products, customers, clients and suppliers of Company and that all such knowledge, information and materials acquired, and the existence, terms and conditions of this Agreement, are and will be the trade secrets and confidential and proprietary information of Company (collectively “Confidential Information”). Confidential Information will not include, however, any information that is or becomes part of the public domain through no fault of Consultant or that Company regularly gives to third parties without restriction on use or disclosure. Consultant agrees to hold all such Confidential Information in strict confidence, not to disclose it to others or use it in any way, commercially or otherwise, except in performing the Services, and not to allow any unauthorized person access to it, either before or after expiration or termination of this Agreement. Consultant further agrees to take all action reasonably necessary and satisfactory to protect the confidentiality of the Confidential Information including, without limitation, implementing and enforcing operating procedures to minimize the possibility of unauthorized use or copying of the Confidential Information.

4. Termination and Expiration

     4.1 Termination. Either party may terminate this Agreement in the event of a breach by the other party if such breach continues uncured for a period of ten (10) days after written notice.

     4.2 Expiration. Unless terminated earlier, this Agreement will expire at the end of the Period of Consultancy.

     4.3 No Election of Remedies. The election by Company to terminate this Agreement in accordance with its terms shall not be deemed an election of remedies, and all other remedies provided by this Agreement or available at law or in equity shall survive any termination.

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5. Effect of Expiration or Termination

Upon the expiration or termination of this Agreement for any reason:

a)

each party will be released from all obligations to the other arising after the date of expiration or termination, except that expiration or termination of this Agreement for any reason will not relieve Company of its obligations under Sections 1.3, 6 and 8 nor will this release indemnification obligations with respect to any claims (including coverage of attorneys’ fees and costs for Employee’s individual representation) arising under Consultant’s existing rights to indemnification and defense pursuant to the articles and bylaws of the Company for acts as a director and/or officer or to Consultant’s rights of insurance under any director and officer liability policy in effect covering the Company’s directors and officers or Consultant’s rights under California Labor Code section 2802 or Consultant of its obligations under Sections 2.2, 3, 6 and 8 nor will expiration or termination relieve Consultant or Company from any liability arising from any breach of this Agreement; and

b)

upon the Company’s reasonable request, Consultant will promptly notify Company of all Confidential Information in Consultant’s possession and, at the expense of Consultant and in accordance with Company’s instruction, will promptly deliver to Company all such Confidential Information.

6. Limitation of Liability

IN NO EVENT SHALL COMPANY OR CONSULTANT BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH THIS AGREEMENT, EVEN IF COMPANY OR CONSULTANT HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES.

7. Competitive Activities

Consultant will not during the term of this Agreement, directly or indirectly, in any individual or representative capacity, engage or participate in or provide services to any business whose primary business is directly competitive with Company.

8. General

     8.1 Assignment. Consultant may not assign Consultant’s rights or delegate Consultant’s duties under this Agreement either in whole or in part without the prior written consent of Company. Any attempted assignment or delegation without such consent will be void.

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     8.2 Attorneys’ Fees. If any action is necessary to enforce the terms of this Agreement, the substantially prevailing party will be entitled to reasonable attorney’s fees, costs and expenses in addition to any other relief to which such prevailing party may be entitled.

     8.3 Governing Law Severability. This Agreement will be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflict of laws. If any provision of this Agreement is for any reason found to be unenforceable, the remainder of this Agreement will continue in full force and effect.

     8.4 Notices. Any notices under this Agreement will be sent by certified or registered mail, return receipt requested, to the address specified below or such other address as the party specifies in writing. Such notice will be effective upon its mailing as specified.

     8.5 Complete Understanding; Modifications. This Agreement, together with the Restated Employment Agreement between the parties of even date herewith, constitutes the complete and exclusive understanding and agreement of the parties and supersedes all prior understandings and agreements, whether written or oral, with respect to the subject matter hereof and thereof. Any waiver, modification or amendment of any provision of this Agreement will be effective only if in writing and signed by the parties hereto.

IN WITNESS WHEREOF, the parties have executed this Agreement as of August 17, 2004.

COMPANY		CONSULTANT
By:	/s/ David D. Lee	/s/ Robert G. Gargus
Name:	David D. Lee	Robert G. Gargus
Title:	CEO and Chairman of the Board
Date:	8/17/04	8/17/04
Address:

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EX-10.33

Exhibit 10.33

October 6, 2004

Mrs. Kathy Khodi

Dear Mrs. Khodi:

I am writing this letter for you to be used as a Summary of Benefits, which I would be available to discuss with you in greater detail, at your earliest convenience.

The items listed below need your attention and some of the items may be time sensitive, so I have highlighted them in bold for your review and action:

•   Continuation of Pay – A direct deposit in the amount of $83,384.88 will be made to your checking account on October 15, 2004. This payment represents six (6) months salary minus applicable taxes, as agreed to by the Executive Committee.

•   2004 Executive Bonus – A direct deposit in the amount of $43,571.02 will be made to your checking account on October 15, 2004. The amount referenced above, represents a 100% payout for the 2004 Executive Bonus program, minus applicable taxes, which Parviz was eligible for at the 30% bonus level.

