##### 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 June 30, 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
    
    77-0396307(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1060 East Arques Avenue
Sunnyvale, California 94085
 (408) 616-4000
 þ o
  o þ o
 o þ




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##### 



Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three and Six Months Ended
June 30, 2006
 Table of Contents
 Part I Financial Information (Unaudited)Item 1 Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4 Controls and Procedures
    
    
    23Part II Other InformationItem 1 Legal Proceedings
    
    
    24Item 1A Risk Factors
    
    
    25Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3 Defaults Upon Senior Securities
    
    
    41Item 4 Submission of Matters to a Vote of Security Holders
    
    
    41Item 5 Other Information
    
    
    42Item 6 Exhibits
    
    
    43Signatures
    
    
    44EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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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)
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    44,537
    
    
    $
    77,877Short-term investments
    
    
    144,493
    
    
    
    73,685Accounts receivable
    
    
    38,219
    
    
    
    30,141Inventories
    
    
    18,944
    
    
    
    17,072Prepaid and other current assets
    
    
    3,684
    
    
    
    3,037Total current assets
    
    
    249,877
    
    
    
    201,812Property and equipment, net
    
    
    11,982
    
    
    
    9,613Goodwill
    
    
    13,021
    
    
    
    13,021Intangible assets, net
    
    
    234
    
    
    
    585Other assets
    
    
    1,422
    
    
    
    7,990Total assets
    
    $
    276,536
    
    
    $
    233,021Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    13,477
    
    
    $
    13,372Accrued liabilities
    
    
    17,994
    
    
    
    13,952Deferred license revenue
    
    
    8,102
    
    
    
    8,283Debt and capital lease obligations
    
    
    117
    
    
    
    230Deferred margin on sales to distributors
    
    
    16,894
    
    
    
    13,771Deferred patent infringement proceeds
    
    
    6,966
    
    
    
    Current liabilities
    
    
    63,550
    
    
    
    49,608Other liabilities
    
    
    1,057
    
    
    
    6,867Total liabilities
    
    
    64,607
    
    
    
    56,475Commitments and contingencies (See Note 7)Stockholders Equity:Common stock
    
    
    83
    
    
    
    80Additional paid-in capital
    
    
    327,922
    
    
    
    307,149Unearned stock compensation
    
    
    
    
    
    
    (6,742
    )Accumulated deficit
    
    
    (115,279
    )
    
    
    (123,429
    )Accumulated other comprehensive loss
    
    
    (797
    )
    
    
    (512
    )Total stockholders equity
    
    
    211,929
    
    
    
    176,546Total liabilities and stockholders equity
    
    $
    276,536
    
    
    $
    233,021
  3




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##### Table of Contents



Silicon Image, Inc.
 
 Condensed Consolidated Statements of Income
 (in thousands, except per share amounts)
 (unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Product
    
    $
    61,667
    
    
    $
    47,323
    
    
    $
    114,947
    
    
    $
    88,131Development, licensing and royalties
    
    
    8,912
    
    
    
    3,398
    
    
    
    14,731
    
    
    
    6,910Total revenue
    
    
    70,579
    
    
    
    50,721
    
    
    
    129,678
    
    
    
    95,041Cost of revenue and operating expenses:Cost of revenue (1)
    
    
    29,785
    
    
    
    20,987
    
    
    
    55,133
    
    
    
    36,492Research and development (2)
    
    
    15,179
    
    
    
    11,903
    
    
    
    30,745
    
    
    
    20,025Selling, general and administrative (3)
    
    
    16,563
    
    
    
    8,873
    
    
    
    32,025
    
    
    
    12,826Amortization of intangible assets
    
    
    78
    
    
    
    274
    
    
    
    351
    
    
    
    548Total cost of revenue and operating expenses
    
    
    61,605
    
    
    
    42,037
    
    
    
    118,254
    
    
    
    69,891Income from operations
    
    
    8,974
    
    
    
    8,684
    
    
    
    11,424
    
    
    
    25,150Interest income and other, net
    
    
    2,020
    
    
    
    641
    
    
    
    3,558
    
    
    
    1,259Gain from investment security
    
    
    
    
    
    
    1,382
    
    
    
    
    
    
    
    1,263Income before provision for income taxes
    
    
    10,994
    
    
    
