##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to          .
 Commission file number: 000-26887
 Silicon Image, Inc.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    77-0396307
(I.R.S. Employer Identification No.)
 1060 East Arques Avenue
Sunnyvale, California 94085
 (408) 616-4000
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
 o þ




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##### 



Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three Months Ended
March 31, 2006
 Table of Contents
 Part I Financial Information (Unaudited)
3Item 1 Financial Statements
3Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
3Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005
4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
5Notes to Condensed Consolidated Financial Statements
6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
16Item 3 Quantitative and Qualitative Disclosures About Market Risk
21Item 4 Controls and Procedures
22Part II Other Information
23Item 1 Legal Proceedings
23Item 1A Risk Factors
24Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
40Item 3 Defaults Upon Senior Securities
40Item 4 Submission of Matters to a Vote of Security Holders
40Item 5 Other Information
40Item 6 Exhibits
41Signatures
42EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Silicon Image, Inc.
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share and per share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    71,093
    
    
    $
    77,877Short-term investments
    
    
    96,397
    
    
    
    73,685Accounts receivable, net of allowances for
doubtful accounts of $216 at March 31, 2006 and
$417 at December 31, 2005
    
    
    37,339
    
    
    
    30,141Inventories
    
    
    18,039
    
    
    
    17,072Prepaid expenses and other current assets
    
    
    3,065
    
    
    
    3,037Total current assets
    
    
    225,933
    
    
    
    201,812Property and equipment, net
    
    
    9,518
    
    
    
    9,613Goodwill
    
    
    13,021
    
    
    
    13,021Intangible assets, net
    
    
    311
    
    
    
    585Other assets
    
    
    7,900
    
    
    
    7,990Total assets
    
    $
    256,683
    
    
    $
    233,021Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    16,029
    
    
    $
    13,372Accrued liabilities
    
    
    11,826
    
    
    
    13,952Deferred license revenue
    
    
    9,915
    
    
    
    8,283Debt obligations and capital leases
    
    
    174
    
    
    
    230Deferred margin on sales to distributors
    
    
    19,026
    
    
    
    13,771Current liabilities
    
    
    56,970
    
    
    
    49,608Other long-term liabilities
    
    
    6,927
    
    
    
    6,867Total liabilities
    
    
    63,897
    
    
    
    56,475Commitments and contingencies (See Note 8)Stockholders Equity:Common stock, par value $0.001; shares
authorized:
150,000,000; shares issued and outstanding: 81,437,980
 March 31, 2006 and 80,491,557 
December 31, 2005
    
    
    81
    
    
    
    80Additional paid-in capital
    
    
    314,429
    
    
    
    307,149Unearned stock compensation
    
    
    
    
    
    
    (6,742
    )Accumulated deficit
    
    
    (121,077
    )
    
    
    (123,429
    )Accumulated other comprehensive loss
    
    
    (647
    )
    
    
    (512
    )Total stockholders equity
    
    
    192,786
    
    
    
    176,546Total liabilities and stockholders equity
    
    $
    256,683
    
    
    $
    233,021
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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Income
 (in thousands, except
per share amounts)
(unaudited)
 Three Months Ended March 31,2006
    
    
    2005Revenue:Product
    
    $
    53,280
    
    
    $
    40,808Development, licensing and royalties
    
    
    5,819
    
    
    
    3,512Total revenue
    
    
    59,099
    
    
    
    44,320Cost of revenue and operating expenses:Cost of revenue (1)
    
    
    25,348
    
    
    
    15,505Research and development (2)
    
    
    15,566
    
    
    
    8,122Selling, general and administrative (3)
    
    
    15,461
    
    
    
    3,953Amortization of intangible assets
    
    
    274
    
    
    
    274Total cost of revenue and operating expenses
    
    
    56,649
    
    
    
    27,854Income from operations
    
    
    2,450
    
    
    
    16,466Interest income and other, net
    
    
    1,538
    
    
    
    498Income before provision for income taxes
    
    
    3,988
    
    
    
    16,964Provision for income taxes
    
    
    1,636
    
    
    
    331Net income
    
    $
    2,352
    
    
    $
    16,633Net income
per share  basic
    
    $
    0.03
    
    
    $
    0.21Net income
per share  diluted
    
    $
    0.03
    
    
    $
    0.19Weighted
average shares  basic
    
    
    80,986
    
    
    
