UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 R
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2008OR£
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from           to           .
 
 Commission
file number: 000-26887
 
 Silicon
Image, Inc.
 (Exact name of
registrant as specified in its charter)
 
 Delaware
              77-0396307(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 1060
East Arques Avenue
 Sunnyvale,
California 94085
 (Address
of principal executive offices and zip code)
 
 (408)
616-4000
 (Registrant’s
telephone number, including area code)
 
 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  RNo £
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated Filer R
              Accelerated
      Filer £
              Non-Accelerated
      Filer £
              Smaller
      Reporting Company £(Do
      not check if a smaller reporting
company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
 
 As of
June 30, 2008, there were 73,609,604 shares outstanding of the registrant’s
Common Stock, $0.001 par value per share.
 
 
 
 
 
 
 
  
  Silicon
Image, Inc.
 Quarterly
Report on Form 10-Q
 Three
and Six Months Ended
 June
30, 2008
 
 Table of Contents
 
 Part I Financial Information (Unaudited)
              3Item 1 Financial Statements
              3Condensed Consolidated Balance Sheets as of June 30, 2008
      and December 31, 2007
              3Condensed Consolidated Statements of Operations for the three
      and six months ended June 30, 2008 and 2007
              4Condensed Consolidated Statements of Cash Flows for
      the six months ended June 30, 2008 and 2007
              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
              25Item 4 Controls and Procedures
              25Part II Other Information
              26Item 1 Legal Proceedings
              26Item 1A Risk Factors
              26Item 2 Unregistered Sales of Equity Securities and Use
      of Proceeds
              43Item 3 Defaults Upon Senior
    Securities
              43Item 4 Submission of Matters to a Vote of Security
      Holders
              44Item 5 Other Information
              44Item 6 Exhibits
              45Signatures
              46
 EXHIBIT 10.05
 EXHIBIT 31.01
 EXHIBIT 31.02
 EXHIBIT 32.01
 EXHIBIT 32.02
  2
 Table of Contents
  Part I. Financial Information
 
 Item 1. Financial Statements (Unaudited)
 
 Silicon
Image, Inc.
 Condensed Consolidated Balance Sheets
 (in
thousands)
 (unaudited)
 
 
 June
      30, 2008
              
              
              December
      31, 2007AssetsCurrent
      Assets:Cash
      and cash equivalents
              
              $
              106,545
              
              
              $
              137,822Short-term
      investments
              
              
              78,911
              
              
              
              111,889Accounts
      receivable, net of allowances for doubtful accounts
                $1,976
      at June 30, 2008 and $1,565 at December 31, 2007
              
              
              28,636
              
              
              
              21,254Inventories
              
              
              17,686
              
              
              
              20,198Prepaid
      expenses and other current assets
              
              
              12,201
              
              
              
              13,732Deferred
      income taxes, current
              
              
              4,486
              
              
              
              3,984Total
      current assets
              
              
              248,465
              
              
              
              308,879Property
      and equipment, net
              
              
              23,790
              
              
              
              24,191Goodwill
              
              
              19,210
              
              
              
              19,210Intangible
      assets, net
              
              
              36,095
              
              
              
              39,269Deferred
      income taxes, non-current
              
              
              22,199
              
              
              
              19,978Other
      assets
              
              
              1,444
              
              
              
              1,421Total
      assets
              
              $
              351,203
              
              
              $
              412,948Liabilities
      and Stockholders’ EquityCurrent
      Liabilities:Accounts
      payable
              
              $
              21,707
              
              
              $
              17,892Accrued
      and other liabilities
              
              
              28,574
              
              
              
              36,996Deferred
      license revenue
              
              
              4,295
              
              
              
              3,860Deferred
      margin on sales to distributors
              
              
              27,986
              
              
              
              26,443Total
      current liabilities
              
              
              82,562
              
              
              
              85,191Other
      long-term liabilities
              
              
              11,029
              
              
              
              13,910Total
      liabilities
              
              
              93,591
              
              
              
              99,101Commitments
      and contingencies (See Note 9)Stockholders’
      Equity:Common
      stock
              
              
              91
              
              
              
              90Treasury
      stock
              
              
              (106,276
              )
              
              
              (38,096
              )Additional
      paid-in capital
              
              
              431,659
              
              
              
              418,796Accumulated
      deficit
              
              
              (68,117
              )
              
              
              (67,093
              )Accumulated
      other comprehensive income
              
              
              255
              
              
              
              150Total
      stockholders’ equity
              
              
              257,612
              
              
              
              313,847Total
      liabilities and stockholders’ equity
              
              $
              351,203
              
              
              $
              412,948
 
 See
accompanying Notes to Condensed Consolidated Financial Statements.
 `
  3
 Table of Contents
  Silicon
Image, Inc.
 Condensed Consolidated Statements of Operations
 (in
thousands, except per share amounts)
 (unaudited)
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue:Product
              
              $
              61,836
              
              
              $
              66,532
              
              
              $
              119,023
              
              
              $
              122,871Licensing
              
              
              8,247
              
              
              
              13,239
              
              
              
              18,173
              
              
              
              26,019Total
      revenue
              
              
              70,083
              
              
              
              79,771
              
              
              
              137,196
              
              
              
              148,890Cost
      of revenue and operating expenses:Cost
      of revenue (1)
              
              
              29,107
              
              
              
              36,938
              
              
              
              57,244
              
              
              
              67,696Research
      and development (2)
              
              
              22,298
              
              
              
              19,025
              
              
              
              43,840
              
              
              
              36,220Selling,
      general and administrative (3)
              
              
              19,067
              
              
              
              17,151
              
              
              
              37,385
              
              
              
              34,295Amortization
      of intangible assets
              
              
              1,587
              
              
              
              537
              
              
              
              3,174
              
              
              
              1,152Total
      cost of revenue and operating expenses
              
              
              72,059
              
              
              
              73,651
              
              
              
              141,643
              
              
              
              139,363Income
      (loss) from operations
              
              
              (1,976
              )
              
              
              6,120
              
              
              
              (4,447
              )
              
              
              9,527Interest
      income and other, net
              
              
              1,380
              
              
              
              3,290
              
              
              
              3,296
              
              
              
              6,316Income
      (loss) before provision (benefit) for income taxes
              
              
              (596
              )
              
              
              9,410
              
              
              
              (1,151
              )
              
              
              15,843Provision
      (benefit) for income taxes
              
              
              (134
              )
              
              
              5,038
              
              
              
              (127
              )
              
              
              8,555Net
      income (loss)
              
              $
              (462
              )
              
              $
              4,372
              
              
              $
              (1,024
              )
              
              $
              7,288Net
      income (loss) per share – basic and diluted
              
              $
              (0.01
              )
              
              $
              0.05
              
              
              $
              (0.01
              )
              
              $
              0.08Weighted
      average shares – basic
              
              
              73,399
              
              
              
              86,737
              
              
              
              77,257
              
              
              
              86,781Weighted
      average shares – diluted
              
              
              73,399
              
              
              
              88,817
              
              
              
              77,257
              
              
              
              89,156_________________(1)
      Includes stock-based compensation expense
              
              $
              431
              
              
              $
              443
              
              
              $
              781
              
              
              $
              789(2)
      Includes stock-based compensation expense
              
              
              2,213
              
              
              
              2,056
              
              
              
              3,447
              
              
              
              4,364(3)
      Includes stock-based compensation expense
              
              
              3,614
              
              
              
              2,687
              
              
              
              6,053
              
              
              
              4,065
 
 
 
 See
accompanying Notes to Condensed Consolidated Financial
Statements.
  4
 Table of Contents
  Silicon Image,
Inc.
 Condensed Consolidated Statements of Cash Flows
 (in
thousands)
 (unaudited)
 
 Six
      months ended June 30,2008
              
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (1,024
              )
              
              $
              7,288Adjustments
      to reconcile net income (loss) to cash provided by operating
      activities:Depreciation
              
              
              5,257
              
              
              
              5,027Amortization
      of intangible assets
              
              
              3,174
              
              
              
              1,152Provision
      for doubtful accounts
              
              
              534
              
              
              
              1,544Stock-based
      compensation expense
              
              
              10,281
              
              
              
              9,218Income
      tax benefit (deficiency) from employee based compensation
      plans
              
              
              (501
              )
              
              
              84Excess
      tax benefits from employee stock transactions
              
              
              (304
              )
              
              
              (1,345
              )(Accretion)/Amortization
      of investment (discount)/premium
              
              
              378
              
              
              
              (164
              )Realized
      gain on investments
              
              
              (52
              )
              
              
              (17
              )Loss
      on disposal of property and equipment
              
              
              402
              
              
              
              695Changes
      in assets and liabilities:Accounts
      receivable
              
              
              (7,781
              )
              
              
              (3,639
              )Inventories
              
              
              2,512
              
              
              
              5,697Prepaid
      expenses and other assets
              
              
              1,508
              
              
              
              (9,673
              )Deferred
      income taxes
              
              
              (2,723
              )
              
              
              637Accounts
      payable
              
              
              (1,745
              )
              
              
              5,980Accrued
      liabilities and other liabilities
              
              
              (361
              )
              
              
              (17,467
              )Deferred
      revenue
              
              
              435
              
              
              
              (2,312
              )Deferred
      margin on sales to distributors
              
              
              1,543
              
              
              
              1,375Cash
      provided by operating activities
              
              
              11,533
              
              
              
              4,080Cash
      flows from investing activities:Proceeds
      from sales and maturities of short-term investments
              
              
              144,681
              
              
              
              64,346Purchases
      of short-term investments
              
              
              (111,937
              )
              
              
              (18,657
              )Business
      acquisition, net of cash acquired
              
              
              -
              
              
              
              (13,751
              )Purchases
      of property and equipment
              
              
              (4,622
              )
              
              
              (7,609
              )Purchase
      of intellectual property
              
              
              -
              
              
              
              (10,000
              )Cash
      provided by investing activities
              
              
              28,122
              
              
              
              14,329Cash
      flows from financing activities:Proceeds
      from issuances of common stock, net
              
              
              3,084
              
              
              
              9,679Excess
      tax benefits from employee stock transactions
              
              
              304
              
              
              
              1,345Payment
      for vendor financed software and intangibles purchased
              
              
              (6,153
              )
              
              
              (528
              )Payments
      to acquire treasury stock
              
              
              (68,180
              )
              
              
              (31,140
              )Cash
      used in financing activities
              
              
              (70,945
              )
              
              
              (20,644
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              13
              
              
              
              (125
              )Net
      decrease in cash and cash equivalents
              
              
              (31,277
              )
              
              
              (2,360
              )Cash
      and cash equivalents — beginning of period
              
              
              137,822
              
              
              
              81,921Cash
      and cash equivalents — end of period
              
              $
              106,545
              
              
              $
              79,561Supplemental
      cash flow information:Cash
      payment for interest
              
              $
              19
              
              
              $
              33Cash
      payment for income taxes
              
              
              1,215
              
              
              
              25,576Unrealized
      net gain (loss) on investment securities
              
              
              (30
              )
              
              
              135Property
      and equipment purchased but not paid for
              
              
              636
              
              
              
              2,674
 
 See
accompanying Notes to Condensed Consolidated Financial
Statements.
  5
 Table of Contents
  Silicon
Image, Inc.
 Notes to Condensed Consolidated Financial Statements
 June
30, 2008
 (unaudited)
 
 1.
Basis of Presentation
 
 In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of Silicon Image, Inc. and its subsidiaries (the “Company”,
“Silicon Image”, “we” or “our”) included herein have been prepared on a basis
consistent with our December 31, 2007 audited financial statements and include
all adjustments, consisting of normal recurring adjustments, necessary to fairly
state the condensed consolidated balance sheets of Silicon Image and our
subsidiaries as of June 30, 2008 and December 31, 2007, the related
consolidated statements of operations for the three and six months ended June
30, 2008 and 2007, and the related consolidated statements of cash flows for the
six months ended June 30, 2008 and 2007. All significant intercompany accounts
and transactions have been eliminated. These interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2007. The Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2008 are not necessarily indicative of future
operating results to be expected for the fiscal year ending December 31,
2008.
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation, including the reclassification of revenue generated by our Simplay
subsidiary from the Licensing revenue caption to Product revenue and revenue
between our lines of business, in order to more closely align our revenue
presentation with our key operating metrics. We have also renamed the caption
Development, licensing and royalty revenue as Licensing revenue.
 
 2.
Recent Accounting Pronouncements
  In May
2008, the FASB issued Staff Position No. APB 14-1, "Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)" ("FSP 14-1"), which clarifies the accounting for convertible
debt instruments that may be settled in cash (including partial cash settlement)
upon conversion. FSP 14-1 requires issuers to account separately for the
liability and equity components of certain convertible debt instruments in a
manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing
rate when interest cost is recognized. FSP 14-1 is effective for fiscal years beginning
after December 15, 2008. The Company does not believe that the
implementation of this standard will have a material impact on its consolidated
financial statements.
  In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of
FSP FAS 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141(R) and other
applicable accounting literature. FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact of FSP FAS 142-3 on its consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS 161”), which
requires additional disclosures about the objectives of using derivative
instruments, the method by which the derivative instruments and related hedged
items are accounted for under FASB Statement No.133 and its related
interpretations, and the effect of derivative instruments and related hedged
items on financial position, financial performance, and cash flows. SFAS 161
also requires disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. The Company is currently
assessing the impact that the adoption of SFAS 161 will have on its
consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”) and SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”).
SFAS 141(R)  significantly changes current practices regarding
business combinations. Among the more significant changes, SFAS 141(R) expands
the definition of a business and a business combination; requires the acquirer
to recognize the assets acquired, liabilities assumed and noncontrolling
interests (including goodwill), measured at fair value at the acquisition date;
requires acquisition-related expenses and restructuring costs to be recognized
separately from the business combination; requires assets acquired and
liabilities assumed from contractual and non-contractual contingencies to be
recognized at their acquisition-date fair values with subsequent
changes
  6
 Table of Contents
  recognized
in earnings; and requires in-process research and development to be capitalized
at fair value as an indefinite-lived intangible asset. SFAS 160 will change the
accounting and reporting for minority interests, reporting them as equity
separate from the parent entity’s equity, as well as requiring expanded
disclosures. SFAS 141(R) and SFAS 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company does not
believe that the implementation of these standards will have a material impact
on its condensed consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment to FASB No.
115” (“SFAS 159”). Under SFAS 159, entities may elect to measure specified
financial instruments as well as warranty and insurance contracts at fair value
on a contract-by-contract basis, with changes in fair value recognized in
earnings each reporting period. The election, called the fair value option, will
enable entities to achieve an offset accounting effect for changes in fair value
of certain related assets and liabilities without having to apply complex hedge
accounting provisions. SFAS 159 is effective as of the beginning of a company’s
first fiscal year that begins after November 15, 2007. The Company did not adopt
the fair value option for any of its financial instruments.
 