    10,707
    
    
    
    14,982
    
    
    
    27,672Provision for income taxes
    
    
    5,196
    
    
    
    247
    
    
    
    6,832
    
    
    
    578Net income
    
    $
    5,798
    
    
    $
    10,460
    
    
    $
    8,150
    
    
    $
    27,094Net income per share  basic
    
    $
    0.07
    
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.34Net income per share  diluted
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.32Weighted average shares  basic
    
    
    81,562
    
    
    
    78,981
    
    
    
    81,019
    
    
    
    78,723Weighted average shares  diluted
    
    
    85,628
    
    
    
    83,928
    
    
    
    85,246
    
    
    
    83,469(1) Includes stock compensation expense (benefit)
    
    $
    554
    
    
    $
    41
    
    
    $
    1,182
    
    
    $
    (1,156
    )(2) Includes stock compensation expense (benefit)
    
    
    2,800
    
    
    
    747
    
    
    
    5,612
    
    
    
    (3,691
    )(3) Includes stock compensation expense (benefit)
    
    
    3,197
    
    
    
    514
    
    
    
    7,040
    
    
    
    (3,178
    )
  4




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##### Table of Contents



Silicon Image, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Six Months Ended June 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    8,150
    
    
    $
    27,094Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    3,217
    
    
    
    3,153Amortization of intangible assets
    
    
    351
    
    
    
    548Provision for doubtful accounts
    
    
    37
    
    
    
    61Stock compensation expense (benefit)
    
    
    13,834
    
    
    
    (8,025
    )Tax benefit from employee stock transactions
    
    
    (7,289
    )
    
    
    Amortization of investment premium
    
    
    (7
    )
    
    
    Gain on investment security
    
    
    
    
    
    
    (1,263
    )Loss on disposal of property and equipment
    
    
    10
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (8,115
    )
    
    
    (5,871
    )Inventories
    
    
    (1,872
    )
    
    
    1,072Prepaid expenses and other assets
    
    
    488
    
    
    
    (463
    )Accounts payable
    
    
    79
    
    
    
    5,853Accrued liabilities and deferred license revenue
    
    
    8,262
    
    
    
    (325
    )Deferred margin on sales to distributors
    
    
    3,124
    
    
    
    23Cash provided by operating activities
    
    
    20,269
    
    
    
    21,857Cash flows from investing activities:Proceeds from sales and maturities of short-term investments
    
    
    28,771
    
    
    
    32,930Purchases of short-term investments
    
    
    (99,858
    )
    
    
    (63,454
    )Purchases of property and equipment
    
    
    (3,059
    )
    
    
    (2,243
    )Release of
restriction on cash received in conjunction with resolution of
litigation (see Note 7)
    
    
    6,966
    
    
    
    Cash used in investing activities
    
    
    (67,180
    )
    
    
    (32,767
    )Cash flows from financing activities:Proceeds from issuances of common stock, net
    
    
    6,395
    
    
    
    5,681Excess tax benefits from employee stock transactions
    
    
    7,289
    
    
    
    Repayments of debt and capital lease obligations
    
    
    (113
    )
    
    
    (71
    )Cash provided by financing activities
    
    
    13,571
    
    
    
    5,610Net decrease in cash and cash equivalents
    
    
    (33,340
    )
    
    
    (5,300
    )Cash and cash equivalents  beginning of period
    
    
    77,877
    
    
    
    23,280Cash and cash equivalents  end of period
    
    $
    44,537
    
    
    $
    17,980Supplemental cash flow information:Cash payment for interest
    
    $
    7
    
    
    $
    Cash payment for income taxes
    
    $
    450
    
    
    $
    296Unrealized
net gain on investment security
    
    $
    10
    
    
    $
    Property and equipment purchased but not paid for
    
    $
    2,537
    
    
    $
    
  5




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##### Table of Contents



Silicon Image, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 June 30, 2006
 (unaudited)
 1. Basis of Presentation
  2. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 3. Stock-Based Compensation
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Adoption of SFAS No. 123(R)
 Accounting for Stock Issued to Employees Accounting for Stock-based Compensation.
 Share-Based Payment
  Determining Fair Value
 Valuation and amortization method
 Expected Term
 Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
 7