    78,307Weighted
average shares  diluted
    
    
    85,398
    
    
    
    83,963
 (1) Includes stock compensation expense (benefit)
    
    $
    628
    
    
    $
    (1,196
    )(2) Includes stock compensation expense (benefit)
    
    
    2,812
    
    
    
    (4,438
    )(3) Includes stock compensation expense (benefit)
    
    
    3,843
    
    
    
    (3,693
    )
  4




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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
(unaudited)
 Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,352
    
    
    $
    16,633Adjustments to reconcile net income to cash
provided by operating activities:Depreciation and amortization
    
    
    1,620
    
    
    
    1,524Amortization of intangible assets
    
    
    274
    
    
    
    274Stock compensation expense (benefit)
    
    
    7,283
    
    
    
    (9,327
    )Excess tax
benefits from employee stock transactions
    
    
    (1,356
    )
    
    
    Amortization of investment premium
    
    
    83
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (7,198
    )
    
    
    (2,663
    )Inventories
    
    
    (967
    )
    
    
    1,782Prepaid expenses and other assets
    
    
    123
    
    
    
    (304
    )Accounts payable
    
    
    2,657
    
    
    
    385Accrued liabilities and deferred license revenue
    
    
    861
    
    
    
    (2,724
    )Deferred margin on sales to distributors
    
    
    5,256
    
    
    
    70Cash provided by operating activities
    
    
    10,988
    
    
    
    5,650Cash flows from investing activities:Proceeds from sales and maturities of short-term investments
    
    
    12,052
    
    
    
    67Purchases of short-term investments
    
    
    (34,983
    )
    
    
    (16,541
    )Purchases of property and equipment
    
    
    (1,525
    )
    
    
    (1,138
    )Cash used in investing activities
    
    
    (24,456
    )
    
    
    (17,612
    )Cash flows from financing activities:Proceeds from issuances of common stock, net
    
    
    5,384
    
    
    
    4,235Excess tax benefit from employee stock transactions
    
    
    1,356
    
    
    
    Repayments of debt and capital lease obligations
    
    
    (56
    )
    
    
    (54
    )Cash provided by financing activities
    
    
    6,684
    
    
    
    4,181Net decrease in cash and cash equivalents
    
    
    (6,784
    )
    
    
    (7,781
    )Cash and cash equivalents  beginning of period
    
    
    77,877
    
    
    
    23,280Cash and cash equivalents  end of period
    
    $
    71,093
    
    
    $
    15,499Supplemental cash flow information:Cash payment for interest
    
    $
    4
    
    
    $
    2Unrealized loss on investment security
    
    $
    (135
    )
    
    $
    (1,807
    )Increase in restricted cash and related long-term
liability associated with ongoing litigation
    
    $
    61
    
    
    $
    
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Silicon Image, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 March 31, 2006
 (unaudited)
 1. Basis of Presentation
  2. Recent Accounting Pronouncements
 Accounting Changes and Error Corrections
 Accounting for Purchases and Sales of Inventory with the Same Counterparty Accounting
for Nonmonetary Transactions
 Accounting for Certain Hybrid
InstrumentsAn Amendment of FASB Statements No. 133 and No. 144
 3. Stock-Based Compensation
   6




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Adoption
of SFAS No. 123(R)
 Accounting for Stock Issued to Employees Accounting for Stock-based Compensation.
 Share-Based Payment
  7




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Determining Fair Value
 Valuation and amortization method
 Expected Term
 Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
  Three Months EndedMarch 31, 2006
    
    March 31, 2005Employee stock option plans:Expected life in years
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    90.0
    %
    
    
    90.0
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    4.3
    %Expected dividends
    
    none
    
    noneWeighted average fair value
    
    $
    7.31
    
    
    $
    10.28Employee Stock Purchase Plan:Expected life in years
    
    
    1.3
    
    
    
    1.7Expected volatility
    
    
    57.0
    %
    
    
    85.0
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    3.8
    %Expected dividends
    
    none
    
    noneWeighted average fair value
    
    $
    4.75
    
    
    $
    4.75
  Stock Compensation Expense
  8




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Cost of sales
    
    $
    628Research and development
    
    
    2,812Selling, general and administrative
    
    
    3,843Income tax effect
    
    
    (2,986
    )$
    4,297
     Stock
Options and Awards Activity
  Weighted AverageRemainingWeighted Average
    