 3.
Significant Accounting Policies
 
 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, stock based
compensation, cash equivalents and short-term investments, allowance for
doubtful accounts, inventory valuation, realization of long lived assets,
including goodwill and intangibles, income taxes, deferred tax assets, accrued
liabilities, guarantees, indemnifications and warranty liabilities, foreign
currency, and legal matters. The condensed consolidated financial statements
include the accounts of Silicon Image, Inc. and its subsidiaries after
elimination of all inter-company balances and transactions.
 
 For a
discussion of the significant accounting policies, see Significant Accounting
Policies in our Annual Report on Form 10-K for the year ended December 31,
2007.
 
 Financial
Instruments
 
 The
Company accounts for its investments in debt securities under Statement of
Financial Accounting Standards, or SFAS, No. 115, Accounting for Certain
Investments in Debt and Equity Securities and FASB Staff Position, or FSP No.
115-1/124-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments. Management determines the appropriate classification of
such securities at the time of purchase and reevaluates such classification as
of each balance sheet date. The investments are adjusted for amortization of
premiums and discounts to maturity and such amortization is included in interest
income. We follow the guidance provided by FSP 115-1/124-1 and Emerging Issues
Task Force ("EITF") No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments, to assess whether our investments with
unrealized loss positions are other than temporarily impaired. Realized gains
and losses and declines in value judged to be other than temporary are
determined based on the specific identification method and are reported in the
condensed consolidated statements of operations. Factors considered in
determining whether a loss is temporary include the length of time and extent to
which fair value has been less than the cost basis, the financial condition and
near-term prospects of the investee, and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
 
 The
classification of our investments into cash equivalents and short term
investments is in accordance with Statement of Financial Accounting Standard No.
95 ("SFAS No. 95") Statement
of Cash Flows. Cash equivalents have maturities of three months or less
from the date of purchase. Short-term investments consist of commercial paper,
United States government agency obligations, corporate/municipal notes and
bonds. These securities have maturities greater than three months from the date
of purchase.
 
 Effective
January 1, 2008, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157 ("SFAS 157") “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements required under other accounting
pronouncements. SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants.
SFAS  157 also requires that a fair value measurement reflect the
assumptions market participants would use in pricing an asset or liability based
on the best information available. Assumptions include the risks inherent in a
particular valuation technique (such as a pricing model) and/or the risks
inherent in the inputs to the model. SFAS 157 is effective for the current
fiscal year and was adopted by the company as of January 1, 2008. The adoption
of SFAS 157 on our assets and liabilities did not have a significant impact on
our financial statements.
  7
 Table of Contents
  
 SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
 
 Level
1   Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities;
 
 Level
2   Quoted prices in markets that are not active or financial
instruments for which all significant inputs are observable, either directly or
indirectly;
 
 Level
3   Prices or valuations that require inputs that are both
significant to the fair value measurement and unobservable.
 
 A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.
 
 In
February 2008, the Financial Accounting Standards Board ("FASB") issued Staff
Position No. 157-2 ("FSP 157-2") that delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The delay is intended to allow the FASB and
constituents additional time to consider the effect of various implementation
issues that have arisen, or that may arise, from the application of SFAS
157.
 
 Further
information about the application of SFAS 157 may be found in Note 13
below.
 
 4.
Stock-Based Compensation
 
 The
Company has a share-based compensation program that provides its Board of
Directors with broad discretion in creating equity incentives for employees,
officers and non-employee board members. This program includes incentive and
non-statutory stock option grants, grants of restricted stock units (RSUs) and
an automatic grant program for non-employee board members pursuant to which
non-employee board members will receive option grants at designated intervals
over their period of board service. Stock option grants to employees and
officers under the discretionary grant program generally vest as follows: 25% of
the shares vest on the first anniversary of the vesting commencement date and
the remaining 75% vest proportionately each month over the next 36 months of
continued service. Stock option grants to members of our Board of Directors vest
monthly, over periods not to exceed four years. Some options provide for
accelerated vesting if certain identified milestones are achieved, upon a
termination of employment or upon a change in control of the Company. RSU grants
generally vest over a one to four year period and certain of the RSU grants also
have performance based vesting criteria. Additionally, the Company has an
Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of
common stock at the lower of 85% of the fair market value on the commencement
date of the six-month offering period or on the last day of the six-month
offering period.
 
 Valuation
and Expense Information Under SFAS 123(R)
 
 Share-based
compensation expense recognized under Statement of Financial Accounting
Standards No. 123 (revised 2004) “Share-Based Payment”, (SFAS 123(R)) consists
primarily of expenses for employee stock options, employee stock purchase plan
and employee RSU grants.
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model and the straight-line attribution approach
with the following weighted-average assumptions:
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Employee
      stock option plans:Expected
      life in years
              
              
              4.8
              
              
              
              4.9
              
              
              
              4.8
              
              
              
              4.9Expected
      volatility
              
              
              62.3
              %
              
              
              70.0
              %
              
              
              64.8
              %
              
              
              74.1
              %Risk-free
      interest rate
              
              
              3.3
              %
              
              
              4.8
              %
              
              
              2.7
              %
              
              
              4.7
              %Expected
      dividends
              
              none
              
              
              none
              
              
              none
              
              
              noneWeighted
      average fair value
              
              $
              3.70
              
              
              $
              5.10
              
              
              $
              2.80
              
              
              $
              6.09Employee
      Stock Purchase Plan:Expected
      life in years
              
              
              0.5
              
              
              
              0.5
              
              
              
              0.5
              
              
              
              0.5Expected
      volatility
              
              
              78.1
              %
              
              
              51.0
              %
              
              
              78.1
              %
              
              
              51.0
              %Risk-free
      interest rate
              
              
              3.5
              %
              
              
              5.2
              %
              
              
              3.5
              %
              
              
              5.2
              %Expected
      dividends
              
              none
              
              
              none
              
              
              none
              
              
              noneWeighted
      average fair value
              
              $
              1.63
              
              
              $
              3.62
              
              
              $
              1.63
              
              
              $
              3.62
 
 
 As
required by SFAS No. 123(R), management made an estimate of expected forfeitures
and is recognizing stock-based compensation expense only for those equity awards
expected to vest. For the three months ended June 30, 2008 no shares were
purchased under the ESPP program.
 .
 Stock-based
Compensation Expense
 
 The
following table shows total stock-based compensation expense included in the
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2008 and 2007 (in thousands):
 
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Cost
      of sales
              
              $
              431
              
              
              
              443
              
              
              $
              781
              
              
              
              789Research
      and development
              
              
              2,213
              
              
              
              2,056
              
              
              
              3,447
              
              
              
              4,364Selling,
      general and administrative
              
              
              3,614
              
              
              
              2,687
              
              
              
              6,053
              
              
              
              4,065$
              6,258
              
              
              $
              5,186
              
              
              $
              10,281
              
              
              $
              9,218
 
 Stock
Options Activity
 
 The
following is a summary of option activity for our Stock Option Plans excluding
RSUs (in thousands, except weighted average exercise price):
 Number
      of Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term in Years
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2008
              
              
              14,030
              
              
              $
              8.92
              
              
              
              6.75
              
              
              $
              3,576Granted
              
              
              1,201
              
              
              
              5.01
              
              
              
              -
              
              
              
              -Exercised
              
              
              (385
              )
              
              
              3.59
              
              
              
              -
              
              
              
              -Forfeitures
      and cancellations
              
              
              (527
              )
              
              
              10.05
              
              
              
              -
              
              
              
              -Outstanding
      at June 30, 2008
              
              
              14,319
              
              
              $
              8.69
              
              
              
              6.71
              
              
              $
              13,686Vested
      and expected to vest at June 30, 2008
              
              
              13,252
              
              
              $
              8.75
              
              
              
              6.54
              
              
              $
              12,634Exercisable
      at June 30, 2008
              
              
              8,908
              
              
              $
              8.84
              
              
              
              5.72
              
              
              $
              9,407
 
 At June
30, 2008, the total compensation cost related to options granted to employees
under our share-based compensation plans but not yet recognized was
approximately $30.5 million, net of estimated forfeitures. The unamortized
compensation expense will be amortized on a straight-line basis, and the
weighted average period of this expense is approximately 2.5
years.
  8
 Table of Contents
  
 Restricted
Stock Units
 
 RSUs
granted to non-executive employees vest over a period of four years subject to
the employee’s continuing service to the Company over that period. Vesting of
RSUs to executives is dependent on continuing service over a period of one to
two years as well as achieving certain performance conditions. RSUs are
converted into shares of the Company’s common stock upon vesting on a
one-for-one basis. The cost of the RSUs is determined using the fair value of
the Company’s common stock on the date of the grant. Compensation is recognized
on a straight-line basis over the requisite service period of each grant
adjusted for estimated forfeitures.
 
 A summary
of the RSUs outstanding as of June 30, 2008 is as follows: (in
thousands):
  Number
      of shares
                
                
                Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2008
                
                
                -
                
                
                
                -Awarded
                
                
                3,715
                
                
                
                -Vested
                
                
                -
                
                
                
                -Forfeitures
                
                
                (25
                )
                
                
                -Outstanding
      at June 30, 2008
                
                
                3,690
                
                
                $
                26,754Vested
      and expected to vest at June 30, 2008
                
                
                2,780
                
                
                $
                20,155Exercisable
      at June 30, 2008
                
                
                -
                
                
                
                -
  As of
June 30, 2008, the Company had $10.2 million of total unrecognized compensation
expense, net of estimated forfeitures, related to RSUs. The unamortized
compensation expense will be recognized on a straight-line basis, and the
weighted average estimated remaining life is 2.1 years.
 
 5.
Stock Repurchase Program
 
 In
February 2007, our Board of Directors authorized a stock repurchase program
under which we were authorized to purchase up to $100.0 million of common stock,
on the open market, or in negotiated or block transactions, over a 36 month
period. As of December 31, 2007, we had repurchased a total of 5.0 million
shares at a total cost of $38.1 million. In February 2008, the Company’s Board
of Directors authorized an additional $100 million stock repurchase program,
under which shares may be repurchased over a period of three years, to commence
following completion of the Company’s accelerated stock repurchase plan (“ASR”)
(see below). Purchases under this program may be increased, decreased or
discontinued at any time without prior notice.
 
 In
February 2008, we entered into an accelerated stock repurchase agreement (ASR)
with Credit Suisse International (Credit Suisse), to purchase shares of common
stock for an aggregate purchase price of approximately $62 million. The ASR
terminated on June 30, 2008 (‘termination date’) with final settlement taking
place in July 2008 (‘settlement date). On June 25, 2008, Silicon Image made a
payment of approximately $6.2 million for the purchase of shares based on the
volume weighted average share price during the period of the agreement. On the
settlement date, Credit Suisse returned approximately $1 million based on the
average share price during the settlement period. In accordance with the
relevant accounting guidance, the Company has reflected the 11.5 million shares
repurchased and the $68.2 million paid to Credit Suisse as treasury stock and
will record a portion of the $1 million received as part of other income in the
income statement in the third quarter of 2008.
 
 With the
repurchase, the Company completed its original stock repurchase program and
repurchased approximately $5 million of its stock under the new $100 million
stock repurchase program approved by the Board of Directors in February
2008.
 