•   A Life Insurance Claim Form- The Company issued a term life policy on behalf of Parviz, which is payable to you as his beneficiary. You will need to complete the Life Insurance Claim Form, providing a copy of the certificate of death in order for the to be claim to be paid. I have enclosed a copy instruction for filing and a copy of the claim form for your review and action. I will also be available to personally assist you through this process, if you would prefer.

•   A 401(k) distribution form- Our records show that Parviz had a balance of $75,088.01 in the 401K-retirement account. Per our 401K plan you are not be required to withdraw the funds if you have over $5,000.00, unless you wish to do so. Upon your request, the Company could transfer the existing funds into an individual account naming you as the participant or, if you would prefer to liquidate the account you would need to complete the distribution forms enclosed and return it to Carrie Malmgren for processing.

•   COBRA Continuation of Benefits — Your medical, dental and vision benefits are effective until September 30, 2004, after which time you will be eligible to continue your benefits for up to 36 months due to the qualifying event through COBRA. The Silicon Image has agreed to pay your COBRA premiums for a total of six (6) months starting October 1, 2004 through March 31, 2005. Effective April 1, 2005, you will be responsible for the monthly premiums. You will be receiving enrollment applications from our COBRA Administrator TLC, These forms will need to be filled out and returned at your earliest opportunity, but no later than 60-days from September 22, 2004.

Please be aware, that you must elect COBRA Coverage to receive the payment of premiums by Silicon Image. A Certificate of Group Health Plan Coverage has also been provided in your folder, should you need to show proof of prior health coverage.

Section 125 Cafeteria Plan- You FSA Medical Account has a balance of $1125.00. You will need to submit claim forms for any out of pocket medical expenses that you my have incurred by February 28, 2005 this account may be used for any medical expenses incurred through September 22, 2004. After that time, any money left in the account will be forfeited per IRS Regulations. I have included reimbursement claim forms for your convenience.

I want to assist you in any way possible. Please do not hesitate to contact me should you have any questions or need additional assistance. You can reach me on my direct line is (408) 616-1560.

Sincerely,

/s/ Carrie Malmgren

Carrie Malmgren
Human Resources Consultant

Timeline of Events

October 15, 2004	Wire transfer to Checking	$43,571.02 (Bonus)
October 15, 2004	Wire Transfer to Checking	$83,384.88 (lump sum payment for continuation of salary for 6-mos)
October 31, 2004 (or sooner)	Need to send be beneficiary claim statement and copy of death certificate to Silicon Image for processing.	MetLife PH: 925/658-1104
October 31, 2004 (or sooner)	Provide second copy of death certificate to be used by Silicon Image to transfer 401K account into individual account or fill out forms taking distribution.	Fidelity Investments PH: 800/835-5097
November 22, 2004 (or sooner)	Fill out the COBRA Election Claim Forms and mail them back to TLC for processing You only have 60-days from date of termination to file for benefits.	TLC COBRA Administrators (800) 533-0113 X311
February 28, 2004 (or sooner)	You have $1125.00 remaining in the 125 Cafeteria Plan. You will need to submit claims forms any eligible out of pocket expenses. Claim forms have been provided to you for your convenience. You must submit claims before February 28, 2004 in order to get the claims reimbursed.	Pacific Benefits 800/838-4511

EX-10.34

Exhibit 10.34

1060 East. Arques Ave.

November 11, 2004

Steve Laub

Dear Steve:

     On behalf of the Board of Directors (the “Board”) of Silicon Image, Inc. (the “Company”), it is my pleasure to offer you the position of Chief Executive Officer and President of the Company. The terms of our offer and the benefits provided by the Company are as follows:

     1. You will report to the Board, which will nominate and elect you to the Board as a Class I director following the date you start your employment with the Company (the “Start Date”). Your Start Date will be November 11, 2004. While you are employed at the Company, you will abide by your duty of loyalty to the Company, will perform your duties and follow the lawful directions of the Board in a diligent manner, and will devote your full time, energy and attention to the interests of the Company, subject to your devotion of time to manage your personal assets and investments, to participate in charitable, professional and community activities and to serve on boards of directors of other companies, provided such devotion of time does not materially interfere with your service to the Company and such service on boards of other companies is permissible as not representing a conflict of interest under the Company’s Code of Conduct as determined by the Board. You will receive an indemnification agreement for your service as an officer and director of the Company consistent with indemnification agreements in place with other members of the Board.

     2. Your annual base salary will be $425,000 per year. For the 2004 fiscal year, you will be eligible to receive a cash bonus equal to a prorated portion of the calculated amount (if any) payable to the current Chief Executive Officer under the executive bonus program of the Company for the 2004 fiscal year (it being acknowledged that the current Chief Executive Officer’s target bonus is $200,000). In addition, for the 2005 fiscal year and each fiscal year thereafter, you will be eligible to receive a cash bonus under an executive bonus program for the year to be proposed by you and approved by the Compensation Committee of the Board. Such executive bonus program will provide for a potential cash bonus to you of at least 50% of your annual base salary, provided that the actual bonus amount (which may be less than 50% of your annual base salary) will be determined by Company performance and whatever other factors the executive bonus program considers. Your cash compensation will be subject to annual review by the Compensation Committee.