    
    Contractual
    
    
    Aggregate IntrinsicNumber of Shares
    
    
    Exercise Price
    
    
    Term in Years
    
    
    ValueOutstanding at
December 31, 2005
    
    
    20,684
    
    
    $
    7.98Granted
    
    
    1,381
    
    
    
    10.15Exercised
    
    
    (740
    )
    
    
    4.59Forfeitures and
cancellations
    
    
    (217
    )
    
    
    10.07Outstanding at
March 31, 2006
    
    
    21,108
    
    
    $
    8.21
    
    
    
    6.95
    
    
    $
    66,264Vested and expected
to vest at March
31, 2006
    
    
    20,149
    
    
    $
    8.11
    
    
    
    0.61
    
    
    $
    65,085Exercisable at
March 31, 2006
    
    
    11,183
    
    
    $
    6.74
    
    
    
    5.60
    
    
    $
    49,426
   Pro-forma Disclosures
  9




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Net income  as reported
    
    $
    16,633Stock-based employee compensation benefit included in the determination of net income as reported
    
    
    (10,266
    )Stock-based employee compensation expense determined under fair value based method for all
awards, net of income taxes
    
    
    (6,655
    )Pro forma net loss
    
    $
    (288
    )Earnings per share:Basic  as reported
    
    $
    0.21Basic  pro forma
    
    $
    0.00Diluted  as reported
    
    $
    0.19Diluted  pro forma
    
    $
    0.00
  4. Comprehensive income
  Three Months Ended March 31,2006
    
    
    2005Net income
    
    $
    2,352
    
    
    $
    16,633Change in
unrealized gain or loss on investments
    
    
    (135
    )
    
    
    (1,807
    )Total comprehensive income
    
    $
    2,217
    
    
    $
    14,826
 5. Net Income Per Share
  Three Months Ended March 31,2006
    
    
    2005Net income
    
    $
    2,352
    
    
    $
    16,633Weighted average shares
    
    
    80,988
    
    
    
    78,560Unvested common shares subject to repurchase
    
    
    (2
    )
    
    
    (253
    )Weighted
average shares  basic
    
    
    80,986
    
    
    
    78,307Weighted average shares  diluted
    
    
    85,398
    
    
    
    83,963Net income per share  basic
    
    $
    0.03
    
    
    $
    0.21Net income per share  diluted
    
    $
    0.03
    
    
    $
    0.19
  10




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Three Months Ended March 31,2006
    
    
    2005Weighted-average common shares for basic net income per share
    
    
    80,986
    
    
    
    78,307Weighted-average dilutive stock options outstanding under the treasury stock method
    
    
    4,409
    
    
    
    5,392Unvested common shares subject to repurchase
    
    
    3
    
    
    
    264Total
    
    
    85,398
    
    
    
    83,9636. Balance Sheet ComponentsMarch 31,
    
    
    December 31,2006
    
    
    2005(in thousands)Inventories:Raw materials
    
    $
    3,752
    
    
    $
    3,123Work in process
    
    
    3,434
    
    
    
    4,511Finished goods
    
    
    10,853
    
    
    
    9,438Total inventories
    
    $
    18,039
    
    
    $
    17,072Property and equipmentComputers and software
    
    $
    17,114
    
    
    $
    16,669Equipment
    
    
    17,438
    
    
    
    16,601Furniture and fixtures
    
    
    2,407
    
    
    
    2,25936,959
    
    
    
    35,529Less: accumulated depreciation
    
    
    (27,441
    )
    
    
    (25,916
    )Total property and equipment, net
    
    $
    9,518
    
    
    $
    9,613Accrued liabilities:Accrued payroll and related expenses
    
    $
    3,475
    
    
    $
    4,738Restructuring accrual
    
    
    
    
    
    
    25Accrued legal fees
    
    
    720
    
    
    
    490Warranty accrual
    
    
    391
    
    
    
    382Bonus accrual
    
    
    1,189
    
    
    
    2,615Other accrued liabilities
    
    
    6,051
    
    
    
    5,702Total accrued liabilities
    
    $
    11,826
    
    
    $
    13,952At the time of revenue recognition, we provide an accrual for estimated costs to be
incurred pursuant to our warranty obligation. Our estimate is based primarily on historical
experience. Warranty accrual activity was as
follows (in thousands):March 31,
    