  9
 Table of Contents
  6.
Comprehensive income (loss)
 
 The
components of comprehensive income (loss), net of related taxes, were as follows
(in thousands):
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income (loss)
              
              $
              (462
              )
              
              $
              4,372
              
              
              $
              (1,024
              )
              
              $
              7,288Change
      in unrealized value of investments
              
              
              (87
              )
              
              
              20
              
              
              
              (30
              )
              
              
              135Foreign
      currency translation adjustments
              
              
              (10
              )
              
              
              (114
              )
              
              
              133
              
              
              
              (125
              )Total
      comprehensive income (loss)
              
              $
              (559
              )
              
              $
              4,278
              
              
              $
              (921
              )
              
              $
              7,298
 
 7.
Net Income (loss) Per Share
 
 Basic net
income (loss) per share is computed using the weighted-average number of common
shares outstanding during the period and diluted net income (loss) per
share is computed using the weighted-average number of common shares and diluted
equivalents outstanding during the period, if any, determined using the treasury
stock method. The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per share
amounts):
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income (loss)
              
              $
              (462
              )
              
              $
              4,372
              
              
              $
              (1,024
              )
              
              $
              7,288Weighted
      average shares – basic
              
              
              73,399
              
              
              
              86,737
              
              
              
              77,257
              
              
              
              86,781Weighted
      average shares – diluted
              
              
              73,399
              
              
              
              88,817
              
              
              
              77,257
              
              
              
              89,156Net
      income (loss) per share – basic and diluted
              
              $
              (0.01
              )
              
              $
              0.05
              
              
              $
              (0.01
              )
              
              $
              0.08
 
 The
following is a reconciliation of the weighted-average common shares used to
calculate basic net income (loss) per share to the weighted-average common
shares used to calculate diluted net income (loss) per share (in
thousands):
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Weighted-average
      common shares for basic net income (loss) per share
              
              
              73,399
              
              
              
              86,737
              
              
              
              77,257
              
              
              
              86,781Weighted-average
      dilutive stock options outstanding under the treasury stock
      method
              
              
              -
              
              
              
              2,080
              
              
              
              -
              
              
              
              2,375Weighted-average
      common shares for diluted net income (loss) per
      share
              
              
              73,399
              
              
              
              88,817
              
              
              
              77,257
              
              
              
              89,156
 
  10
 Table of Contents
  8.
Balance Sheet Components
 
 June
      30, 2008
              
              
              December
      31, 2007(in
      thousands)Inventories:Raw
      materials
              
              $
              2,547
              
              
              $
              3,132Work
      in process
              
              
              5,437
              
              
              
              2,719Finished
      goods
              
              
              9,702
              
              
              
              14,347Total
      inventories
              
              $
              17,686
              
              
              $
              20,198Property
      and equipmentComputers
      and software
              
              $
              28,301
              
              
              $
              29,950Equipment
              
              
              28,868
              
              
              
              28,188Furniture
      and fixtures
              
              
              4,021
              
              
              
              4,06161,190
              
              
              
              62,199Less:
      accumulated depreciation
              
              
              (37,400
              )
              
              
              (38,008
              )Total
      property and equipment, net
              
              $
              23,790
              
              
              $
              24,191Accrued
      and other liabilities:Accrued
      payroll and related expenses
              
              $
              5,495
              
              
              $
              5,586Accrued
      legal fees
              
              
              1,452
              
              
              
              970Payable
      related to intangibles acquired
              
              
              10,000
              
              
              
              17,500Other
      accrued liabilities
              
              
              11,628
              
              
              
              12,940Total
      accrued liabilities
              
              $
              28,575
              
              
              $
              36,996
 
 9.
Commitments and Contingencies
 
 Legal
Proceedings
 
 On
December 7, 2001, we and certain of our officers and directors were named as
defendants, along with the underwriters of the Company’s initial public
offering, in a securities class action lawsuit. The lawsuit alleges that the
defendants participated in a scheme to inflate the price of our stock in our
initial public offering and in the aftermarket through a series of misstatements
and omissions associated with the offering. The lawsuit is one of several
hundred similar cases pending in the Southern District of New York that have
been consolidated by the court. In February 2003, the District Court issued an
order denying a motion to dismiss by all defendants on common issues of law. In
July 2003, we, along with over 300 other issuers named as defendants, agreed to
a settlement of this litigation with plaintiffs. While the parties’ request for
court approval of the settlement was pending, in December 2006 the United States
Court of Appeals for the Second Circuit reversed the District Court’s
determination that six focus cases could be certified as class actions. In April
2007, the Second Circuit denied plaintiffs’ petition for rehearing, but
acknowledged that the District Court might certify a more limited class. At a
June 26, 2007 status conference, the Court terminated the proposed settlement as
stipulated among the parties. Plaintiffs filed an amended complaint on August
14, 2007. On September 27, 2007, plaintiffs filed a motion for class
certification in the six focus cases. The court has not yet decided the class
certification motion. On November 13, 2007 defendants in the six focus cases
filed a motion to dismiss the complaint for failure to state a claim, which the
district court denied on March 8, 2008.
 
 On July
31, 2007, we received a demand on behalf of alleged shareholder Vanessa Simmonds
that our board of directors prosecute a claim against the underwriters of our
initial public offering, in addition to certain unidentified officers, directors
and principal shareholders as identified in our IPO prospectus, for violations
of sections 16(a) and 16(b) of the Securities Exchange Act of 1934. In October
2007, a lawsuit was filed in the United States District Court for the Western
District of Washington by Ms. Simmonds against certain of the underwriters of
our initial public offering. The plaintiff alleges that the underwriters engaged
in short-swing trades and seeks disgorgement of profits in amounts to be proven
at trial from the underwriters. On February 25, 2008, Ms. Simmonds filed an
amended complaint. The suit names us as a nominal defendant, contains no claims
against us and seeks no relief from us.
 
 In
January 2005, we and certain of our officers were named as defendants in a
securities class action captioned “Curry v. Silicon Image, Inc., Steve Tirado
and Robert Gargus.” Plaintiffs filed the action on behalf of a putative class of
stockholders who purchased Silicon Image stock between October 19, 2004 and
January 24, 2005. The lawsuit alleged that we and certain of our officers and
directors made alleged misstatements of material facts and violated certain
provisions of Sections 20(a) and 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Final judgment was entered in favor of
defendants on September 25,
  11
 Table of Contents
  2007. On
October 19, 2007, plaintiffs filed notice of appeal of the court’s final
judgment to the United States Court of Appeals for the Ninth Circuit.
Appellants’ opening brief was filed February 28, 2008 and our responsive
pleading was filed April 14, 2008. Appellants filed a reply brief on May 16,
2008. The court has not yet set a date for a hearing on the appeal.
 
 On
January 31, 2007, we filed a lawsuit in the United States District Court for the
Northern District of California against Analogix Semiconductor, Inc.
(“Analogix”). The complaint charges Analogix with copyright infringement,
misappropriation of trade secrets and unfair competition under California law.
The lawsuit alleges that Analogix, without authorization and in violation of our
intellectual property rights, copied and used our proprietary register maps by
gaining unauthorized access to our proprietary and confidential information,
violated our copyright protection and unfairly competed with Silicon Image in
the marketplace.  In addition to seeking monetary damages in an amount
to be determined at trial, we seek an injunction barring Analogix from
misappropriation of Silicon Image’s trade secrets.  On June 18, 2007,
Analogix filed a counterclaim alleging that we breached a confidentiality
agreement by purportedly disclosing Analogix’s confidential information within
the Company. The court has set a trial date for September 29, 2008.
 
 On June
11, 2008, Analogix filed a lawsuit in the United States District Court for the
Northern District of California against us alleging violations of the Sherman
Act Sections 1 and 2, Cartwright Act, and Section 17200 of the California
Business and Professions Code.  The complaint seeks monetary damages
and injunctive relief.  The complaint alleges that Silicon Image, and
co-defendants HDMI Licensing, LLC and Simplay Labs, LLC, conspired with the
founders of the HDMI Consortium in violation of the antitrust
laws.  Specifically, the complaint claims that the defendants and the
founders of the HDMI Consortium have created certain structural advantages and
engaged in anti-competitive conduct for the purpose of monopolizing the markets
for HDMI Solutions and Discrete HDMI Solutions.  Silicon Image
believes the HDMI Consortium is pro-competitive, bringing critical technology to
the market and enabling hundreds of adopters to supply HDMI-enabled
products.  We intend to vigorously contest Analogix’s claims. 
The court has yet to set a trial date.
 
 On
January 14, 2005, we received a preliminary notification that the Securities and
Exchange Commission had commenced a formal investigation involving trading in
our securities. On February 14, 2005, through our legal counsel, we received a
formal notification of that investigation and associated subpoenas. On January
18, 2006, the SEC announced that it filed a civil complaint (Case No. CV 06-0256
DSF, C.D. Cal.) for insider trading against Deog Kyoon Jeong, a co-founder and
consultant to the Company, and that it was also entering into a consent judgment
with Mr. Jeong. The SEC stated that Mr. Jeong had agreed to pay a civil penalty
of $56,000 and to disgorge profits of $56,000, without admitting or denying the
allegations in the SEC complaint. We are not aware of any further actions taken
by the SEC in this matter. We intend to continue to fully cooperate with the SEC
in the event that any further actions are necessary.
 
 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, and although adverse decisions or settlements may occur in
one or more of such cases, the final resolution of these matters, individually
or in the aggregate, is not expected to have a material adverse effect on our
results of operations, financial position or cash flows.
 
 Guarantees
 
 Certain
of our licensing agreements indemnify our customers for any expenses or
liabilities resulting from claimed infringements of third party patents,
trademarks or copyrights by 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 any claim.
 
  12
 Table of Contents
  Contractual
Obligations and Off-Balance Sheet Arrangements
 
 The
following table represents our future minimum payments under our operating
leases, inventory and other non-inventory purchase outstanding at June 30, 2008
(in thousands):
 
 
 Contractual
      obligations
              
              Total
              
              
              Less
      than 1 year
              
              
              2-3
      years
              
              
              4-5
      years
              
              
              More
      than 5 yearsOperating
      lease obligations
              
              $
              8,526
              
              
              $
              3,755
              
              
              $
              4,696
              
              
              $
              75
              
              
              $
              -Inventory
      purchase obligations
              
              
              5,095
              
              
              
              5,095
              
              
              
              -
              
              
              
              -
              
              
              
              -Intangibles
      purchase commitments
              
              
              22,699
              
              
              
              19,928
              
              
              
              2,771
              
              
              
              -
              
              
              
              -Total
      contractual obligations
              
              $
              36,320
              
              
              $
              28,778
              
              
              $
              7,467
              
              
              $
              75
              
              
              $
              -
 
 The
amounts above exclude liabilities under FASB Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes”, as we are unable to reasonably estimate the ultimate
amount or timing of settlement.
 
 10.
Customer and Geographic Information
 
 We
operate in one reportable operating segment, semiconductors and IP solutions for
the secure storage, distribution and presentation of high-definition content.
Our Chief Executive Officer, who is considered to be our chief operating
decision maker, reviews financial information presented on one operating segment
basis for purposes of making operating decisions and assessing financial
performance.
 
 Revenue
by geographic area was as follows (in thousands):
 
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Japan
              
              $
              20,895
              
              
              $
              27,646
              
              
              $
              40,181
              
              
              $
              51,728United
      States
              
              
              11,671
              
              
              
              15,239
              
              
              $
              24,982
              
              
              
              28,620Taiwan
              
              
              13,690
              
              
              
              15,902
              
              
              
              25,837
              
              
              
              28,147Europe
              
              
              8,735
              
              
              
              6,096
              
              
              
              16,897
              
              
              
              13,071Korea
              
              
              3,138
              
              
              
              4,865
              
              
              
              7,007
              
              
              
              8,749Hong
      Kong
              
              
              7,509
              
              
              
              5,516
              
              
              
              12,976
              
              
              
              8,125Other
              
              
              4,445
              
              
              
              4,507
              
              
              
              9,316
              
              
              
              10,450Total
      revenue
              
              $
              70,083
              
              
              $
              79,771
              
              
              $
              137,196
              
              
              $
              148,890
 
 Revenue
by product line was as follows  (in thousands):
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Consumer
      Electronics (1)
              
              $
              50,310
              
              
              $
              63,036
              
              
              $
              99,845
              
              
              $
              113,334Personal
      Computer (1)
              
              
              11,758
              
              
              
              9,475
              
              
              
              22,927
              
              
              
              19,297Storage
      (1)
              
              
              8,015
              
              
              
              7,260
              
              
              
              14,424
              
              
              
              16,259Total
      revenue
              
              $
              70,083
              
              
              $
              79,771
              
              
              $
              137,196
              
              
              $
              148,890
 ____________
 (1)
              Includes
      licensing revenue
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Consumer
      Electronics
              
              $
              44,613
              
              
              $
              52,274
              
              
              $
              87,065
              
              
              $
              94,516Personal
      Computer
              
              
              10,970
              
              
              
              8,518
              
              
              
              20,977
              
              
              
              16,967Storage
              
              
              6,253
              
              
              
              5,740
              
              
              
              10,981
              
              
              
              11,388Licensing
      revenue
              
              
              8,247
              
              
              
              13,239
              
              
              
              18,173
              
              
              
              26,019Total
      revenue
              
              $
              70,083
              
              
              $
              79,771
              
              
              $
              137,196
              
              
              $
              148,890
 
  13
 Table of Contents
  For the
three months ended June 30, 2008, three customers each
generated  15.3%, 12.3%, and 12.2% of our revenue, respectively. For
the six months ended June 30, 2008, three customers each generated 14.9%, 12.3%,
and 11.6% of our revenue, respectively. At June 30, 2008, three customers each
represented 16.3%, 13.5% and 10.8% of gross accounts receivable,
respectively.
 
 For the
three months ended June 30, 2007, three customers each generated 18.3%, 12.5%,
and 11.7% of our revenue respectively. For the six months ended June 30, 2007,
three customers each generated 16.6%, 13.2% and 10.5% of our revenue
respectively. At June 30, 2007, two customers each represented 19.0 and 10.6% of
gross accounts receivable, respectively.
 
 Location
of long lived assets including property plant and equipment, goodwill and
intangibles are as follows (in thousands):
 
 
 June
      30, 2008
              
              
              December
      31, 2007US
              
              $
              66,982
              
              
              $
              70,051Germany
              
              
              10,570
              
              
              
              10,855Other
      foreign countries
              
              
              1,543
              
              
              
              1,764Total
              
              $
              79,095
              
              
              $
              82,670
 
 
 11.
Provision (benefit) for Income Taxes
 
 For the
three and six months ended June 30, 2008, we recorded a benefit for income taxes
of ($134,000) and ($127,000), respectively. The effective tax rate for the three
and six months ended June 30, 2008 are 22.5% and 11.0%, respectively, and are
based on our projected taxable income for 2008, plus certain discrete items
recorded during the quarter.
 
 For
the three and six months ended June 30, 2007, we recorded a provision for income
taxes of $5.0 million and $8.6 million, respectively. The effective tax rate for
the three and six months ended June 30, 2007 was 53.5% and 54.0% respectively.
The effective tax rate was based on projected taxable income for 2007. The
effective tax rate for the three months ended June 30, 2007 of 53.5% was
comprised of 41.4%, 1.0% and 11.1% for federal, state and foreign,
respectively.
 