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     3. You will be granted an option (the “Option”) for 1,500,000 shares of common stock (as of October 29, 2004, there were approximately 76,648,000 shares outstanding). The Option will have an exercise price equal to the closing price of our common stock on the Nasdaq Stock Market on the Start Date and will vest and become exercisable with respect to one-fourth of the shares on the first anniversary of the Start Date and an additional one-forty-eighth of the shares each month thereafter so long as you remain continuously employed by the Company, subject to the vesting acceleration provisions set forth in Section 5 of this letter agreement.

     4. You will be eligible to participate in the other employee benefit plans and executive compensation programs maintained by the Company applicable to other employees and key executives of the Company, including without limitation stock option, stock purchase, incentive or other bonus plans, life, disability, health, accident and other insurance programs, and similar plans or programs. You will receive not less than three weeks of paid vacation each year.

     5. Upon termination of your employment with the Company for any reason, you will receive payment for all unpaid salary and vacation accrued to the date of your termination of employment, you will receive reimbursement for expenses per existing Company policies and your benefits will be continued under the Company’s then existing benefit plans and policies as provided under the terms of such plans and policies and as required by applicable law; such payments and benefits are not included within the separation benefits described below (but likewise will not operate to duplicate such separation benefits either). Under certain circumstances, you will also be entitled to receive separation benefits as set forth below, but you will not be entitled to any other compensation, award or damages with respect to your employment or termination. A full unilateral release (including a waiver of unknown claims and covenant not to sue) in favor of the Company and its directors, officers and other related persons and an agreement not to solicit employees of the Company for a period of one year following termination, each in the form then used by the Company for departing executives (but in all events containing no terms inconsistent with, or additional to, the terms hereof unless mutually and reasonably agreed at the time), must be executed by you in order to receive any separation benefits; provided, however, you will not be required to release any right to indemnification that you may have under applicable law, the Company’s Certificate of Incorporation, the Company’s bylaws or any indemnity agreement between you and the Company nor any rights related to your then existing equity ownership in the Company; provided further, that in the event that the Company subsequently commences litigation or arbitration proceedings against you (excluding derivative suits brought by stockholders of the Company unaffiliated with members of the Board), upon written notice to the Company from you within 30 days of the initiation of any such proceeding, such release shall be considered null and void.

          A. In the event of your voluntary termination (other than for Good Reason) or termination for Cause (as defined following), you will not be entitled to any cash separation benefits or additional vesting of shares of restricted stock or options.

          B. In the event of your termination without Cause, termination by you for Good Reason or your termination due to death or disability, you shall be entitled to (i) cash severance (at the rate of your then current annual base salary) paid pro rata in accordance with normal payroll dates and reimbursement of COBRA insurance premiums (if you elect COBRA coverage), each for twelve months following your termination, and (ii) the calculated amount (if any) payable to the Chief Executive Officer under the executive bonus program of the Company for the entire year in which such termination occurs and pro rated for a sufficient portion of the following year so as to constitute participation in such executive bonus program effective through the date that is one year after such termination, in each case less

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applicable deductions and withholdings and in accordance with the Company’s normal payroll practices. Your right to receive COBRA insurance premiums shall terminate upon your commencement of full-time employment with another company (which you shall promptly notify the Company of).

          C. In the event of your termination without Cause, termination by you for Good Reason or your termination due to death or disability, you shall be entitled to twelve months of accelerated vesting under your Company stock options and restricted stock awards (whether referred to above or otherwise granted in the future).

          D. In the event (i) there is a Change of Control (as defined following), (ii) you are not offered (or continued in, as the case may be) the position of chief executive officer of the Successor Company (as defined following) for at least the one year period after the Change of Control with annual base salary and potential cash bonus at least as favorable to you as those referred to herein and principal office location located within 25 miles from the current location of the Company’s principal place of business at 1060 East Arques Avenue, Sunnyvale, California, and (iii) if so requested by the Successor Company, you continue to serve the Successor Company (unless prevented by death or disability) on a full-time basis (the Successor Company to continue to provide cash compensation (at the rate of your then current annual base salary), continued eligibility for bonus, health benefits and equity vesting as provided herein) to provide reasonable and appropriate transition assistance commensurate with your experience and reporting to the chief executive officer for such transition period as is requested by the Successor Company, not to exceed six months (unless you agree in writing to a longer transition period), then upon your termination from the Company or Successor Company (as the case may be) in connection with the Change of Control or completion of such transition period, in addition to the separation benefits described in paragraph B above, but in lieu of the separation benefits described in paragraph C above, you shall be entitled to accelerated vesting under your Company stock options and restricted stock awards (whether referred to above or otherwise granted in the future), or equity securities of the Successor Company received in exchange therefor, based on the number of options and/or shares that would have vested had you remained employed with continued vesting for three years after the later of the closing of the Change of Control or the completion of such transition period.