    
    December 31,2006
    
    
    2005Balance at January 1
    
    $
    382
    
    
    $
    351Provision for warranties issued during the period
    
    
    14
    
    
    
    273Cash and other settlements made during the period
    
    
    (5
    )
    
    
    (242
    )Balance
    
    $
    391
    
    
    $
    382
 11




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7. Asset impairment and restructuring activities
    2006
    
    
    2005Severance and
    
    
    Leased
    
    
    
    
    
    
    Severance and
    
    
    LeasedBenefits
    
    
    Facilities
    
    
    Total
    
    
    Benefits
    
    
    Facilities
    
    
    TotalBalance as of January 1
    
    $
    
    
    
    $
    25
    
    
    $
    25
    
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036Cash payments
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )
    
    
    
    
    
    
    (201
    )
    
    
    (201
    )Adjustment related to lease negotiation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of March 31
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    32
    
    
    $
    803
    
    
    $
    835
  8. Commitments and Contingencies
     12




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9. Customer and Geographic Information
  Three Months Ended March 31,2006
    
    
    2005Taiwan
    
    $
    14,741
    
    
    $
    11,368Japan
    
    
    14,768
    
    
    
    7,541United States
    
    
    12,816
    
    
    
    12,158Korea
    
    
    5,420
    
    
    
    4,694Hong Kong
    
    
    2,045
    
    
    
    1,218Other
    
    
    9,309
    
    
    
    7,341Total revenue
    
    $
    59,099
    
    
    $
    44,320
  Three Months Ended March 31,2006
    
    
    2005Consumer
Electronics(1)
    
    $
    35,392
    
    
    $
    21,232Personal
Computer(1)
    
    
    13,306
    
    
    
    11,105Storage(1)
    
    
    10,401
    
    
    
    11,983Total revenue
    
    $
    59,099
    
    
    $
    44,320
 
 (1) Includes
development, licensing and royalty revenue
     10. Provision for taxes
   11. Gain on investment security
  14




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12. Subsequent event
 TM (
  13. Related party transactions
       15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements within the meaning of Section 21E of the
Exchange Act 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 Form
10-Q 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 Form 10-Q are identified by words such as believes, anticipates,
expects, intends, estimates, may, will and variations of such words 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 revisions to these forward-looking statements that may be made
to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the
SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. 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.
 Overview
  tm
  Ô Ô
 16




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Ô
  Commitments, Contingencies and Concentrations
   Critical Accounting Policies
  17




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Results of Operations
 REVENUE
 Three months ended March 31,2006
    
    
    2005
    
    
    Change(dollars in thousands)Product revenue
    
    $
    53,280
    
    
    $
    40,808
    
    
    
    30.6
    %Development, licensing and royalty revenue
    
    
    5,819
    
    
    
    3,512
    
    
    
    65.7
    %Total revenue
    
    $
    59,099
    
    
    $
    44,320
    
    
    
    33.3
    %
 Three months ended March 31,2006
    
    
    2005
    
    
    Change(dollars in thousands)Consumer Electronics (1)
    
    $
    35,392
    
    
    $
    21,232
    
    
    
    66.7
    %Personal
Computers (1)
    
    
    13,306
    
    
    
    11,105
    
    
    
    19.8
    %Storage (1)
    
    
    10,401
    
    
    
    11,983
    
    
    
    -13.2
    %Total revenue
    
    $
    59,099
    
    
    $
    44,320
    
    
    
    33.3
    %
 
   COST OF REVENUE AND GROSS PROFIT
 Three months ended March 31,2006
    
    2005
    
    Change(dollars in thousands)Cost of revenue (1)
    
    $
    25,348
    
    
    $
    15,505
    
    
    $
    9,843Product gross profit (excluding licensing revenue)
    
    
    27,932
    
    
    
    25,303
    
    
    
    2,629Product gross profit margin
    
    
    52.4
    %
    
    
    62.0
    %Total gross profit
    
    $
    33,751
    
    
    $
    28,815
    
    
    $
    4,936Total gross profit margin
    
    
    57.1
    %
    
    
    65.0
    %
 
 (1) Includes stock compensation expense (benefit)
    