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Three Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2005
    
    June 30, 2006
    
    June 30, 2005Employee stock option plans:Expected life in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    85
    %
    
    
    90
    %
    
    
    89
    %
    
    
    90
    %Risk-free interest rate
    
    
    5.0
    %
    
    
    3.7
    %
    
    
    4.7
    %
    
    
    3.7
    %Expected dividends
    
    none
    
    none
    
    none
    
    noneWeighted average fair value
    
    $
    7.05
    
    
    $
    7.51
    
    
    $
    7.25
    
    
    $
    9.36Employee Stock Purchase Plan:Expected life in years
    
    
    1.3
    
    
    
    1.9
    
    
    
    1.3
    
    
    
    1.7Expected volatility
    
    
    57
    %
    
    
    77
    %
    
    
    57
    %
    
    
    77
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    3.80
    %
    
    
    4.7
    %
    
    
    3.8
    %Expected dividends
    
    none
    
    none
    
    none
    
    noneWeighted average fair value
    
    $
    4.75
    
    
    $
    5.26
    
    
    $
    4.75
    
    
    $
    4.47
  Stock Compensation Expense
  Three Months
    
    
    Six MonthsEnded
June 30, 2006
    
    
    Ended
June 30, 2006Cost of sales
    
    $
    554
    
    
    $
    1,182Research and development
    
    
    2,800
    
    
    
    5,612Selling, general and administrative
    
    
    3,197
    
    
    
    7,040Income tax effect
    
    
    (2,666
    )
    
    
    (5,630
    )$
    3,885
    
    
    $
    8,204
     8




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##### Table of Contents



Stock Options and Awards Activity
  Weighted AverageRemainingWeighted Average
    
    
    Contractual Term in
    
    
    Aggregate IntrinsicNumber of Shares
    
    
    Exercise Price
    
    
    Years
    
    
    ValueOutstanding at December 31, 2005
    
    
    20,684
    
    
    $
    7.98Granted
    
    
    1,833
    
    
    
    10.14Exercised
    
    
    (969
    )
    
    
    4.55Forfeitures and cancellations
    
    
    (502
    )
    
    
    10.90Outstanding at June 30, 2006
    
    
    21,046
    
    
    $
    8.25
    
    
    
    6.74
    
    
    $
    71,927Vested and expected to vest at June 30, 2006
    
    
    20,208
    
    
    $
    8.16
    
    
    
    0.53
    
    
    $
    70,755Exercisable at June 30, 2006
    
    
    11,954
    
    
    $
    6.95
    
    
    
    5.54
    
    
    $
    55,087
   Pro-forma Disclosures
  Three Months
    
    
    Six MonthsEnded
June 30, 2005
    
    
    Ended
June 30, 2005Net income, as reported
    
    $
    10,460
    
    
    $
    27,094Stock-based
employee compensation expense (benefit) included in the determination of net
income as reported
    
    
    560
    
    
    
    (9,705
    )Stock-based
employee compensation benefit determined under fair
value based method for all awards, net of income taxes
    
    
    (6,175
    )
    
    
    (12,765
    )Pro forma
net income
    
    $
    4,845
    
    
    $
    4,624Earnings per share:Basic  as reported
    
    $
    0.13
    
    
    $
    0.34Basic  pro forma
    
    $
    0.06
    
    
    $
    0.06Diluted  as reported
    
    $
    0.12
    
    
    $
    0.32Diluted  pro forma
    
    $
    0.06
    
    
    $
    0.06
  9




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4. Comprehensive income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    5,798
    
    
    $
    10,460
    
    
    $
    8,150
    
    
    $
    27,094Change in unrealized value on investments
    
    
    145
    
    
    
    (1,317
    )
    
    
    10
    
    
    
    (3,124
    )Total comprehensive income
    
    $
    5,943
    
    
    $
    9,143
    
    
    $
    8,160
    
    
    $
    23,970
 5. Net Income Per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    5,798
    
    
    $
    10,460
    
    
    $
    8,150
    
    
    $
    27,094Weighted average shares
    
    
    81,562
    
    
    
    79,214
    
    
    
    81,019
    
    
    
    78,956Unvested common shares subject to repurchase
    
    
    
    
    
    
    (233
    )
    