 We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (FIN
48) on January 1, 2007. As a result of the adoption of FIN 48, we recorded a
reduction to opening retained earnings as of January 1, 2007 of approximately
$5.1 million related primarily to our measurement of certain tax credits based
on the requirements of FIN 48. The $5.1 million reflected an increase of $0.4
million from the amount previously disclosed in the Company’s quarterly
financial statements to correct an error in the original computation of the
cumulative effect of the adoption of FIN 48. We have historically classified
accruals for tax uncertainties in current taxes payable and, where appropriate,
as a reduction to deferred tax assets. As a result of the adoption of FIN 48, we
reclassified $5.6 million from current taxes payable to other long term
liabilities. In addition, we further increased other long term liabilities by
$4.0 million, decreased current deferred tax assets by $2.3 million and
increased non-current deferred tax assets by $1.3 million (the amount related to
our non-current deferred tax assets has been decreased by $0.4 million from the
applicable amounts previously disclosed in the Company’s 2007 quarterly
financial statements for the above mentioned correction). As of the adoption
date, we had gross tax affected unrecognized tax benefits of approximately $14.4
million of which $11.5 million, if recognized, would have affected the effective
tax rate. As of June 30, 2008, we had gross tax affected unrecognized tax
benefits of $20.8 million of which $8.5 million, if recognized, would affect the
effective tax rate.
 
 Our
policy is to include interest and penalties related to unrecognized tax benefits
within the provision for income taxes. The provision for income taxes for the
three and six months ended June 30, 2008 included approximately $106,000 and
$198,000 of accrued interest related to unrecognized tax benefits, respectively.
We conduct business globally and, as a result, we and our subsidiaries file
income tax returns in various jurisdictions throughout the world including the
U.S. federal and various U.S. state jurisdictions as well as various foreign
jurisdictions. In the normal course of business we are subject to examination by
taxing authorities throughout the world. We remain subject to federal and state
examination for all years from 1996 and forward by virtue of the tax attributes
carrying forward from those years. We also remain subject to examination in most
foreign jurisdictions for all years since 2002 or the year we began operations
in those countries if later. We are not aware of any material income tax
examinations in progress at this time.
 
 
  14
 Table of Contents
  12.
Investment in Intellectual Property
 
 In
February 2007, we entered into an agreement with Sunplus Technology Co., Ltd.
(Sunplus) to license certain technology (Sunplus IP) from Sunplus for $40.0
million, as described below, and to license certain of our intellectual property
(Silicon Image IP) to Sunplus for $5.0 million. The purpose of this licensing
agreement is to obtain advanced technology for development of our future
products. The agreement provides for us to pay an aggregate of $40.0 million to
Sunplus, $35.0 million of which is payable in consideration for the Sunplus IP
and related deliverables, and $5.0 million of which is payable in consideration
for Sunplus support and maintenance obligations. Through June 30, 2008, we have
paid Sunplus $22.5 million of the consideration for the licensed technology and
related deliverables. We are required to pay the remaining $12.5 million upon
our acceptance of certain milestone deliverables under the contract over the
next twelve months. The remaining $5.0 million is being paid for support and
maintenance by Sunplus over a two-year period ending in the second quarter of
2009. In accordance with SFAS No. 142 Goodwill and Other
Intangibles, we will evaluate the Sunplus IP for impairment whenever
indicators of impairment exist.
 
 13.
Fair Value Measurements
 
 Our
financial assets measured at fair value on a recurring basis are cash
equivalents and short term investments. Our cash equivalents and short term
investments are generally classified within level 1 or level 2 of the fair value
hierarchy because they are valued using quoted market prices, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price
transparency.
 
 The types
of instruments valued based on quoted market prices in active markets include
most U.S. government and agency securities and most money market securities.
Such instruments are generally classified within level 1 of the fair value
hierarchy.
 
 The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade corporate bonds, and
state, municipal and provincial obligations. Such instruments are generally
classified within level 2 of the fair value hierarchy.
 
 The
following table sets forth our cash and cash equivalents and short-term
investments as of June 30, 2008, which are measured at fair value on a recurring
basis by level within the fair value hierarchy. As required by SFAS No. 157,
these are classified based on the lowest level of input that is significant to
the fair value measurement.
 
 Fair
      value measurements using(dollars In thousands)
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Assets
      at fair valueCash
      and cash equivalents and Short-term investments
              
              $
              58,352
              
              
              $
              110,839
              
              
              $
              -
              
              
              $
              169,191Total
              
              $
              58,352
              
              
              $
              110,839
              
              
              $
              -
              
              
              $
              169,191
 
 The above
table excludes $16.3 million in cash held by us or in our accounts with
investment fund managers as of June 30, 2008. During the three months ended June
30, 2008, we held no direct investments in auction rate securities,
collateralized debt obligations, structured investment vehicles or
mortgage-backed securities.
 
 13.
Subsequent Events
 
 In
July 2008, we reorganized our business to improve the effectiveness and
efficiency of our operating model as part of our program to pursue continuous
improvement. As part of this reorganization, we expect to record a restructuring
expense consisting of severance costs in the third quarter of 2008.
 
 
   15
 Table of Contents
  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. 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.
 
 Silicon Image and Simplay HD are
trademarks, registered trademarks or service marks of Silicon Image, Inc.
in the United States and other countries. HDMITM and High-Definition Multimedia
Interface are trademarks or registered trademarks of HDMI Licensing, LLC in
the United States and other countries, and are used under license from HDMI
Licensing, LLC. All other trademarks and registered trademarks are the
property of their respective owners.
 
 Overview
 
 Silicon
Image, Inc. is a technology innovator and a global leader developing
high-bandwidth semiconductor and intellectual property (IP) solutions based on
our innovative, digital interconnect technology. Our vision is digital content
everywhere. Our mission is to be the leader in the innovation, design,
development and implementation of semiconductors and IP solutions for the secure
storage, distribution and presentation of high-definition content in the home
and mobile environments. We are dedicated to the development and promotion of
technologies, standards and products that facilitate the movement of digital
content between and among digital devices across the consumer electronics (CE),
personal computer (PC) and storage markets. We believe our track record of
innovation around our core competencies, establishing industry standards and
building strategic relationships, positions us to continue to drive change in
the emerging world for high quality digital media storage, distribution and
presentation.
 
 We
provide discrete and various levels of integrated semiconductor products as well
as IP licensing to consumer electronics, computing, display, storage and
networking equipment manufacturers. Our product and IP portfolio includes
solutions for high-definition television (HDTV), high-definition set-top boxes
(STBs), high-definition digital video disc (DVD) players, digital and personal
video recorders (DVRs and PVRs), high-definition game systems, consumer and
enterprise storage products and PC display products.
 
 We have
worked with industry leaders to create industry standards such as the
High-Definition Multimedia Interface (HDMItm)
and Digital Visual Interface (DVItm)
specifications for digital content delivery. We capitalize on our leadership
position through first-to-market, standards-based semiconductor and IP
solutions. Our portfolio of IP solutions that we license to third parties for
consumer electronics, PCs, multimedia, communications, networking and storage
devices further leverages our expertise in these markets. In addition, through
Simplay Labs, LLC, our wholly owned subsidiary, we offer one of the most robust
and comprehensive test suites and testing technology platforms in the consumer
electronics industry. We utilize independent foundries and third-party
subcontractors to manufacture, assemble and test all of our semiconductor
products.
 
 Our
customers are equipment manufacturers in each of our target markets — Consumer
Electronics, Personal Computer and Storage. Because we leverage our technologies
across different markets, certain of our products may be incorporated into
equipment used in multiple markets. We sell our products to original equipment
manufacturers (OEMs) throughout the world using a direct sales force and
through a network of distributors and manufacturer’s representatives. Our net
revenue is generated principally by sales of our semiconductor products, with
other revenues derived from IP core licensing and licensing and royalty fees
from our standards activities. We maintain relationships with the ecosystem of
companies that provide the products that drive digital content creation and
consumption, including the major Hollywood studios, consumer electronics
companies, retailers and service providers. To that end, we have developed
relationships with Hollywood studios such as Universal, Warner Brothers, Disney
and Fox and with major consumer electronics companies such as Sony, Hitachi,
Toshiba, Matsushita, Phillips and Thomson. Through these and other
relationships, we have formed a strong understanding of the requirements for
storing, distributing and viewing high quality digital
  16
 Table of Contents
  video and
audio in the home and mobile environments, especially in the area of High
Definition (HD) content. We have also developed a substantial intellectual
property base for building the standards and products necessary to promote
opportunities for our products.
 
 Historically,
we have grown our business by introducing and promoting the adoption of new
standards and entering new markets. We collaborated with several companies and
jointly developed the DVI and HDMI standards. Our first products addressed the
PC market. Subsequently, we introduced products for a variety of CE market
segments, including DVD, STB, game console and digital television (DTV) markets.
More recently, we have expanded our research and development activities and are
developing products based on our innovative high speed serial digital
interconnect core technology for the mobile device market, including digital
still cameras, HD camcorders, portable media players and smart phones, as well
as the DRAM memory and home networking markets.
 
 We are
headquartered in Sunnyvale, California. Our Internet website address is www.SiliconImage.com.We are
not including the information contained on our web site as a part of, or
incorporating it by reference into, this Quarterly Report on Form 10-Q or the
Annual Report on Form 10-K. We make available through our Internet website free
of charge, 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.
 
 Strategy
and Core Technologies
 
 Our goal
is to enable the access and presentation of high-definition digital content
anytime, anywhere, on any device. Our business strategy is to grow the available
market for our products and IP solutions through the development, introduction
and promotion of industry standards such as HDMI, DVI and Serial Advanced
Technology Attachment (SATA) in our core technology areas, which are as
follows:
 
 Transition
Minimized Differential Signaling (TMDS)
 
 TMDS is a
technology for transmitting high-speed serial data. It is used by the DVI and
HDMI video interfaces, as well as other digital communication
interfaces. TMDS devices are based on a transmitter/receiver pair. 
The transmitter incorporates an advanced coding algorithm which has reduced
electromagnetic interference over copper cables and enables robust clock
recovery at the receiver to achieve high skew tolerance for driving longer cable
lengths as well as shorter low cost/quality cables.
 
 Internal
TMDS (iTMDS)
 
 iTMDS
defines a video-only link, using a protocol that is a superset of DVI, for
connecting video paths within a DTV.  This protocol handles not only
standard 8-bit DVI, but also 10-, 12-, and 16-bit color depths.  The
protocol embeds an indicator of the current color depth within the TMDS stream
allowing the iTMDS receiver to automatically switch to the correct format
without any support microcontroller or software.
 
 Serial
Advanced Technology Attachment (SATA)
 
 SATA is a
computer bus primarily designed for transfer of data between a computer and mass
storage devices such as hard disk drives and optical drives. The main
advantages over the older parallel ATA interface are faster data transfer,
ability to remove or add devices while operating (hot swapping), thinner cables
that let air cooling work more efficiently, and more reliable operation with
tighter data integrity checks.
 
 SATA was
designed as a successor to the Advanced Technology Attachment standard (ATA),
and is expected to eventually replace the older technology (retroactively
renamed Parallel ATA or PATA). Serial ATA adapters and devices communicate over
a high-speed serial cable. The current SATA specification supports data
transfer rates as high as 3.0 Gbit/s per device. SATA uses only 4 signal
lines; cables are more compact and cheaper than PATA. SATA supports hot-swapping
and NCQ. There is a special connector (eSATA) specified for external devices,
and an optionally implemented provision for clips to hold internal connectors
firmly in place.
 
  17
 Table of Contents
  SATA
Software
 
 The
preferred interface for SATA host controllers is Advanced Host Controller
Interface (AHCI), which allows advanced features of SATA such as hot plug and
Native Command Queuing (NCQ). If AHCI is not enabled by the motherboard and
chipset, SATA controllers typically operate in  “IDE emulation”
mode.  Windows device drivers that are labeled as SATA are usually running
in IDE emulation mode unless they explicitly state that they are AHCI. While the
drivers included with Windows XP do not support AHCI, we have implemented
proprietary AHCI drivers to support the features of our advanced host
controllers.  Windows Vista and the current versions of Mac OS X and Linux
have native support for AHCI.
 
 Personal
Entertainment Network (PEN)
 
 PEN is a
set of ultra light weight protocols designed to network consumer electronic
equipment.  The protocol suite is comprised of resource discovery, control
messaging, streaming media and remote user interface components.  The
protocols are designed to be implemented 100% in silicon without the need for
general purpose microprocessors thus allowing extremely cost effective IC
implementations.  PEN protocols incorporate a content protection scheme
suitable for distribution of entertainment content and provide auto federation
and interoperability for networked CE devices.
 
 Because
PEN protocols are designed to operate over IP networks they are suitable for any
physical layer with sufficient speed and latency characteristics including MoCA,
Ethernet, WiFi and power line.  Using these protocols it is possible to
stream media and data without the need for complex software (XML, HTML, Web
Browsers, Java, etc.) in the receiver device.
 
 Consumer
Electronics Control (CEC)
 
 CEC
defines a control channel and protocol for controlling consumer electronic
devices.  The channel wiring is mandatory within the HDMI specification,
although implementation of CEC in a product is optional. The CEC channel uses an
industry standard protocol for remote control functions and is implemented as a
one-wire bidirectional serial bus.  CEC is used to allow a single remote
control to command and control multiple CEC-enabled devices with a single remote
control and individual CEC-enabled devices to command and control each other
without user intervention.
 
 An
example of the latter is to allow the DVD player, when the drawer closes with a
disk, to command the TV and the intervening A/V receiver (all with CEC) to
power-up, select the appropriate HDMI ports, and auto-negotiate the proper video
mode and audio mode. Similarly, the equipment can be commanded by the DVD player
to return to sleep mode when the movie ends.
 