    $
    628
    
    
    $
    (1,196
    )
  18




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OPERATING EXPENSES
 Three months ended March 31,2006
    
    2005
    
    Change(dollars in thousands)Research and development (1)
    
    $
    15,566
    
    
    $
    8,122
    
    
    
    91.7
    %Percentage of total revenue
    
    
    26.3
    %
    
    
    18.3
    %Selling, general and administrative (2)
    
    $
    15,461
    
    
    $
    3,953
    
    
    
    291.1
    %Percentage of total revenue
    
    
    26.2
    %
    
    
    8.9
    %Amortization of intangible assets
    
    $
    274
    
    
    $
    274
    
    
    
    0.0
    %Interest income and other, net
    
    
    1,538
    
    
    
    498
    
    
    
    208.8
    %
 
 (1) Includes stock compensation expense (benefit)
    
    $
    2,812
    
    
    $
    (4,438
    )(2) Includes stock compensation expense (benefit)
    
    
    3,843
    
    
    
    (3,693
    )
 Research
and Development (R&D).
 Selling,
General and Administrative (SG&A)
 Amortization of Intangible Assets.
 Restructuring.
   19




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##### Table of Contents



2006
    
    
    2005Severance and
    
    
    Leased
    
    
    
    
    
    
    Severance and
    
    
    LeasedBenefits
    
    
    Facilities
    
    
    Total
    
    
    Benefits
    
    
    Facilities
    
    
    TotalBalance as of January 1
    
    $
    
    
    
    $
    25
    
    
    $
    25
    
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036Cash payments
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )
    
    
    
    
    
    
    (201
    )
    
    
    (201
    )Adjustment related to
lease negotiation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of March 31
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    32
    
    
    $
    803
    
    
    $
    835
 Interest Income and other, net.
 Loss on investment security.
 Provision for taxes.
   LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    Change(dollars in thousands)Total cash, cash equivalents and short term investments
    
    $
    167,490
    
    
    $
    100,407
    
    
    $
    67,083Cash provided by operating activities
    
    $
    10,988
    
    
    $
    5,650
    
    
    $
    5,338Cash provided by used in investing activities
    
    
    (24,456
    )
    
    
    (17,612
    )
    
    
    (6,844
    )Cash provided by financing activities
    
    
    6,684
    
    
    
    4,181
    
    
    
    2,503Net increase (decrease) in cash and cash equivalents
    
    $
    (6,784
    )
    
    $
    (7,781
    )
    
    $
    997
 Cash,
Cash Equivalents and Investments
  20




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##### Table of Contents



Operating Activities
  Investing and Financing Activities
  Debt and Lease Obligations
    Contractual obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsDebt obligations
    
    $
    174
    
    
    $
    174
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    10,408
    
    
    
    3,432
    
    
    
    4,995
    
    
    
    1,981
    
    
    
    Inventory purchase obligations
    
    
    17,852
    
    
    
    17,852
    
    
    
    
    
    
    
    
    
    
    
    Minimum royalty obligation
    
    
    175
    
    
    
    100
    
    
    
    75
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    28,609
    
    
    $
    21,558
    
    
    $
    5,070
    
    
    $
    1,981
    
    
    $
    
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  21




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##### Table of Contents



Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
    1.
    
    Perform an extensive reconciliation of our income tax accounts.2.
    
    Utilize outside consultants to assist management in the analysis of complex tax accounting
and disclosure matters.3.
    
    Assess our staffing in the accounting and finance areas to ensure we have adequate
technical tax expertise.
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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
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##### Table of Contents



Item 1A. Risk Factors
  We operate in rapidly evolving markets, which makes it difficult to evaluate our future
prospects.
 TM
 We have a history of losses and may not sustain profitability.
  Our annual and quarterly operating results may fluctuate significantly and are difficult to
predict.
  
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
 
 
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  Our future annual and quarterly operating results are highly dependent upon how well we manage
our business.
  
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 
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 
 
 
 
 
 
  The licensing component of our business strategy increases business risk and volatility.
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We face intense competition in our markets, which may lead to reduced revenue from sales of
our products and increased losses.
   Our success depends in part on demand for our new SteelVine storage products.
  Our success depends in part on the success of our new integrated HDMI DTV products.
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##### Table of Contents



Demand for our CE products is dependent on the adoption and widespread use of the HDMI
specification.
     Our success depends in part on strategic relationships.
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##### Table of Contents



We do not have long-term commitments from our customers and we allocate resources based on our
estimates of customer demand.
  Our lengthy sales cycle can result in a delay between incurring expenses and generating
revenue, which could harm our operating results.
  We depend on a few key customers and the loss of any of them could significantly reduce our
revenue.
  