    
    
    
    
    
    (233
    )Weighted average shares  basic
    
    
    81,562
    
    
    
    78,981
    
    
    
    81,019
    
    
    
    78,723Weighted average shares  diluted
    
    
    85,628
    
    
    
    83,928
    
    
    
    85,246
    
    
    
    83,469Net income per share  basic
    
    $
    0.07
    
    
    $
    0.13
    
    
    $
    0.10
    
    
    $
    0.34Net income per share  diluted
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.32
  Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Weighted-average common shares for basic net income per share
    
    
    81,562
    
    
    
    78,981
    
    
    
    81,019
    
    
    
    78,723Weighted-average dilutive stock options outstanding under the treasury
stock method
    
    
    4,066
    
    
    
    4,714
    
    
    
    4,227
    
    
    
    4,491Unvested common shares subject to repurchase
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    255Total
    
    
    85,628
    
    
    
    83,928
    
    
    
    85,246
    
    
    
    83,469
 10




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6. Balance Sheet Components
 June 30,
    
    

December 31,2006
    
    
    2005(in thousands)Inventories:Raw materials
    
    $
    2,547
    
    
    $
    3,123Work in process
    
    
    4,202
    
    
    
    4,511Finished goods
    
    
    12,195
    
    
    
    9,438Total inventories
    
    $
    18,944
    
    
    $
    17,072Property and equipmentComputers and software
    
    $
    18,283
    
    
    $
    16,669Equipment
    
    
    20,252
    
    
    
    16,601Furniture and fixtures
    
    
    2,478
    
    
    
    2,25941,013
    
    
    
    35,529Less: accumulated depreciation
    
    
    (29,031
    )
    
    
    (25,916
    )Total property and equipment, net
    
    $
    11,982
    
    
    $
    9,613Accrued payroll and related expenses
    
    $
    5,673
    
    
    $
    4,738Restructuring accrual
    
    
    
    
    
    
    25Accrued legal fees
    
    
    659
    
    
    
    490Warranty accrual
    
    
    371
    
    
    
    382Bonus accrual
    
    
    3,747
    
    
    
    2,615Other accrued liabilities
    
    
    7,544
    
    
    
    5,702Total accrued liabilities
    
    $
    17,994
    
    
    $
    13,952
  2006Balance at January 1
    
    $
    382Provision for warranties issued during the period
    
    
    14Cash and other settlements made during the period
    
    
    (25
    )Balance at June 30
    
    $
    371
 7. Commitments and Contingencies
  11




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8. Customer and Geographic Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Taiwan
    
    $
    14,551
    
    
    $
    13,087
    
    
    $
    29,292
    
    
    $
    24,455Japan
    
    
    24,665
    
    
    
    8,510
    
    
    
    39,433
    
    
    
    16,051United States
    
    
    13,263
    
    
    
    15,197
    
    
    
    26,079
    
    
    
    27,355Korea
    
    
    5,946
    
    
    
    3,521
    
    
    
    11,366
    
    
    
    8,215Hong Kong
    
    
    2,429
    
    
    
    1,901
    
    
    
    4,474
    
    
    
    3,119Other
    
    
    9,725
    
    
    
    8,505
    
    
    
    19,034
    
    
    
    15,846Total revenue
    
    $
    70,579
    
    
    $
    50,721
    
    
    $
    129,678
    
    
    $
    95,041
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Consumer Electronics
    
    $
    48,217
    
    
    $
    26,802
    
    
    $
    83,609
    
    
    $
    48,034Personal Computer
    
    
    10,201
    
    
    
    12,864
    
    
    
    23,507
    
    
    
    23,970Storage
    
    
    12,161
    
    
    
    11,055
    
    
    
    22,562
    
    
    
    23,037Total revenue
    
    $
    70,579
    
    
    $
    50,721
    
    
    $
    129,678
    
    
    $
    95,041
     9.
Provision for income taxes
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10. Gain on investment security
  14




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11. Related Party Transaction
       12. Subsequent Events
  
 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
 15




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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
     16




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##### Table of Contents



Commitments, Contingencies and Concentrations
   Critical Accounting Policies
  17




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18




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Results of Operations
 REVENUE
 Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(dollars in thousands)
    