          E. “Cause” means (i) conviction of, or plea of guilty or no contest to, a felony under the laws of the United States or any state thereof or any act of fraud, embezzlement or dishonesty, (ii) breach of fiduciary duties not remedied within thirty days of written notice, or (iii) material breach of this agreement or any other written agreement with the Company not remedied within thirty days of written notice.

          F. “Good Reason” means (i) any material reduction in your job duties and responsibilities (it being acknowledged and agreed that your position as Chief Executive Officer and President will entail your having such oversight and authority over Company operations as is customary for a chief executive officer of a typical public company, subject to such oversight of the Board of Directors and its Committees as is customary for a typical public company, satisfaction of legal requirements and the implementation of appropriate checks, balances and procedures associated with the Company’s accounting and financial matters, internal controls and public securities disclosures as approved or established by the Board or the Committee responsible for the matter in question) not approved in writing by you and not restored within thirty days of written notice to the Board, (ii) your failure to be elected at any time as a member of the Board, (iii) any demoting change in your job title as Chief Executive Officer and President, reduction in annual base salary or potential cash bonus, or requirement that your principal place of business be located more than 25 miles from the current location of the Company’s principal place of business at 1060 East Arques Avenue, Sunnyvale, California not rescinded

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within thirty days of written notice to the Board, or (iv) any material breach by the Company of any written obligation to you not remedied within thirty days of written notice to the Board.

          G. “Change of Control” means (i) 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 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 (the “Parent”), 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 of the voting power of the Parent immediately after the transaction or transactions, or (ii) change in composition of the Board such that a majority of the authorized directors consist of individuals whose nomination to the Board was not approved or ratified by a majority of the directors in office immediately prior to such nomination (but excluding from such vote any directors previously not so approved or ratified).

          H. “Successor Company” means (i) the combined company resulting from a Change of Control involving any kind of business combination, (ii) the acquiror of all or substantially all of the assets of the Company in such a transaction, or (iii) the Company in all other cases.

          I. No acceleration of vesting will be deemed to extend beyond the number of then-unvested options or shares under a particular award at the time of acceleration. No additional vesting shall occur following termination of service. Vested options (including replacement options in a Successor Company) will be exercisable for (i) fifteen months following the termination date in the case of your termination without Cause, termination by you for Good Reason, or your termination from the Company or Successor Company (as the case may be) in connection with a Change of Control or completion of transition services period associated with a Change of Control (provided the conditions set forth in clauses (i)-(iii) of paragraph D are satisfied), (ii) twelve months following the termination date in the case of termination due to death or disability, or (iii) three months following the termination date in the case of your voluntary termination or termination for Cause, but in no event later than the expiration date of the options.

     6. As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. To protect the interests of the Company, you will need to sign the Company’s standard employee invention assignment and confidentiality agreement as a condition of your employment. We wish to impress upon you that we do not wish you to bring with you any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employers.

     7. This offer of employment is made to you in confidence, and its terms must not be disclosed by you to anyone outside your immediate family and professional advisors. If you do disclose any of its terms to such a family member or advisor, you must caution him or her that such information is confidential and must not be disclosed to anyone else.

     8. While we look forward to a long and profitable relationship, should you decide to accept our offer, you will be an at-will employee of the Company, which means the employment relationship can be terminated by either of us for any reason at any time. Any statements or

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representations to the contrary (and any statements contradicting any provision in this letter) should be regarded by you as ineffective. Further, your participation in any stock option or benefit program is not to be regarded as assuring you of continuing employment for any particular period of time.

     9. This letter agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to such subject matter.

     10. This offer will remain open until November 12, 2004. If you decide to accept our offer, and I hope you will, please sign the enclosed copy of this letter agreement in the space indicated below and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer. Should you have anything else that you wish to discuss, please do not hesitate to call me.

     We look forward to the opportunity to welcome you to the Company.

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Very truly yours,

Silicon Image, Inc.

By:	/s/ David Hodges
	David Hodges, Director

Acknowledged, Accepted and Agreed

/s/ Steve Laub

Steve Laub

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EX-10.35

Exhibit 10.35

SILICON IMAGE, INC.
NON-PLAN STOCK OPTION AGREEMENT

     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 meaning ascribed to them in Section 20.

Optionee:	Steven A. Laub
Total Option Shares:	1,500,000
Exercise Price Per Share:	$15.20
Date of Grant:	November 11, 2004
First Vesting Date:	November 11, 2005
Expiration Date:	November 11, 2014
Type of Stock Option:	NQSO

          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, $0.001 par value (“Common Stock”), set forth above (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.

          2. Vesting; Exercise Period.

               2.1 Vesting of Shares. This Option shall be exercisable as it vests. Subject to the terms and conditions of this Agreement, this Option shall vest and become exercisable as to portions of the Shares as follows: (a) this Option shall not be exercisable with respect to any of the Shares until November 11, 2005 (the “First Vesting Date”); (b) if Optionee has continuously provided services to the Company, or any Parent or Subsidiary of the Company, then on the First Vesting Date, this Option shall become exercisable as to one fourth (1/4^th) of the Shares (rounded to the nearest whole share); and (c) thereafter this Option shall become exercisable as to an additional one forty-eighth (1/48^th) of the Shares (rounded to the nearest whole share) at the end of each full succeeding month, provided that Optionee has continuously provided services to the Company, or any Parent or Subsidiary of the Company. 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 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, provided,

Silicon Image, Inc.
Non-Plan Stock Option Agreement

however, that this Option will be not be exercisable after the expiration of ten (10) years from the Date of Grant.