 
 
  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.
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##### Table of Contents




 
 
 
   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.
  
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 
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  TM
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We have made acquisitions in the past and may make acquisitions in the future, if
advisable, and these acquisitions involve numerous risks.
  
 
 
 
 
 
  The cyclical nature of the semiconductor industry may create constrictions in our foundry,
test and assembly capacity.
  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.
  
 
 
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
  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.
    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.
   
 
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##### Table of Contents




 
 
 
 
 
 
 
 
  The success of our business depends upon our ability to adequately protect our intellectual
property.
  Our participation in the Digital Display Working Group (DDWG) 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.
  32




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##### Table of Contents




 
  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.
   
 
  Our success depends on managing our relationship with Intel.
  
 
 
 
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##### Table of Contents



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




 
  We have entered into, and may again be required to enter into, patent or other intellectual
property cross-licenses.
  We must attract and retain qualified personnel to be successful, and competition for qualified
personnel is increasing in our market.
      36




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##### Table of Contents



We have experienced a number of transitions with respect to our board of directors, executive
officers, and our independent registered public accounting firm in recent quarters, including the
following:
 
 
 
 
 
 
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 
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 37




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##### Table of Contents



Industry cycles may strain our management and resources.
  
 
 
 
 
  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.
   
 
 
 
 Changes in environmental rules and regulations could increase our costs and reduce our
revenue.
  38




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##### Table of Contents



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.
  
 
 
 
 
 
 
 
  The price of our stock fluctuates substantially and may continue to do so.
  
 
 
 
 
 
  Continued terrorist attacks or war could lead to further economic instability and adversely
affect our operations, results of operations and stock price.
  39




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##### Table of Contents



We indemnify certain of our licensing customers against infringement.
  If we are unable to successfully address the material weakness in our internal controls as
described in Item 9A of our Annual Report on Form 10-K , our ability to report our financial results
on a timely and accurate basis may be adversely affected.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  40




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##### Table of Contents



Item 6. Exhibits
  10.01
    
    Silicon Image, Inc. Bonus Plan for Fiscal Year 2006 (incorporated by reference to
Exhibit 10.01 to our Current Report on Form 8-K, filed February 17, 2006)10.02
    
    Silicon Image, Inc. Sales Incentive Plan for Vice President of Worldwide Sales for
Fiscal Year 2006 (incorporated by reference to Exhibit 10.02 to our Current Report
on Form 8-K filed February 7, 2006)10.03*
    
    Consulting Agreement between
Dr. David D. Lee and the Registrant dated March 15, 2006 (incorporated by reference to Exhibit 10.03 to our Current
Report on Form 8-K filed March 16, 2006)31.01
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.02**
    
    Certification 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 being furnished, rather than filed, and shall not be deemed incorporated by
reference into any filing of the registrant, in accordance with Item 601 of Regulation S-K. 41




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##### Table of Contents



Signatures
  Dated: May 9, 2006
    
    Silicon Image, Inc./s/ Robert R FreemanRobert R FreemanChief Financial Officer (Principal Financial Officer)
 42




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##### Table of Contents



Exhibit Index
 10.01
    
    Silicon Image, Inc. Bonus Plan for Fiscal Year 2006 (incorporated by reference to
Exhibit 10.01 to our Current Report on Form 8-K, filed February 17, 2006)10.02
    
    Silicon Image, Inc. Sales Incentive Plan for Vice President of Worldwide Sales for
Fiscal Year 2006 (incorporated by reference to Exhibit 10.02 to our Current Report
on Form 8-K filed February 7, 2006)10.03*
    
    Consulting Agreement between
Dr. David D. Lee and the Registrant dated March 15, 2006
(incorporated by reference to Exhibit 10.03 to our Current Report on
Form 8-K filed March 16, 2006)31.01
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.02**
    
    Certification 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 being furnished, rather than filed, and shall not be deemed incorporated by
reference into any filing of the Registrant, in accordance with Item 601 of Regulation S-K.