    
    (dollars in thousands)Product revenue
    
    $
    61,667
    
    
    $
    47,323
    
    
    
    30.3
    %
    
    $
    114,947
    
    
    $
    88,131
    
    
    
    30.4
    %Development, licensing and
royalty revenue
    
    
    8,912
    
    
    
    3,398
    
    
    
    162.3
    %
    
    
    14,731
    
    
    
    6,910
    
    
    
    113.2
    %Total revenue
    
    $
    70,579
    
    
    $
    50,721
    
    
    
    39.2
    %
    
    $
    129,678
    
    
    $
    95,041
    
    
    
    36.4
    %
 Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(dollars in thousands)
    
    
    (dollars in thousands)Consumer Electronics (1)
    
    $
    48,217
    
    
    $
    26,802
    
    
    
    79.9
    %
    
    $
    83,609
    
    
    $
    48,034
    
    
    
    74.1
    %Personal Computers (1)
    
    $
    10,201
    
    
    
    12,864
    
    
    
    -20.7
    %
    
    $
    23,507
    
    
    
    23,970
    
    
    
    -1.9
    %Storage (1)
    
    $
    12,161
    
    
    
    11,055
    
    
    
    10.0
    %
    
    $
    22,562
    
    
    
    23,037
    
    
    
    -2.1
    %Total revenue
    
    $
    70,579
    
    
    $
    50,721
    
    
    
    39.2
    %
    
    $
    129,678
    
    
    $
    95,041
    
    
    
    36.4
    %
 
 1)
    
    Includes development, licensing and royalty revenue   COST OF REVENUE AND GROSS PROFIT
 Three months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(dollars in thousands)
    
    (dollars in thousands)Cost of revenue (1)
    
    $
    29,785
    
    
    $
    20,987
    
    
    $
    8,798
    
    
    $
    55,133
    
    
    $
    36,492
    
    
    $
    18,641Total gross profit
    
    $
    40,794
    
    
    $
    29,734
    
    
    $
    11,060
    
    
    $
    74,545
    
    
    $
    58,549
    
    
    $
    15,996Gross profit margin
    
    
    57.8
    %
    
    
    58.6
    %
    
    
    
    
    
    
    57.5
    %
    
    
    61.6
    %(1) Includes stock
compensation
expense (benefit)
    
    $
    554
    
    
    $
    41
    
    
    
    
    
    
    $
    1,182
    
    
    $
    (1,156
    )
 19




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##### Table of Contents



OPERATING EXPENSES
 Three months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(dollars in thousands)
    
    (dollars in thousands)Research and development (1)
    
    $
    15,179
    
    
    $
    11,903
    
    
    
    27.5
    %
    
    $
    30,745
    
    
    $
    20,025
    
    
    
    53.5
    %Percentage of total revenue
    
    
    21.5
    %
    
    
    23.5
    %
    
    
    
    
    
    
    23.7
    %
    
    
    21.1
    %Selling, general and administrative (2)
    
    $
    16,563
    
    
    $
    8,873
    
    
    
    86.7
    %
    
    $
    32,025
    
    
    $
    12,826
    
    
    
    149.7
    %Percentage of total revenue
    
    
    23.5
    %
    
    
    17.5
    %
    
    
    
    
    
    
    24.7
    %
    
    
    13.5
    %Amortization of intangible assets
    
    $
    78
    
    
    $
    274
    
    
    
    -71.5
    %
    
    $
    351
    
    
    $
    548
    
    
    
    -35.9
    %Interest income and other, net
    
    
    2,020
    
    
    
    641
    
    
    
    215.1
    %
    
    
    3,558
    
    
    
    1,259
    
    
    
    182.6
    %Gain from investment security
    
    
    
    
    
    
    1,382
    
    
    
    -100.0
    %
    
    
    
    
    
    
    1,263
    
    
    
    -100.0
    %(1) Includes stock compensation expense (benefit)
    
    $
    2,800
    
    
    $
    747
    
    
    
    
    
    
    $
    5,612
    
    
    $
    (3,691
    )(2) Includes stock compensation expense (benefit)
    
    
    3,197
    
    
    
    514
    
    
    
    
    
    
    
    7,040
    
    
    