          3. Termination.

               3.1 Termination for Any Reason Except Death, Disability or Cause. If Optionee is Terminated for any reason except Optionee’s death, Disability or Cause, then this Option, to the extent (and only to the extent) that it is vested in accordance with the schedule set forth in Section 2.1 of this Agreement on the date of Termination, may be exercised by Optionee no later than three (3) months after the date of Termination, but in any event no 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 a Termination other than because of death, Disability or Cause), then this Option, to the extent that it is vested in accordance with the schedule set forth in Section 2.1 of this Agreement on the date of Termination, may be exercised by Optionee (or Optionee’s legal representative) no later than twelve (12) months after the date of Termination, 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.

               3.4 No Obligation to Employ. Nothing in 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 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.

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Silicon Image, Inc.
Non-Plan Stock Option Agreement

               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)

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 a 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

(b)

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

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Silicon Image, Inc.
Non-Plan Stock Option Agreement

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 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 of some of the federal and California 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 THE OPTION OR DISPOSING OF THE SHARES.

               7.1 Exercise of Nonqualified Stock Option. There may be a regular federal and California 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 will 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, as the case may be.

          8. Privileges of Stock Ownership. Optionee shall not have any of the rights of a shareholder with respect to any Shares until Optionee exercises this Option and pays the Exercise Price.

          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. This Agreement 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

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Silicon Image, Inc.
Non-Plan Stock Option Agreement

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 rapifax or telecopier.

          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 this Agreement. Optionee has read and understands the terms and provisions thereof, and accepts this Option subject to all the terms and conditions of 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.

          15. Modification, Extension or Renewal. The Committee may modify, extend or renew this Option and authorize the grant of new options in substitution therefor, provided that any such action may not, without the written consent of the Optionee, impair any of such Optionee’s rights under this Option. The Committee may reduce the Exercise Price of this Option without the consent of the Optionee affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below 85% of the Fair Market Value of the Shares on the date of grant.

          16. Certificates. All certificates for Shares or other securities delivered upon exercise of this Option 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.

          17. 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 the Exercise Price of and the number of Shares subject to this Option will be proportionately adjusted, subject to any required action by the Board or the Optionee and

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Silicon Image, Inc.
Non-Plan Stock Option Agreement

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.

          18. Corporate Transactions.

               18.1 Assumption or Replacement of Option 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 this Option is assumed, converted or replaced by the successor corporation, which assumption will be binding on the Optionee), (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, this Option may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on the Optionee. In the alternative, the successor corporation may substitute equivalent options or provide substantially similar consideration to the Optionee as was provided to other stockholders. The successor corporation may also issue, in place of outstanding Shares of the Company held by the Optionee, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Optionee. In the event such successor corporation (if any) refuses to assume or substitute this Option, as provided above, pursuant to a transaction described in this subsection, this Option will expire on such transaction at such time and on such conditions as the Committee will determine; provided, however, that the Committee may, in its sole discretion, provide that the vesting of this Option will accelerate. If the Committee exercises such discretion with respect to this Option, this Option 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 this Option is not exercised prior to the consummation of the corporate transaction, it shall terminate at such time as determined by the Committee.

               18.2 Other Treatment of Option. Subject to any greater rights granted to the Optionee under the foregoing provisions of this section, in the event of the occurrence of any transaction described in Section 18.1, this Option will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.

          19. Amendment or Termination of the Agreement. The Board may at any time terminate or amend this Agreement in any respect; provided, however, that the Board will

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Silicon Image, Inc.
Non-Plan Stock Option Agreement

not, without the approval of the Optionee, amend this Agreement in any manner that requires Optionee’s approval.

          20. Definitions. As used in this Agreement, the following terms will have the following meanings:

               “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.

               “Committee” means the Compensation Committee of the Board.

               “Disability” means a disability, whether temporary or permanent, partial or total, within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, as determined by the Committee.

               “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 Committee in good faith.

               “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.

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Silicon Image, Inc.
Non-Plan Stock Option Agreement

               “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 Agreement with respect to the Optionee, that the Optionee 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 the Optionee is on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of this Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may this Option be exercised after the expiration of the term set forth in this Agreement. The Committee will have sole discretion to determine whether the Optionee has ceased to provide services and the effective date on which the Optionee ceased to provide services (the “Termination Date”).