 Mobile
High Definition Link (MHL Technology)
 
 Our MHL
technology is a low pin count HD audio and video serial link specifically
defined for connecting mobile devices to high definition TVs. MHL is based on
the same technology used in DVI and HDMI but only requires single TMDS data pair
to transmit video to MHL enabled TVs at resolutions up to 1080p. MHL uses 5
signal pins that can be used with a small low pin count standard MHL connector
or a proprietary connector in mobile devices. Reduced pin count connectors are
critical in small mobile devices because the available connector real estate is
greatly limited compared to standard consumer electronic devices such as Blu-Ray
players and set top boxes.  The MHL specification also includes provision
to have sink devices to provide power to the mobile device when connected thus
preserving battery life.
 
 Serial
Port Memory Technology (SPMT)
 
 SPMT
is a new memory interface architecture that Silicon Image and other leading
semiconductor companies are currently developing. SPMT is initially targeted for
Dynamic Random Access Memory (DRAM) chips, that employs a serial interface
architecture rather than a parallel interface architecture as commonly found in
current memory offerings. This new architecture will enable greater bandwidth
flexibility, significantly reduced pin count, lower power demand and savings on
overall system cost. As consumers demand more rich features, mobile device
manufacturers are faced with the challenge and expense of adding more processors
to deliver this functionality – and that requires
faster and denser memory. By shifting from parallel to serial interface
technology, you can:
 
 ·
              Reduce
      pin count by a minimum of 40
percent
 ·
              Provide
      a bandwidth range from 3.2-6.4GB/s and
higher
  18
 Table of Contents
  ·
              Reduce
      input/output power by 50 percent or more over other currently available
      DRAM offerings
 ·
              Provide
      the ability to use either a single port or multiple ports into a single
      SPMT-enabled memory chip
 
 All of
the above directly translate into lowering overall system cost.
 
 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 56.5% and 56.1% of our total revenue for the
three and six months ended June 30, 2008, respectively, compared to 56.6% and
54.0% of our total revenue for the same periods of 2007, respectively.
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 services. For the
three and six months ended June 30, 2008, 53.3% and 52.6% of our revenue,
respectively, was generated through distributors, compared to 42.9% and 42.5% in
the comparable periods of 2007, respectively.
 
 A
significant portion of our revenue is generated from products sold overseas.
Sales to customers in Asia, including distributors, generated 70.9% and 69.4% of
our revenue in the three and six months ended June 30, 2008, respectively,
compared to 73.2% and 71.9% for the same periods of  2007. The reason
for the geographical concentration in Asia is that most of our products are
components of consumer electronics, computer and storage products, 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 except for a relatively
insignificant portion generated in Euros through our subsidiary in
Germany.
 
 Critical
Accounting Policies
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect amounts reported in our condensed 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. Our critical accounting estimates include those regarding (1) revenue
recognition, (2) allowance for doubtful accounts receivable, (3) inventories,
(4) goodwill and intangible assets, (5) income taxes, (6) accrued liabilities,
(7) stock-based compensation expense, and (8) legal matters. For a discussion of
the critical accounting estimates, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting
Policies” in our Annual Report on Form 10-K for the year ended December 31,
2007.
 
  19
 Table of Contents
  Results
of Operations
 
 REVENUE
 
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)
              
              
              
              
              
              (dollars
      in thousands)Product
      revenue
              
              $
              61,836
              
              
              $
              66,532
              
              
              
              -7.1
              %
              
              $
              119,023
              
              
              $
              122,871
              
              
              
              -3.1
              %Licensing
      revenue
              
              
              8,247
              
              
              
              13,239
              
              
              
              -37.7
              %
              
              
              18,173
              
              
              
              26,019
              
              
              
              -30.2
              %Total
      revenue
              
              $
              70,083
              
              
              $
              79,771
              
              
              
              -12.1
              %
              
              $
              137,196
              
              
              $
              148,890
              
              
              
              -7.9
              %
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)
              
              
              
              
              
              (dollars
      in thousands)Consumer
      Electronics (1)
              
              $
              50,310
              
              
              $
              63,036
              
              
              
              -20.2
              %
              
              $
              99,845
              
              
              $
              113,334
              
              
              
              -11.9
              %Personal
      Computers (1)
              
              
              11,758
              
              
              
              9,475
              
              
              
              24.1
              %
              
              
              22,927
              
              
              
              19,297
              
              
              
              18.8
              %Storage
      (1)
              
              
              8,015
              
              
              
              7,260
              
              
              
              10.4
              %
              
              
              14,424
              
              
              
              16,259
              
              
              
              -11.3
              %Total
      revenue
              
              $
              70,083
              
              
              $
              79,771
              
              
              
              -12.1
              %
              
              $
              137,196
              
              
              $
              148,890
              
              
              
              -7.9
              %
 ____________
 
 (1)
              Includes
      licensing revenue
  Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)
              
              
              
              
              
              (dollars
      in thousands)Consumer
      Electronics
              
              $
              44,613
              
              
              $
              52,274
              
              
              
              -14.7
              %
              
              $
              87,065
              
              
              $
              94,516
              
              
              
              -7.9
              %Personal
      Computers
              
              
              10,970
              
              
              
              8,518
              
              
              
              28.8
              %
              
              
              20,977
              
              
              
              16,967
              
              
              
              23.6
              %Storage
              
              
              6,253
              
              
              
              5,740
              
              
              
              8.9
              %
              
              
              10,981
              
              
              
              11,388
              
              
              
              -3.6
              %Licensing
      revenue
              
              
              8,247
              
              
              
              13,239
              
              
              
              -37.7
              %
              
              
              18,173
              
              
              
              26,019
              
              
              
              -30.2
              %Total
      revenue
              
              $
              70,083
              
              
              $
              79,771
              
              
              
              -12.1
              %
              
              $
              137,196
              
              
              $
              148,890
              
              
              
              -7.9
              %
 
 The
decrease in product revenues for the three months as well as the six months
ended June 30, 2008, respectively, is primarily due to declines in sales of our
Consumer Electronics (“CE”) products partially offset by increase in revenues
from our Personal Computers (“PC”) products. The decrease in CE product revenues
compared to comparable periods in 2007 is primarily due to changes in product
mix, decrease in revenues from our discrete receiver chips and input processors
in our DTV business, the result of our previously announced product transition
along with, increased competition of discrete and integrated solutions from
other companies.We believe
the weakening consumer demand due to concerns about the economy, also had
an impact on our revenue for the current quarter. Revenue from our HDMI 1.3
products increased for both the three months and six months ended June 30, 2008.
However, the decrease in overall CE revenues reflects a product transition
wherein sales of our HDMI 1.1 and 1.2 products are decreasing, partially offset
by increased sales of HDMI 1.3 products. We expect our CE business
to follow normal seasonal patterns, increasing sequentially in the
third quarter of 2008 and declining in the fourth quarter as compared to
the third quarter of 2008.
 
 There was
an increase in PC revenues for three and six months ended June 30, 2008 over the
comparable periods in 2007 primarily due to increasing adoption and sales of our
HDMI products in multimedia notebook computers. Average selling prices ("ASPs")
in the PC business decreased in the quarter ended June 30, 2008 as compared to
in the corresponding period 2007 but for the half year ended June 30, 2008 ASPs
registered a slight increase compared to the corresponding period in 2007 mainly
due to mix changes. The increase in storage revenue for the three months ended
June 30, 2008 was primarily due to growth in sales of our Steelvine
processor chips which also resulted in an increase in storage product ASPs.
While revenue for Storage  products for the six
months declined modestly year over year basis, we believe that our
Steelvine storage processor business will increase  and result in
growth of our overall storage products in the second half of 2008 as compared to
2007.
 
 Licensing
revenues decreased for the three and six months ended June 30, 2008 as compared
to comparable periods in 2007 due to decreased licensing activity attributable
to the CE line of business and the timing of recognition of revenue development
and licensing arrangements.
  20
 Table of Contents
  COST
OF REVENUE AND GROSS PROFIT
 
 Three
      months ended June 30,
                
                
                Six
      months ended June 30,2008
                
                
                2007
                
                
                Change
                
                
                2008
                
                
                2007
                
                
                Change(dollars
      in thousands)
                
                
                
                
                
                (dollars
      in thousands)Product
      cost of revenue (1)
                
                $
                28,615
                
                
                $
                35,587
                
                
                
                -19.6
                %
                
                $
                56,403
                
                
                $
                63,685
                
                
                
                -11.4
                %Licensing
      cost of revenue
                
                
                492
                
                
                
                1,351
                
                
                
                -63.6
                %
                
                
                841
                
                
                
                4,011
                
                
                
                -79.0
                %Total
      Cost of revenue (1)
                
                
                29,107
                
                
                
                36,938
                
                
                
                -21.2
                %
                
                
                57,244
                
                
                
                67,696
                
                
                
                -15.4
                %Total
      gross profit
                
                
                40,976
                
                
                
                42,833
                
                
                
                -4.3
                %
                
                
                79,952
                
                
                
                81,194
                
                
                
                -1.5
                %Gross
      profit margin
                
                
                58.5
                %
                
                
                53.7
                %
                
                
                
                
                
                
                58.3
                %
                
                
                54.5
                %(1)
      Includes stock-based compensation expense
                
                $
                431
                
                
                $
                443
                
                
                
                
                
                
                $
                781
                
                
                $
                789
  Cost of
revenue consists primarily of costs incurred to manufacture, assemble and test
our products, license development costs, as well as other related overhead costs
relating to the aforementioned costs including stock-based compensation expense.
The $7.8 million and $10.4 million decreases in cost of revenue for three months
and six months ended June 30, 2008, respectively, over the comparable
periods in 2007 was primarily due to decreases in revenues, lower
manufacturing and outside processing costs through negotiation and improved
supply chain efficiencies, use of vendors offering lower pricing, increasing use
of company-owned testing equipment, better inventory control, absence of
integration expenses associated with the sci-worx acquisition, all slightly
offset by higher shipping and warehousing fees as a result of increase in fuel
prices. Stock-based compensation expense was relatively flat for the three and
six months ended June 30, 2008 over the comparable periods of 2007.
 
 Total
gross profit decreased by $1.9 million and $1.2 million for the three and six
months ended June 30, 2008, respectively, compared to the same periods in
2007. Our gross profit margins of 58.5% and 58.3% for the three and six months
ended June 30, 2008 increased from 53.7% and 54.5% for the same periods in
2007, primarily due to product mix and operational efficiencies. For the third
quarter of 2008, we expect the gross margin percentage to be lower than the
second quarter of 2008, as a result of seasonality in revenue and cost of
revenue and changes in product mix.
 
 OPERATING
EXPENSES
 
 Research
and Development (“R&D”).
 
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)
              
              
              
              
              
              (dollars
      in thousands)Research
      and development (1)
              
              $
              22,298
              
              
              $
              19,025
              
              
              
              17.2
              %
              
              $
              43,840
              
              
              $
              36,220
              
              
              
              21.0
              %Percentage
      of total revenue
              
              
              31.8
              %
              
              
              23.8
              %
              
              
              
              
              
              
              32.0
              %
              
              
              24.3
              %(1)
      Includes stock-based compensation expense
              
              $
              2,213
              
              
              $
              2,056
              
              
              
              
              
              
              $
              3,447
              
              
              $
              4,364
 
 R&D
expense consists primarily of employee compensation, including stock-based
compensation expense, and other related costs, fees for independent contractors,
the cost of software tools used for designing and testing our products, and
costs associated with prototype materials. R&D expenses increased $3.3
million and $7.6 million for the three and six months ended June 30, 2008 as
compared to the comparable periods in 2007, due to the higher compensation
expenses caused by increased staffing and an overall increase in other R&D
activities during the quarter and half year, which resulted in higher tape-out
expenses, higher depreciation expenses, and an increase in software purchased
solely for use in R&D. The increase in R&D expense for the six months
ended June 30, 2008 compared to the same period in 2007 was partially offset by
a decrease in stock-based compensation expense as a result of changes in our
Black-Scholes fair value assumptions as described in Note 4 to the Condensed
Consolidated Financial statements. We expect the R&D expenses to be
relatively flat for the second half of fiscal year 2008 as compared to the
second half of fiscal year 2007.
 
 
  21
 Table of Contents
  Selling, General
and Administrative (“SG&A”).
 
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Selling,
      general and administrative (1)
              
              $
              19,067
              
              
              $
              17,151
              
              
              
              11.2
              %
              
              $
              37,385
              
              
              $
              34,295
              
              
              
              9.0
              %Percentage
      of total revenue
              
              
              27.2
              %
              
              
              21.5
              %
              
              
              
              
              
              
              27.2
              %
              
              
              23.0
              %(1)
      Includes stock-based compensation expense
              
              $
              3,614
              
              
              $
              2,687
              
              
              
              
              
              
              $
              6,053
              
              
              $
              4,065
 
 SG&A
expense consists primarily of employee compensation, including stock-based
compensation expense, sales commissions, professional fees, marketing and
promotional expenses. The increase in SG&A expenses of $1.9 million and $3.1
million respectively for the three and six months ended June 30, 2008 as
compared to similar periods in 2007, is primarily due to increased compensation
expense partly due to increase in headcount, increased legal expense for
litigation activities, an increase in stock based compensation expense as a
result of grant of RSUs to employees and executives as discussed in Note 4 to
the Condensed Consolidated Financial statements, partially offset by decrease in
consultant expense due to a decrease in the use of consultants as a result of
completion of projects and cost reduction efforts. We expect the SG&A
expenses to be relatively flat for the second half of fiscal year 2008 as
compared to the second half of fiscal year 2007.
 
 Amortization of
Intangible Assets.
 