    (3,178
    )
 Research and Development (R&D).
 Selling, General and Administrative (SG&A)
 Amortization
of Intangible Assets.
 Restructuring.
 20




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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
    )
    
    
    
    
    
    
    (381
    )
    
    
    (381
    )Adjustment related to lease negotiation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of June 30
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    32
    
    
    $
    623
    
    
    $
    655
 Interest Income and other, net.
 Gain from investment security.
 Provision
for income taxes.
   21




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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    Change(dollars in thousands)Total cash, cash equivalents and short term investments
    
    $
    189,030
    
    
    $
    116,838
    
    
    $
    72,192Cash provided by operating activities
    
    $
    20,269
    
    
    $
    21,857
    
    
    $
    (1,588
    )Cash provided by (used in) investing activities
    
    
    (67,180
    )
    
    
    (32,767
    )
    
    
    (34,413
    )Cash provided by financing activities
    
    
    13,571
    
    
    
    5,610
    
    
    
    7,961Net increase (decrease) in cash and cash
equivalents
    
    $
    (33,340
    )
    
    $
    (5,300
    )
    
    $
    (28,040
    )
 Cash, Cash Equivalents and Investments
  Operating Activities
  Investing and Financing Activities
  Debt and other Obligations
  Contractual obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsDebt obligations
    
    $
    117
    
    
    $
    117
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    20,432
    
    
    
    5,505
    
    
    
    9,269
    
    
    
    5,658
    
    
    
    Inventory purchase obligations
    
    $
    35,985
    
    
    $
    35,098
    
    
    
    887
    
    
    
    
    
    
    
    Minimum royalty obligation
    
    
    150
    
    
    
    100
    
    
    
    50
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    56,684
    
    
    $
    40,820
    
    
    $
    10,206
    
    
    $
    5,658
    
    
    $
    
  22




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
   23




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
     24




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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.
  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.
  
 
 25




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
 
 
 
 
 
 
 
  Our future annual and quarterly operating results are highly dependent upon how well we manage
our business.
  
 
 
 
 
 
 
 
 26




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##### Table of Contents




 
  The licensing component of our business strategy increases business risk and volatility.
  We face intense competition in our markets, which may lead to reduced revenue from sales of
our products and increased losses.
   27




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##### Table of Contents



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.
  Demand for our CE products is dependent on the adoption and widespread use of the HDMI
specification.
         28




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##### Table of Contents



Our success depends in part on strategic relationships.
   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.
  
 
 
 29




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##### Table of Contents



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.
  
 
 
 
   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.
  
 
 
 
 
 
 
 
  TM
 30




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##### Table of Contents



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.
  31




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##### Table of Contents



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.
  
 
 
 
  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.
  32




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##### Table of Contents




 
 
 
 
 
 
 
 
 
 
  The success of our business depends upon our ability to adequately protect our intellectual
property.
  33




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##### Table of Contents



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.
  
 
  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.
  
 
 
 
 34




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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.
  35




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##### Table of Contents



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.
     36




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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.
   37




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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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 38




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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.
  39




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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.
  40




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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
  Shares
    
    Shares
    
    Shares
    
    Shares
    
    BrokerName
    
    For
    
    Against
    
    Abstaining
    
    Withheld
    
    Non-VotesPeter Hanelt
    
    
    71,767,559
    
    
    
    
    
    
    
    
    
    
    
    1,123,431
    
    
    
    William George
    
    
    71,773,069
    
    
    
    
    
    
    
    
    
    
    
    1,117,921
 41




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##### Table of Contents



Shares
    
    Shares
    
    Shares
    
    BrokerShares For
    
    Against
    
    Abstaining
    
    Withheld
    
    Non-Votes72,765,307
    
    
    74,249
    
    
    
    51,434
    
    
    
    
    
    
    
    
 
 Item 5. Other Information
  42




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##### Table of Contents



Item 6. Exhibits
  31.01
    
    Certification of Principal
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification of Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.02**
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    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. 43




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##### Table of Contents



Signatures
  Dated: August 7, 2006
    Silicon Image, Inc./s/ Robert R FreemanRobert R FreemanChief Financial Officer (Principal Financial Officer) 44




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##### Table of Contents



Exhibit Index
 31.01
    
    Certification of Principal
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification of Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.02**
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    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.