               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
/s/ Bob Gargus	/s/ Steven A. Laub
Bob Gargus, Chief Financial Officer	Steven A. Laub
Chief Financial Officer

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EX-10.36

Exhibit 10.36

1060 East. Arques Ave.
Sunnyvale CA 94085
Ph: (408) 616-4000
Fax: (408) 830-9525

January 24, 2005

Steve Tirado

Dear Steve:

     On behalf of the Board of Directors (the “Board”) of Silicon Image, Inc. (the “Company”), it is my pleasure to offer you the position of Chief Executive Officer and President of the Company. The terms of our offer and the benefits provided by the Company are as follows:

     1. You will report to the Board, which will nominate and elect you to the Board as a Class I director. While you are employed at the Company, you will abide by your duty of loyalty to the Company, will perform your duties and follow the lawful directions of the Board in a diligent manner, and will devote your full time, energy and attention to the interests of the Company, subject to your devotion of time to manage your personal assets and investments, and to participate in charitable, professional and community activities, provided such devotion of time does not materially interfere with your service to the Company. You will receive an indemnification agreement for your service as an officer and director of the Company consistent with indemnification agreements in place with other members of the Board.

     2. Your annual base salary will be $475,000 per year. For the 2005 fiscal year, you will be eligible to receive a cash bonus under an executive bonus program for the year to be proposed by you and approved by the Compensation Committee of the Board. Such executive bonus program will provide for a potential cash bonus to you of 70% of your annual base salary for the 2005 fiscal year, provided that the actual bonus amount (which may be less than 70% of your annual base salary for the 2005 fiscal year) will be determined by Company performance (as determined by the Company’s 2005 Annual Operating Plan) and whatever other factors the executive bonus program considers. Your cash compensation will be subject to annual review by the Compensation Committee.

     3. You will be granted an option for 380,000 shares of common stock upon execution of this letter agreement. In addition, on the first business day of 2006 you will be granted an option for 500,000 shares of common stock. The options will have an exercise price equal to the closing price of our common stock on the Nasdaq Stock Market on their respective grant dates, and each option will vest and become exercisable with respect to one-forty-eighth of the shares in such option each month after the grant date of such option so long as you remain continuously

1

employed by the Company as an employee, subject to the vesting acceleration provisions set forth in Section 5 of this letter agreement.

     4. You will be eligible to participate in the other employee benefit plans and executive compensation programs maintained by the Company applicable to other employees and key executives of the Company, including without limitation stock option, stock purchase, incentive or other bonus plans, life, disability, health, accident and other insurance programs, and similar plans or programs. You will receive not less than three weeks of paid vacation each year.

     5. Upon any termination of your employment with the Company, you shall in all cases receive (i) payment for all unpaid salary and vacation accrued through the date of your termination of employment; (ii) reimbursement for expenses per existing Company policies; and (iii) continued benefits in accordance with the terms of the Company’s then existing benefit plans and policies and/or as required by applicable law; such payments and benefits are not included within the separation benefits described below (but likewise will not operate to duplicate such separation benefits either). In addition to the above benefits, you shall under certain circumstances, also be entitled to receive separation benefits as set forth below; provided, that in order to receive any separation benefits you must first execute a full unilateral release (including a waiver of unknown claims and covenant not to sue) in favor of the Company and its directors, officers and other related persons and an agreement not to solicit employees of the Company for a period of one year following termination, each in the form then used by the Company for departing executives; and further provided, however, that you will not be required to release any right to indemnification that you may have under applicable law, the Company’s Certificate of Incorporation, the Company’s bylaws or any indemnity agreement between you and the Company nor any rights related to your then existing equity ownership in the Company. You will not be entitled to any other compensation, award or damages with respect to your employment or termination.

      A. In the event of your voluntary termination (other than for Good Reason) or termination for Cause (as defined below), you will not be entitled to any cash separation benefits or additional vesting of shares of restricted stock or options.

i.

“Cause” means (i) conviction of, or plea of guilty or no contest to, a felony under the laws of the United States or any state thereof or any act of fraud, embezzlement or dishonesty, (ii) breach of fiduciary duties not remedied within thirty days of written notice, or (iii) material breach of this letter agreement or any other written agreement with the Company not remedied within thirty days of written notice.

ii.

“Good Reason” means (i) any material reduction in your job duties and responsibilities not approved in writing by you and not restored within thirty days of written notice to the Board, (ii) your failure to be elected at any time as a member of the Board, or (iii) any demoting change in your job title as Chief Executive Officer and President, reduction in annual base salary or potential cash bonus, or requirement that your principal place of business be located more than 25 miles from the current location of the Company’s principal place of business at 1060 East Arques Avenue, Sunnyvale, California not rescinded within thirty days of written notice to the Board.

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           B. In the event the Company terminates your employment without Cause, or in the event of termination by you for Good Reason or your termination due to death or disability, you shall be entitled to (i) cash severance equal to your then current annual base salary, paid pro rata over the next twelve months in accordance with normal payroll dates, (ii) reimbursement of COBRA insurance premiums (if you elect COBRA coverage), for twelve months following your termination, (iii) the calculated amount (if any) payable to the Chief Executive Officer under the executive bonus program of the Company pro rata for the year in which such termination occurs, less applicable deductions and withholdings and in accordance with the Company’s normal payroll practices. Your right to receive COBRA insurance premiums shall terminate upon your commencement of full-time employment with another company (which you shall promptly notify the Company of); and (iv) twelve months of accelerated vesting under your Company stock options and restricted stock awards (whether referred to above or otherwise granted in the future).