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Amortization
      of intangible assets
              
              $
              1,587
              
              
              $
              537
              
              
              
              195.5
              %
              
              $
              3,174
              
              
              $
              1,152
              
              
              
              175.5
              %Percentage
      of total revenue
              
              
              2.3
              %
              
              
              0.7
              %
              
              
              
              
              
              
              2.3
              %
              
              
              0.8
              %
 
 Amortization
of intangible assets was $1.6 million and $3.2 million, respectively, for the
three and six months ended June 30, 2008, as compared to $537,000 and $1.2
million for the same period in 2007. The increase in the amortization of
intangible assets was primarily caused by the commencement of amortization of
the acquired Sunplus technology in the fourth quarter of 2007.  See
further discussion in Note 12 to the Condensed Consolidated Financial
Statements.
 
 Interest Income
and other, net.
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Interest
      income and other, net
              
              $
              1,380
              
              
              $
              3,290
              
              
              
              -58.1
              %
              
              $
              3,296
              
              
              $
              6,316
              
              
              
              -47.8
              %Percentage
      of total revenue
              
              
              2.0
              %
              
              
              4.1
              %
              
              
              
              
              
              
              2.4
              %
              
              
              4.2
              %
 
 
 The
interest income and other, net, which principally includes interest income, was
$1.4 million and $3.3 million for the three and six months ended June 30, 2008,
respectively, compared to $3.3 million and $6.3 million for the same periods of
2007. The decrease was primarily due to a switch to investments in tax exempt
securities in 2008, which generally carry lower interest rates than similar
taxable securities, a lower interest rate environment and lower average total
cash balances as a result of the stock repurchase payments made during the first
six months of  2008.
 
 Provision
(benefit)  for income taxes.
 
 Three
      months ended June 30,
              
              
              Six
      months ended June 30,2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Provision
      (benefit) for income taxes
              
              $
              (134
              )
              
              $
              5,038
              
              
              
              -102.7
              %
              
              $
              (127
              )
              
              $
              8,555
              
              
              
              -101.5
              %Percentage
      of total revenue
              
              
              -0.2
              %
              
              
              6.3
              %
              
              
              
              
              
              
              -0.1
              %
              
              
              5.7
              %
 
 Provision (benefit) for Income
Taxes.For the three and six months ended June 30, 2008, we recorded a
benefit for income taxes of ($134,000) and ($127,000), respectively. The
effective tax rate for the three and six months ended June 30, 2008 was 22.5%
and 11.0%, respectively and was based on our projected taxable income for 2008,
plus certain discrete items recorded during the quarter.
  22
 Table of Contents
  The
difference between the provision (benefit) for income taxes and the income tax
determined by applying the statutory federal income tax  rate of 35%
was due primarily to various forecasted items including tax exempt income, state
taxes and foreign taxes, adjusted for certain discrete items recorded during the
quarter. We currently expect a tax rate of 30-35%, before discrete items for the
three quarters and full year 2008.
 
 For the
three and six months ended June 30, 2007, we recorded a provision for income
taxes of $5.0 million and $8.6 million, respectively. The effective tax rate for
the three and six months ended June 30, 2007 was 53.5% and 54.0% respectively.
The effective tax rate was based on projected taxable income for 2007. The
effective tax rate for the three months ended June 30, 2007 of 53.5% was
comprised of 41.4%, 1.0% and 11.1% for federal, state and foreign, respectively.
The difference between the provision for income taxes and the income tax
determined by applying the combined statutory rate of 38% was due primarily to
certain forecasted unbenefited foreign losses in 2007 related to the ongoing
implementation of a new global business structure. The unbenefited foreign
losses represent expenses for sharing in the costs of our ongoing research and
development efforts as well as licensing commercial rights to exploit
pre-existing intangibles to better align with customers outside the Americas.
The new global structure is designed to better align asset ownership and
business functions with our expectations related to the sources, timing and
amounts of future revenues and profits.
 
 The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109” (FIN 48) as of January 1,
2007. See “Note 11: Provision (benefit) for income taxes” in the Notes to
Condensed Consolidated Financial Statements under Part I Item I of this report
for further discussion.
 
 Recent
Accounting Pronouncements
 
 See Note
2, “Recent Accounting Pronouncements” in the Notes to Condensed Consolidated
Financial Statements under Part I Item I of this report.
 
 LIQUIDITY,
CAPITAL RESOURCES AND FINANCIAL CONDITION
 
 The
following sections discuss the effects of changes in our balance sheet and cash
flows, contractual obligations, other commitments, and the stock repurchase
program on our liquidity and capital resources.
 
 Cash and Cash Equivalents and
Investments.
 
 Six
      months ended June 30,2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Total
      cash, cash equivalents and
    short-term  investments
              
              $
              185,456
              
              
              $
              202,912
              
              
              
              -8.6
              %Cash
      provided by operating activities
              
              $
              11,533
              
              
              $
              4,080
              
              
              
              182.7
              %Cash
      provided by in investing activities
              
              
              28,122
              
              
              
              14,329
              
              
              
              96.3
              %Cash
      used in financing activities
              
              
              (70,945
              )
              
              
              (20,644
              )
              
              
              243.7
              %Effect
      of exchange rate changes on cash & cash equivalents
              
              
              13
              
              
              
              (125
              )
              
              
              -110.4
              %Net
      decrease in cash and cash equivalents
              
              $
              (31,277
              )
              
              $
              (2,360
              )
              
              
              1225.3
              %
 
 The
decrease in cash and cash equivalents of $31.3 million for the six months ended
June30, 2008, was primarily due to payment of $68.2 million in connection
with our accelerated stock repurchase program, payment of $6.2 million to
Sunplus and Oracle in connection with the investment in intangibles and software
and $4.6 million investments in property, plant and equipment, partially offset
by cash received on sale of the investments, net of purchases, of $32.7 million,
cash received on exercise of stock options and for purchases of stock by
employees under the ESPP of $3.0 million, and cash generated from operations of
$11.5 million.
 
  23
 Table of Contents
  Accounts Receivable, Net.
  June
      30,
              
              
              December
      31,2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Accounts
      receivable, net
              
              $
              28,636
              
              
              $
              21,254
              
              
              
              34.7
              %
 
 
 Net
accounts receivable as of June 30, 2008 represents 37 days of sales outstanding.
This compares to 22 days of sales outstanding on December 31, 2007. The accounts
receivable balance as of December 31, 2007 was lower due to a high level of
collections at year end. The increase in accounts receivable of $7.4 million was
in line with our expectations and reflects increased invoicing activity in the
month of June 2008 as compared to December 2007.
 
 Inventory.
  June
      30,
              
              
              December
      31,2008
              
              
              2007
              
              
              Change(dollars
      in thousands)Inventory
              
              $
              17,686
              
              
              $
              20,198
              
              
              
              -12.4
              %
 
 
 Our
inventories are accounted for at the lower of cost or market. Inventory is
written down based on excess and obsolete inventories determined primarily by
future demand forecasts. Inventory write downs are measured as the difference
between the cost of the inventory and market, based upon assumptions about
future demand, and is charged to the provision for inventory, which is a
component of our cost of sales. Inventory decreased primarily due to lower
manufacturing and outside processing costs through negotiation, use of vendors
offering better pricing, increasing use of company-owned testing equipments,
implementation of enhanced tools enabling better inventory control, all
resulting in lower inventory balance.
 
 Financial
Outlook
 
 The
following is Silicon Image’s current financial outlook for the third quarter of
2008:
 
 ·
              Revenue:
      $75 million - $77 million
 ·
              Gross
      margin: 56% - 57%
 ·
              Operating
      expenses: $43 million - $44 million
 ·
              Interest
      Income: $0.9 million - $1.0 million
 ·
              Effective
      tax rate:  30% - 35%
 ·
              Diluted
      shares outstanding: approximately 75
million
 
 For the
full year of 2008, Silicon Image expects
 
 ·
              Revenue:
      $284 million - $289 million
 ·
              Gross
      margin: 57% - 58%
 ·
              Operating
      expenses: $171 million - $173
million
 ·
              Effective
      tax rate: 30% - 35%
 ·
              Diluted
      shares outstanding: approximately 75 million on December 31,
      2008
 
 Commitments
and Contractual Obligations
 
 See Note
9. Commitments and Contingencies, in the Notes to Condensed Consolidated
Financial Statements under Part I Item I of this report.
 
 We
purchase components from a variety of suppliers and use several contract
manufacturers to provide manufacturing services for our products. During the
normal course of business, in order to manage manufacturing lead times and help
ensure adequate component supply, we enter into agreements with contract
manufacturers and suppliers that either allow them to procure inventory based
upon criteria as defined by us or that establish the parameters defining our
requirements. In certain instances, these agreements allow us
the
  24
 Table of Contents
  option to
cancel, reschedule, and adjust our requirements based on our business needs
prior to firm orders being placed. Consequently, only a portion of our reported
purchase commitments arising from these agreements are firm, non-cancelable, and
unconditional commitments.
 
 Liquidity
and Capital Resource Requirements
 
 Based on
our estimated cash flows, 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 extent to which we generate cash through stock option
exercises and proceeds from sales of shares under our employee stock purchase
plan, the timing and extent of licensing revenue, investments in inventory and
accounts receivable, the cost of securing access to adequate manufacturing
capacity, our operating expenses, including legal and patent assertion costs,
and general economic conditions. In addition, cash may be required for future
acquisitions should we choose to pursue any. To the extent existing resources
and cash from operations are insufficient to support our activities; we may need
to raise additional funds through public or private equity or debt financing.
These funds may not be available, or if available, we may not be able to obtain
them on terms favorable to us.
 
 Item 3. Quantitative and Qualitative Disclosures About Market
Risk
 
 Interest
Rate Risk
 
 A
sensitivity analysis was performed on our investment portfolio as of June 30,
2008. This sensitivity analysis was based on a modeling technique that measures
the hypothetical market value changes that would result from a parallel shift in
the yield curve of plus 50, 100, or 150 basis points over a twelve-month time
horizon. The following represents the potential decrease to the value of our
investments given a negative shift in the yield curve used in our sensitivity
analysis.
 
 0.5%
              1.0%
              1.5%$315,000
              $630,000
              $940,000
 
 Foreign
Currency Exchange Risk
 
 A
majority of our revenue, expense, and capital purchasing activities are
transacted in U.S. dollars. However, certain operating expenditures and capital
purchases are incurred in or exposed to other currencies, primarily the Euro,
British Pound, the South Korean Won, Taiwan Dollar and the Chinese Yuan. The
effect of any adverse changes in foreign currency exchange rates may impact our
future operating results or cash flows as any such changes in our currency
exchange rate may result in increased ongoing research and development or sales
and marketing costs in our foreign operations. Additionally, some of our foreign
distributors price our products in the local currency of the countries in which
they sell. Therefore, significant strengthening or weakening of the U.S. dollar
relative to those foreign currencies could result in reduced demand or lower
U.S. dollar prices or vice versa, for our products, which would negatively
affect our operating results. Subsequent to the end of the second quarter, we
entered into forward contracts to hedge a portion of our foreign currency
expenses incurred in Euros, Japanese Yen and British Pounds.
 
 Item 4. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 Based on
our management’s evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the “Exchange Act”) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
 
 Changes
in Internal Control over Financial Reporting
 
 There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during our second quarter of
fiscal 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 
  25
 Table of Contents
  Part II. Other Information
 
 Item 1. Legal Proceedings
 
 Please
refer to Note 9 to our financial statements under Part I Item I financials
statements.
 
 Item 1A. Risk Factors
 
 A description of the risk factors
associated with our business is set forth below. 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.
 
 Our annual and
quarterly operating results may fluctuate significantly and are difficult to
predict.
 
 Our
annual and quarterly operating results are likely to vary significantly in the
future based on a number of factors over which we have little or no control.
These factors include, but are not limited to:
 
 •
              the
      growth, evolution and rate of adoption of industry standards for our key
      markets, including consumer electronics, digital-ready PCs and displays
      and storage devices and systems;
 
 •
              the
      fact that our licensing revenue is heavily dependent on a few key
      licensing transactions being completed for any given period, the timing of
      which is not always predictable and is especially susceptible to delay
      beyond the period in which completion is expected and our concentrated
      dependence on a few licensees in any period for substantial portions of
      our expected licensing revenue and
profits;
 
 •
              the
      fact that our licensing revenue has been uneven and unpredictable over
      time and is expected to continue to be uneven and unpredictable for the
      foreseeable future, resulting in considerable fluctuation in the amount of
      revenue recognized in a particular
quarter;
 
 •
              competitive
      pressures, such as the ability of competitors to successfully introduce
      products that are more cost-effective or that offer greater functionality
      than our products, including integration into their products of
      functionality offered by our products, the prices set by competitors for
      their products and the potential for alliances, combinations, mergers and
      acquisitions among our competitors;
 
 •
              average
      selling prices of our products, which are influenced by competition and
      technological advancements, among other
factors;
 
 •
              government
      regulations regarding the timing and extent to which digital content must
      be made available to consumers;
 
 •
              the
      availability of other semiconductors or other key components that are
      required to produce a complete solution for the customer; usually, we
      supply one of many necessary components;
and
 
 •
              the
      cost of components for our products and prices charged by the third
      parties who manufacture, assemble and test our
  products.
 
 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 annual
and quarterly operating results are highly dependent upon how well we
manage our business.
 