           C. No acceleration of vesting will be deemed to extend beyond the number of then-unvested options or shares under a particular award at the time of acceleration. No additional vesting shall occur following termination of service. Vested options will be exercisable for (i) three months following the termination date in the case of your termination without Cause, termination by you for Good Reason, your voluntary termination or termination for Cause, but in no event later than the expiration date of the options, or (ii) twelve months following the termination date in the case of termination due to death or disability.

     6. While we look forward to a long and profitable relationship, should you decide to accept our offer, you will be an at-will employee of the Company, which means the employment relationship can be terminated by either of us for any reason at any time. Any statements or representations to the contrary (and any statements contradicting any provision in this letter) should be regarded by you as ineffective. Further, your participation in any stock option or benefit program is not to be regarded as assuring you of continuing employment for any particular period of time.

     7. This letter agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to such subject matter, including without limitation the April 1, 2004 letter agreement between you and the Company which the parties hereto agree is hereby terminated and superceded by this letter agreement.

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     8. This offer will remain open until 11:59 p.m. on January 24, 2005. If you decide to accept our offer, and I hope you will, please sign the enclosed copy of this letter agreement in the space indicated below and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer. Should you have anything else that you wish to discuss, please do not hesitate to call me.

     We look forward to the opportunity to welcome you to the Company.

Silicon Image, Inc.	Accepted
By   /s/ Chris Paisley	/s/ Steve Tirado
Chris Paisley	Steve Tirado
Title:       Chairman of the Board	Date    1/24/05

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EX-10.37

Exhibit 10.37

1060 East. Arques Ave.
Sunnyvale CA 94085
Ph: (408) 616-4000
Fax: (408) 830-9525

February 8, 2005

Jimmy Garcia-Meza

Dear Jimmy:

          Silicon Image, Inc. (the “Company”) is pleased to confirm our offer of continued employment to you. The terms of our offer and the benefits provided by the Company are as follows:

1.

You will report to the Chief Executive Officer in the position of Vice President, Storage. By your signature below, you hereby concurrently resign from your other sales positions at the Company.

2.

Your annual base salary will be $275,000 per year, effective as of February 8, 2005. You will be eligible to participate in 2005 Bonus Plan to be determined by the Compensation Committee of the Board of Directors at a level appropriate to your position. We will also recommend that the Compensation Committee grant you a stock option for 100,000 shares with an exercise price equal to the closing price of our stock on the date of grant. Vesting for this grant will occur at the end of each month based on the schedule below, provided you continue to be employed by us.

-   1.2500% per month for each of the twelve (12) months beginning January 1, 2007 and ending December 31, 2007;

-   5.0000% per month for each of the twelve (12) months beginning January 1, 2008 and ending December 31, 2008;

-   2.0833% per month for each of the twelve (12) months beginning January 1, 2009 and ending December 31, 2009;

3.   You will be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company applicable to other employees and key executives of the Company, including, without limitation, retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, stock purchase, incentive or other bonus plans, life, disability, health, accident and other insurance programs, and similar plans or

1

programs. You will be eligible for the applicable number of days of paid PTO per year, per the PTO policy.

4.   Employment and Termination. Your employment with Silicon Image will be at-will and may be terminated by you or by Silicon Image at any time for any reason as follows:

(a) You may terminate your employment upon written notice to the Board of Directors at any time in your discretion (“Voluntary Termination”);

(b) Silicon Image may terminate your employment upon written notice for “Cause,” as defined below, for such termination (“Termination for Cause”);

(c) Silicon Image may terminate your employment upon written notice to you at any time without a determination that there is Cause for such termination (“Termination without Cause”);

(d) Your employment will automatically terminate upon your death or upon your disability as determined by the Board of Directors (“Termination for Death or Disability”); provided that “disability” shall mean your complete inability to perform your job responsibilities for a period of 180 consecutive days or 180 days in the aggregate in any 12-month period;

(e) Your employment may be a “Termination in Connection with a Change in Control” if there is a Change in Control and either (i) you are employed by Silicon Image on the date of the Change in Control and continue your employment after the Change in Control to aid in an orderly transition, if Silicon Image so requests (provided that you shall not be required to continue your employment for more than three (3) months after the Change in Control in order to satisfy such obligation), or (ii) Silicon Image terminates your employment other than for Cause, death or Disability after Silicon Image begins negotiations with a third party that culminates in a Change of Control and not more than 150 days prior to the Change in Control (in which case, for the purpose of interpreting the vesting and exercisability provisions of your stock option grants, your termination shall be deemed to occur on the date of the Change in Control).

Definitions used in this agreement:

“Cause” means willful gross misconduct, conviction of a felony or an act of material personal dishonesty.

“Change in Control” means the closing of any transaction or series of related transactions, including the acquisition of Silicon Image by another entity and any reorganization, merger or consolidation, which results in the holders of Silicon Image’s capital stock prior to the transaction or transactions holding less than fifty percent (50%) of the outstanding voting power of Silicon Image after the transaction or transactions, or which results in the sale of all or substantially all of the assets of Silicon Image.