 Our
annual and quarterly operating results may fluctuate based on how well we manage
our business. Some of these factors include the following:
  26
 Table of Contents
  •
              our
      ability to manage product introductions and transitions, develop necessary
      sales and marketing channels and manage other matters necessary to enter
      new market segments;
 
 •
              our
      ability to successfully manage our business in multiple markets such as
      CE, PC and storage, which may involve additional research and development,
      marketing or other costs and
expenses;
 
 •
              our
      ability to enter into licensing deals when expected and make timely
      deliverables and milestones on which recognition of revenue often
      depends;
 
 •
              our
      ability to engineer customer solutions that adhere to industry standards
      in a timely and cost-effective
manner;
 
 •
              our
      ability to achieve acceptable manufacturing yields and develop automated
      test programs within a reasonable time frame for our new
      products;
 
 •
              our
      ability to manage joint ventures and projects, design services and our
      supply chain partners;
 
 •
              our
      ability to monitor the activities of our licensees to ensure compliance
      with license restrictions and remittance of
  royalties;
 
 •
              our
      ability to structure our organization to enable achievement of our
      operating objectives and to meet the needs of our customers and
      markets;
 
 •
              the
      success of the distribution and partner channels through which we choose
      to sell our products and
 
 •
              our
      ability to manage expenses and inventory levels;
  and
 
 •
              our
      ability to successfully maintain certain structural and various compliance
      activities in support of our global structure which in the long run, will
      result in certain operational benefits as well as achieve an overall lower
      tax rate.
 
 If we
fail to effectively manage our business, this could adversely affect our results
of operations.
 
 Our business may
be significantly impacted by a downturn in the economy.
 
 Our CE
product revenue, which comprised of approximately 63.7% and 63.5% of total
revenue for the three and six months ended June 30, 2008 respectively, is
dependent on continued demand for consumer electronics, including but not
limited to, DTVs, STBs, DVDs and game consoles. Demand for consumer electronics
business is a function of the health of the economies in the United States and
around the world. If the US economy or other economies around the world move
into recession, we expect that the demand for overall consumer electronics will
be adversely affected and therefore, demand for our CE, PC and storage products
and our operating results will be adversely affected as well.
 
 The licensing
component of our business strategy increases business risk and volatility.
 
 Part of
our business strategy is to license intellectual property (IP) through
agreements with companies whereby companies incorporate our IP into their
respective technologies that address markets in which we do not want to directly
participate. There can be no assurance that additional companies will be
interested in purchasing these virtual products on commercially favorable terms
or at all. We also cannot ensure that companies who purchase 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.
The IP agreements are complex and depend upon many factors including completion
of milestones, allocation of values to delivered items and customer acceptances.
Many of these factors require significant judgments. Licensing revenue could
fluctuate significantly from period to period because it is heavily dependent on
a few key deals being completed in a particular period, the timing of which is
difficult to predict and may not match our expectations. Because of its high
margin content, the sales of these virtual products can have a disproportionate
impact on gross profit and profitability. Also, generating revenue from these
arrangements is a lengthy and complex process that may last beyond the period in
which efforts begin and once an agreement is in place, the timing of revenue
recognition may be dependent on customer acceptance of deliverables, achievement
of milestones, our ability to track and report progress on contracts, customer
commercialization of the licensed technology and other factors. Licensing that
occurs in connection with actual or contemplated litigation is subject to risk
that the adversarial nature of the transaction will induce non-compliance or
non-payment. The accounting rules associated with recognizing revenue from these
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.
  27
 Table of Contents
  
 We face intense
competition in our markets, which may lead to reduced revenue from sales of our
products and increased losses.
 
 The CE,
PC and storage markets in which we operate are intensely competitive. These
markets are characterized by rapid technological change, evolving standards,
short product life cycles and declining selling prices. We expect competition
for many of our products to increase, as industry standards become widely
adopted and as new competitors enter our markets.
 
 Our
products face competition from companies selling similar discrete products and
from companies selling products such as chipsets with integrated functionality.
Our competitors include semiconductor companies that focus on the CE, display or
storage markets, as well as major diversified semiconductor companies and we
expect that new competitors will enter our markets. Current or potential
customers, including our own licensees, may also develop solutions that could
compete with us, including solutions that integrate the functionality of our
products into their solutions. In addition, current or potential OEM customers
may have internal semiconductor capabilities and may develop their own solutions
for use in their products rather than purchasing them from companies such as us.
Some of our competitors have already established supplier or joint development
relationships with current or potential customers and may be able to leverage
their existing relationships to discourage these customers from purchasing
products from us or persuade them to replace our products with theirs. Many of
our competitors have longer operating histories, greater presence in key
markets, better name recognition, access to larger customer bases and
significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do and 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 CE
manufacturers, such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba,
may compete against us in the future. Some of our competitors could merge, which
may enhance their market presence. Existing or new competitors may also develop
technologies that more effectively address our markets with products that offer
enhanced features and functionality, lower power requirements, greater levels of
integration or lower cost. Increased competition has resulted in and is likely
to continue to result in price reductions and loss of market share in certain
markets. We cannot assure you that we can compete successfully against current
or potential competitors, or that competition will not reduce our revenue and
gross margins.
 
 We operate in
rapidly evolving markets, which makes it difficult to evaluate our future
prospects.
 
 The
markets in which we compete are characterized by rapid technological change,
evolving customer needs and frequent introductions of new products and
standards. As we adjust to evolving customer requirements and technological
advances, we may be required to further reposition our existing offerings and to
introduce new products and services. We may not be successful in developing and
marketing such new offerings, or we may experience difficulties that could delay
or prevent the development and marketing of such new offerings. Moreover, new
standards that compete with DVI and HDMI have been and in the future may be
introduced from time to time, which could impact our success. 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.
 
 Our success
depends on demand for our new products.
 
 Our
future growth and success depends on our ability to develop and bring to market
on a timely basis new products, such as our HDTV input processors and MHL
products, which we have recently introduced into the market. There can be no
assurance that we will be successful in developing and marketing these new or
other future products, such as our Personal Entertainment Network (PEN) products
under development. Moreover, there is no assurance that our new or future
products will achieve the desired level of market acceptance in the anticipated
timeframes or that any such new or future products will contribute significantly
to our revenue. Our new products face significant competition from established
companies that have been selling competitive products for longer periods of time
than we have.
 
 Demand for our
HDMI based products is dependent on continued adoption and widespread
implementation of the HDMI specification.
 
 Our
success in the HDMI market is largely dependent upon the continued adoption and
widespread implementation of the HDMI specification. Demand for our products may
be inhibited by unanticipated unfavorable changes in or new regulations that
delay or impede the transition to digital broadcast technologies in the U.S. or
abroad. Demand for our consumer electronics products may also be inhibited in
the event of negative consumer experience with HDMI technology as more consumers
put it into service. Transmission of audio and video from “player devices” (such
as a DVD player or set-top box) to intermediary devices (such as an
audio-video
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  receiver
(“AVR”) to displays (such as an HDTV) over HDMI with HDCP represents a
combination of new technologies working in concert. Complexities with these
technologies, the interactions between content protection technologies and HDMI
with HDCP and the variability in HDMI 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. In addition, we believe that the rate of HDMI adoption
may be affected by changes in FCC rules and European Information Communications
and Consumer Electronics Technology Industry Associations (EICTA) and Cable
& Satellite Broadcasting Association of Asia (CASBAA) recommendations
described below.
 
 In the
United States, the FCC issued its Plug and Play order in October 2003. In
November 2003 and March 2004, these rules, known as the Plug & Play Final
Rules (Plug & Play Rules), became effective. The Plug and Play Rules are
relevant to DVI and HDMI with respect to high definition set-top boxes and the
labeling of digital cable ready televisions. Regarding high-definition set-top
boxes, the FCC stated that, as of July 1, 2005, all high definition set-top
boxes acquired by cable operators for distribution to subscribers would need to
include either a Digital Visual Interface (DVI) or High-Definition Multimedia
Interface (HDMI) with HDCP. Regarding digital cable ready televisions, the FCC
stated that a 720p or 1080i unidirectional digital cable television may not be
labeled or marketed as digital cable ready unless it includes the following
interfaces DVI or HDMI with HDCP according to a phase-in timetable. In the past,
the FCC has made modifications to its rules and timetable for the DTV transition
and it may do so in the future. We cannot predict whether these FCC rules will
be amended prior to completion of the phase-in dates or that such phase-in dates
will not be delayed. In addition, we cannot guarantee that the FCC will not in
the future reverse these rules or adopt rules requiring or supporting different
interface technologies, either of which would adversely affect our
business.
 
 In
January 2005, the European Industry Association for Information Systems,
Communication Technologies and Consumer Electronics (EICTA) issued its
“Conditions for High Definition Labeling of Display Devices” which requires all
HDTVs using the “HD Ready” logo to have either an HDMI or DVI input with HDCP.
In August 2005, EICTA issued its “Minimum Requirements for HD Television
Receivers” which requires HD Receivers without an integrated display (e.g. HD
STBs) utilizing the “HDTV” logo and intended for use with HD sources (e.g.
television broadcasts), some of which require content protection in order to
permit HD quality output, to have either a DVI or HDMI output with
HDCP.
 
 In August
2005, the Cable and Satellite Broadcasting Association of Asia (CASBAA) issued a
series of recommendations in its “CASBAA Principles for Content Protection in
the Asia-Pacific Pay-TV Industry” for handling digital output from future
generations of set-top boxes for VOD, PPV, Pay-TV and other encrypted digital
programming applications. These recommendations include the use of one or more
HDMI with HDCP or DVI with HDCP digital outputs for set-top boxes capable of
outputting uncompressed high-definition content.
 
 With
respect to the EICTA and CASBAA recommendations, we cannot predict the rate at
which manufacturers will implement the HDMI-related recommendations in their
products.
 
 The HDMI
founders decided to reduce the annual license fee payable by HDMI adopters from
$15,000 to $10,000 per year effective on November 1, 2006 for all adopters after
that date in order to encourage more widespread adoption of HDMI. The annual
fees collected by our subsidiary HDMI Licensing, LLC are recognized as revenues
by us. Accordingly, if there are not sufficient new adopters of HDMI to offset
the reduction in the annual license fee payable per adopter, our revenues will
be negatively impacted. In addition, during 2007, at a founders meeting, the
founders decided to share the HDMI adopter’s royalty revenues among the various
founders. Our subsidiary no longer receives 100% of the HDMI adopter royalty
revenues.
 
 We will have
difficulty selling our products if customers do not design our products into
their product offerings or if our customers’ product offerings are not
commercially successful.
 
 Our
products are generally incorporated into our customers’ products at the design
stage. As a result, we rely on equipment manufacturers to select our products to
be designed into their products. Without these “design wins,” it is very
difficult to sell our products. We often incur significant expenditures on the
development of a new product without any assurance that an equipment
manufacturer will select our product for design into its own product.
Additionally, in some instances, we are dependent on third parties to obtain or
provide information that we need to achieve a design win. Some of these third
parties may be our competitors and, accordingly, may not supply this information
to us on a timely basis, if at all. Once an equipment manufacturer designs a
competitor’s product into its product offering, it becomes significantly more
difficult for us to sell our products to that customer because
changing
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  suppliers
involves significant cost, time, effort and risk for the customer. Furthermore,
even if an equipment manufacturer designs one of our products into its product
offering, we cannot be assured that its product will be commercially successful
or that we will receive any revenue from that product. Sales of our products
largely depend on the commercial success of our customers’ products. Our
customers generally can choose at any time to stop using our products if their
own products are not commercially successful or for any other reason. We cannot
assure you that we will continue to achieve design wins or that our customers’
equipment incorporating our products will ever be commercially
successful.
 
 Our products
typically have lengthy sales cycles. A customer may decide to cancel or change
its product plans, which could cause us to lose anticipated sales. In
addition, our average product life cycles tend to be short and, as a
result, we
may hold excess or obsolete inventory that could adversely affect our operating
results.
 
 After we
have developed and delivered a product to a customer, the customer will usually
test and evaluate our product prior to designing its own equipment to
incorporate our product. Our customers generally need three months to over six
months to test, evaluate and adopt our product and an additional three months to
over nine months to begin volume production of equipment that incorporates our
product. Due to this lengthy sales cycle, we may experience significant delays
from the time we incur operating expenses and make investments in inventory
until the time that we generate revenue from these products. It is possible that
we may never generate any revenue from these products after incurring such
expenditures. Even if a customer selects our product to incorporate into its
equipment, we have no assurances that the customer will ultimately market and
sell its equipment or that such efforts by our customer will be successful. The
delays inherent in our lengthy sales cycle increase the risk that a customer
will decide to cancel or change its product plans. Such a cancellation or change
in plans by a customer could cause us to lose sales that we had anticipated. In
addition, anticipated sales could be materially and adversely affected if a
significant customer curtails, reduces or delays orders during our sales cycle
or chooses not to release equipment that contains our products.
 
 While our
sales cycles are typically long, our average product life cycles tend to be
short as a result of the rapidly changing technology environment in which we
operate. As a result, the resources devoted to product sales and marketing may
not generate material revenue for us and from time to time, we may need to write
off excess and obsolete inventory. If we incur significant marketing expenses
and investments in inventory in the future that if we are not able to recover
and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced
prices in anticipation of cost reductions but still hold higher cost products in
inventory, our operating results would be harmed.
 
 Our customer may
not purchase anticipated levels of products, which can result in increased
inventory levels
 
 We
generally do not obtain firm, long-term purchase commitments from our customers
and, in order to accommodate the requirements of certain customers, we may from
time to time build inventory that is specific to that customer in advance of
receiving firm purchase orders. The short-term nature of our customers’
commitments and the rapid changes in demand for their products reduce our
ability to accurately estimate the future requirements of those customers.
Should the customer’s needs shift so that they no longer require such inventory,
we may be left with excessive inventories, which could adversely affect our
operating results.
 
 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 three months ended June 30, 2008,
shipments to World Peace Industrial, Microtek Corporation, and Innotech
Corporation generated 15.3%, 12.3% and 12.2% of our revenue, respectively. For
the six months ended June 30, 2008, shipments to World Peace Industrial,
Microtek Corporation, and Innotech Corporation generated 14.9%, 12.3% and 11.6%
of our revenue, respectively. For the three  months ended June 30,
2007, shipments to Innotech Corporation, Microtek Corporation and World Peace
Industrial, generated 18.3%, 12.5% and 11.7% of our revenue, respectively. For
the six months ended June 30, 2007, shipments to Innotech Corporation, Microtek
Corporation and World Peace Industrial, generated 16.6%, 13.2%, 10.5% of our
revenue respectively.  In addition, an end-customer may buy our
products 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; and/or
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  •
              one
      or more significant customers selects products manufactured by one of our
      competitors for inclusion in their future product
    generations.
 