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Separation Benefits. Upon termination of your employment with Silicon Image for any reason, you will receive payment for all unpaid salary and vacation accrued to the date of your termination of employment; and your benefits will be continued under Silicon Image’s then existing benefit plans and policies for so long as provided under the terms of such plans and policies and as required by applicable law. Under certain circumstances, you will also be entitled to receive severance benefits as set forth below, but you will not be entitled to any other compensation, award or damages with respect to your employment or termination.

(a) In the event of your Voluntary Termination or Termination for Cause, you will not be entitled to any cash severance benefits or additional vesting of shares of restricted stock or options.

(b) In the event of your Termination without Cause, you shall be entitled to severance for six (6) months following your termination, at the rate of your Base Salary plus target bonus for that year and in accordance with Silicon Image’s normal payroll practices.

(c) In the event of your Termination in Connection with a Change in Control, your stock option grant number 000808 dated April 5, 2001 (“Initial Stock Grant”) shall have a vesting rate of twice the vesting rate set forth in the grant, provided, that in no event shall the minimum aggregate number of shares vested be less than at least one-quarter (1/4) of the aggregate number of shares granted; and you shall be entitled to severance for six (6) months following your termination, at the rate of your Base Salary plus target bonus for that year and in accordance with Silicon Image’s normal payroll practices.. For example, if immediately prior to a Change of Control, your Initial Stock Grant would have otherwise vested as to forty percent (40%) of the shares, then upon such Change in Control such Initial Stock Grant shall instead be vested as to eighty percent (80%) of the shares. For example, if immediately prior to a Change of Control, your Initial Stock Grant would have otherwise vested as to none of the shares subject to the grants, then upon such Change in Control, such Initial Stock Grant shall instead be vested as to twenty-five percent (25%) of the shares. In addition, should your employment continue following a Change in Control, all your stock options granted prior to the Change in Control shall continue to vest at the vesting rate set forth in the original grant.

(d) If your severance and other benefits provided for in this Section 8 constitute “parachute payments” within the meaning of Section 280G of the Code and, but for this subsection, would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then your severance and other benefits under this Section 8 will be payable, at your election, either in full or in such lesser amount as would result, after taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, in your receipt on an after-tax basis of the greatest amount of severance and other benefits.

(e) No payments due you hereunder shall be subject to mitigation or offset.In consideration of and as a condition to receiving the severance set forth in this Section 4, concurrently with your termination of employment, you will execute an agreement in form acceptable to the Company providing for a full unilateral release in favor of

3

the Company and its directors, officers and other related persons. However, you will not be required to release any right to indemnification that you may have under applicable law, the Company’s bylaws or the Indemnity Agreement between you and the Company.

5.	During the term of your employment with the Company and for one year thereafter, you will not, on behalf of yourself or any third party, solicit or attempt to induce any employee of the Company to terminate his or her employment with the Company.
6.	Should you decide to accept our offer, you will remain an at-will employee of the Company, which means the employment relationship can be terminated by either of us for any reason at any time. Any statements or representations to the contrary (and, indeed, any statements contradicting any provision in this letter) should be regarded by you as ineffective. Further, your participation in any stock option or benefit program is not to be regarded as assuring you of continuing employment for any particular period of time.
7.	This letter agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to such subject matter, including without limitation the letter agreement between you and the Company dated July 16, 1999. This agreement will be governed by the laws of the State of California without reference to conflict of laws provisions. The parties 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.
8.	If you decide to accept our offer, and I hope you will, please sign the enclosed copy of this letter agreement in the space indicated below and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer. Should you have anything else that you wish to discuss, please do not hesitate to call me.

We look forward to the opportunity to continue working together.

Very truly yours,

Silicon Image, Inc.

By:	/s/ Steve Tirado
	Steve Tirado, CEO

2/15/05
Acknowledged, Accepted and Agreed

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     /s/ Jimmy Garcia-Meza

Jimmy Garcia-Meza

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EX-23.01

EXHIBIT 23.1

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 and 333-113856) of Silicon Image, Inc. of our report dated March 14, 2005 relating to the consolidated financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/PricewaterhouseCoopers LLP

San Jose, California
March 14, 2005

EX-31.01

Exhibit 31.01

Certification Under
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)) 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)	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
(c)	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 15, 2005

/s/ Steve Tirado
Steve Tirado
Chief Executive Officer
(Principal Executive Officer)

EX-31.02

Exhibit 31.02

Certification Under
Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert G. Gargus, 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)) 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)	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
(c)	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 15, 2005

/s/ Robert G. Gargus
Robert G. Gargus
Chief Financial Officer
(Principal Financial Officer)

EX-32.01

Exhibit 32.01

Certification 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, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steve Tirado, 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.

/s/ Steve Tirado  

Steve Tirado 

Chief Executive Officer
(Principal Executive Officer) 

March 15, 2005

     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 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, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert G. Gargus, 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.

/s/ Robert G. Gargus  

Robert G. Gargus 

Chief Financial Officer
(Principal Financial Officer) 

March 15, 2005

     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.