 While our
participation in multiple markets, has broadened our customer base, 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 end
customers, therefore reducing our ability to forecast sales and increasing the
complexity of our business.
 
 Many
original equipment manufacturers (“OEM”) rely on third-party manufacturers or
distributors to provide inventory management and purchasing functions.
Distributors generated 53.3% and 52.6% of our revenue for the three and six
months ended June, 2008 ,respectively. Distributors generated 42.9% and 42.5% of
our revenue for the three and six months ended June 30, 2007, respectively.
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
distributor 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
products and will continue to introduce new products in the future. As our
products integrate new, more advanced functions, they become more complex and
increasingly difficult to design, manufacture and debug. Successful product
development and introduction depends on a number of factors, including, but not
limited to:
 
 •
              accurate
      prediction of market requirements and the establishment of market
      standards and the evolution of existing standards, including enhancements
      or modifications to existing standards such as HDMI, HDCP, DVI, SATA I and
      SATA II;
 
 •
              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, when use of such processes are required
      and achievement of high manufacturing yields and low cost
      testing;
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  •
              market
      acceptance of new products; and
 
 •
              market
      acceptance of new architectures such as our input
    processors.
 
 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 constraints,
the inability to license third-party technology or other factors. Competitors
and customers may integrate the functionality of our products into their own
products, thereby reducing 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.
 
 There
are risks to our global strategy
 
 In 2006,
we implemented a global strategy that involves maintaining operations in various
countries around the world. We believe that, in the long run, we will realize
certain operational benefits from this global strategy as well as achieve an
overall lower tax rate. However, the effectiveness of the strategy requires, in
addition to maintaining and increasing profitability, maintenance of a certain
corporate structure and various compliance activities required by foreign
jurisdictions in support of the structure. Should management fail to adhere to
the these compliance requirements or fail to maintain supportive processes, our
ability to realize the expected benefits of our global strategy may be
jeopardized, which may adversely affect our business, operating results or
financial condition.
 
 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. Acquisitions of companies
or intangible assets is a strategy we may use to develop new products and enter
new markets. In January 2007, we completed the acquisition of sci-worx, now
Silicon Image, GmbH. We may acquire additional companies or technologies in the
future. Acquisitions involve numerous risks, including, but not limited to, the
following:
 
 •
              difficulty
      and increased costs in assimilating employees, including our possible
      inability to keep and retain key employees of the acquired
      business;
 
 •
              disruption
      of our ongoing business;
 
 •
              discovery
      of undisclosed liabilities of the acquired companies and legal disputes
      with founders or shareholders of acquired
  companies;
 
 •
              inability
      to successfully incorporate acquired technology and operations into our
      business and maintain uniform standards, controls, policies and
      procedures;
 
 •
              inability
      to commercialize acquired technology;
and
 
 •
              the
      need to take impairment charges or write-downs with respect to acquired
      assets.
 
 No
assurance can be given that our prior acquisitions or our future acquisitions,
if any, will be successful or provide the anticipated benefits, or that they
will not adversely affect our business, operating results or financial
condition. Failure to manage growth effectively and to successfully integrate
acquisitions made by us could materially harm our business and operating
results.
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  Our acquisition
of sci-worx GmbH exposes us to a variety of risks.
 
 We
acquired sci-worx, now Silicon Image, GmbH, a limited liability company based in
Germany, in January 2007. In addition to the acquisition-related risks described
in the risk factor above, this acquisition exposes us to complexities of
operating in Germany, a country in which we had not previously had significant
operations and whose regulatory framework with which we have only recently
become familiar and of difficulties in managing and integrating approximately
172 employees, as of the date of acquisition, based in Germany. In addition, the
technologies acquired from sci-worx may require significant additional
development before they can be marketed and may not generate sufficient revenue
to offset expenses associated with the acquisition. Any of these problems or
factors with respect to this acquisition could adversely affect our business,
financial condition or results of operations.
 
 Industry cycles
may strain our management and resources.
 
 Cycles of
growth and contraction in our industry may strain our management and resources.
To manage these industry cycles effectively, we must:
 
 •
              improve
      operational and financial systems;
 
 •
              train
      and manage our employee base;
 
 •
              successfully
      integrate operations and employees of businesses we acquire or have
      acquired;
 
 •
              attract,
      develop, motivate and retain qualified personnel with relevant experience;
      and
 
 •
              adjust
      spending levels according to prevailing market
  conditions.
 
 If we
cannot manage industry cycles effectively, our business could be seriously
harmed.
 
 The cyclical
nature of the semiconductor industry may create constrictions in our foundry, test
and assembly capacity.
 
 The
semiconductor industry is characterized by significant downturns and wide
fluctuations in supply and demand. This cyclicality has led to significant
fluctuations in product demand and in the foundry, test and assembly capacity of
third-party suppliers. Production capacity for fabricated semiconductors is
subject to allocation, whereby not all of our production requirements would be
met. This may impact our ability to meet demand and could also increase our
production costs and inventory levels. 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. Our
financial performance has been and may in the future be, negatively impacted by
downturns in the semiconductor industry. In a downturn situation, we may incur
substantial losses if there is excess production capacity or excess inventory
levels in the distribution channel.
 
 We depend on
third-party sub-contractors to manufacture, assemble and test nearly all of our
products, which reduce our control over the production process.
 
 We do not
own or operate a semiconductor fabrication facility. We rely on third party
semiconductor manufacturing companies overseas to produce the vast majority of
our semiconductor products. We also rely on outside assembly and test services
to test all of our semiconductor products. Our reliance on independent
foundries, assembly and test facilities involves a number of significant risks,
including, but not limited to:
 
 •
              reduced
      control over delivery schedules, quality assurance, manufacturing yields
      and production costs;
 
 •
              lack
      of guaranteed production capacity or product supply, potentially resulting
      in higher inventory levels;
 
 •
              lack
      of availability of, or delayed access to, next-generation or key process
      technologies; and
 
 •
              limitations
      on our ability to transition to alternate sources if services are
      unavailable from primary
suppliers.
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  In
addition, our semiconductor products are assembled and tested by several
independent subcontractors. We do not have a long-term supply agreement with all
of our subcontractors and instead obtain production services on a purchase order
basis. Our outside sub-contractors have no obligation to supply products to us
for any specific period of time, in any specific quantity or at any specific
price, except as set forth in a particular purchase order. Our requirements
represent a small portion of the total production capacity of our outside
foundries, assembly and test facilities and our sub-contractors may reallocate
capacity to other customers even during periods of high demand for our products.
These foundries may allocate or move production of our products to different
foundries under their control, even in different locations, which may be time
consuming, costly and difficult, have an adverse affect on quality, yields and
costs and require us and/or our customers to re-qualify the products, which
could open up design wins to competition and result in the loss of design wins
and design-ins. If our subcontractors are unable or unwilling to continue
manufacturing our products in the required volumes, at acceptable quality,
yields and costs and in a timely manner, our business will be substantially
harmed. As a result, we would have to identify and qualify substitute
contractors, which would be time-consuming, costly and difficult. This
qualification process may also require significant effort by our customers and
may lead to re-qualification of parts, opening up design wins to competition and
loss of design wins and design-ins. Any of these circumstances could
substantially harm our business. In addition, if competition for foundry,
assembly and test capacity increases, our product costs may increase and we may
be required to pay significant amounts or make significant purchase commitments
to secure access to production services.
 
 The complex
nature of our production process, which can reduce yields and prevent
identification of problems until well into the production cycle or, in
some cases,
after the product has been shipped.
 
 The
manufacture of semiconductors is a complex process and it is often difficult for
semiconductor foundries to achieve acceptable product yields. Product yields
depend on both our product design and the manufacturing process technology
unique to the semiconductor foundry. Since low yields may result from either
design or process difficulties, identifying problems can often only occur well
into the production cycle, when an actual product exists that can be analyzed
and tested.
 
 Further,
we only test our products after they are assembled, as their high-speed nature
makes earlier testing difficult and expensive. As a result, defects often are
not discovered until after assembly. This could result in a substantial number
of defective products being assembled and tested or shipped, thus lowering our
yields and increasing our costs. These risks could result in product shortages
or increased costs of assembling, testing or even replacing our
products.
 
 Although
we test our products before shipment, they are complex and may contain defects
and errors. In the past we have encountered defects and errors in our products.
Because our products are sometimes integrated with products from other vendors,
it can be difficult to identify the source of any particular problem. Delivery
of products with defects or reliability, quality or compatibility problems, may
damage our reputation and our ability to retain existing customers and attract
new customers. In addition, product defects and errors could result in
additional development costs, diversion of technical resources, delayed product
shipments, increased product returns, warranty and product liability claims
against us that may not be fully covered by insurance. Any of these
circumstances could substantially harm our business.
 
 We face foreign
business, political and economic risks because a majority of our products and
our customers’ products are manufactured and sold outside of the United
States.
 
 A
substantial portion of our business is conducted outside of the United States.
As a result, we are subject to foreign business, political and economic risks.
Nearly all of our products are manufactured in Taiwan or elsewhere in Asia. For
the three and six months ended June 30, 2008, approximately 83.3% and 81.8% 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. In addition, we undertake various sales and
marketing activities through regional offices in several other countries and we
have significantly expanded our research and development operations outside of
the United States. We intend to continue to expand our international business
activities. Accordingly, we are subject to international risks, including, but
not limited to:
 
 •
              political,
      social and economic instability;
 
 •
              exposure
      to different business practices and legal standards, particularly with
      respect to intellectual property;
 
 •
              natural
      disasters and public health
emergencies;
 
 •
              nationalization
      of business and blocking of cash
flows;
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 Table of Contents
  
 •
              trade
      and travel restrictions
 
 •
              the
      imposition of governmental controls and
  restrictions;
 
 •
              burdens
      of complying with a variety of foreign
laws;
 
 •
              import
      and export license requirements and restrictions of the United States and
      each other country in which we
operate;
 
 •
              unexpected
      changes in regulatory requirements;
 
 •
              foreign
      technical standards;
 
 •
              changes
      in taxation and tariffs;
 
 •
              difficulties
      in staffing and managing international
  operations;
 
 •
              fluctuations
      in currency exchange rates;
 
 •
              difficulties
      in collecting receivables from foreign entities or delayed revenue
      recognition;
 
 •
              expense
      and difficulties in protecting our intellectual property in foreign
      jurisdictions;
 
 •
              exposure
      to possible litigation or claims in foreign jurisdictions;
    and
 
 •
              potentially
      adverse tax consequences.
 
 Any of
the factors described above may have a material adverse effect on our ability to
increase or maintain our foreign sales. In addition, original equipment
manufacturers that design our semiconductors into their products sell them
outside of the United States. This exposes us indirectly to foreign risks.
Because sales of our products are denominated exclusively in United States
dollars, relative increases in the value of the United States dollar will
increase the foreign currency price equivalent of our products, which could lead
to a change in the competitive nature of these products in the marketplace. This
in turn could lead to a reduction in sales and profits.
 
 The success of
our business depends upon our ability to adequately protect our intellectual
property.
 
 We rely
on a combination of patent, copyright, trademark, mask work and trade secret
laws, as well as nondisclosure agreements and other methods, to protect our
proprietary technologies. We have been issued patents and have a number of
pending patent applications. However, we cannot assure you that any patents will
be issued as a result of any applications or, if issued, that any claims allowed
will protect our technology. In addition, we do not file patent applications on
a worldwide basis, meaning we do not have patent protection in some
jurisdictions. It may be possible for a third-party, including our licensees, to
misappropriate our copyrighted material or trademarks. It is possible that
existing or future patents may be challenged, invalidated or circumvented and
effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in foreign countries. It may be possible for a
third-party to copy or otherwise obtain and use our products or technology
without authorization, develop similar technology independently or design around
our patents in the United States and in other jurisdictions. It is also possible
that some of our existing or new licensing relationships will enable other
parties to use our intellectual property to compete against us. Legal actions to
enforce intellectual property rights tend to be lengthy and expensive and the
outcome often is not predictable. As a result, despite our efforts and expenses,
we may be unable to prevent others from infringing upon or misappropriating our
intellectual property, which could harm our business. In addition, practicality
also limits our assertion of intellectual property rights. Patent litigation is
expensive and its results are often unpredictable. Assertion of intellectual
property rights often results in counterclaims for perceived violations of the
defendant’s intellectual property rights and/or antitrust claims. Certain
parties after receipt of an assertion of infringement will cut off all
commercial relationships with the party making the assertion, thus making
assertions against suppliers, customers and key business partners risky. If we
forgo making such claims, we may run the risk of creating legal and equitable
defenses for an infringer.
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  Our participation
in working groups for the development and promotion of industry
standards in our target markets, including the Digital Visual Interface and
HDMI specifications, requires us to license some of our intellectual
property for free or under specified terms and conditions, which may make it
easier for others to compete with us in such markets.
 
 A key
element of our business strategy includes participation in working groups to
establish industry standards in our target markets, promote and enhance
specifications and develop and market products based on such specifications and
future enhancements. We are a promoter of the Digital Display Working Group
(DDWG), which published and promotes the DVI specification and a founder in the
working group that develops and promotes the HDMI specification. In connection
with our participation in such working groups:
 
 •
              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
and
 
 •
              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,
certain companies that implement the DVI and HDMI specifications in their
products can use specific elements of our intellectual property to compete with
us, in certain cases for free. Although in the case of the HDMI specification,
there are annual fees and royalties associated with the adopters’ agreements,
there can be no assurance that such annual fees and royalties will adequately
compensate us for having to license our intellectual property. Fees and
royalties received during the early years of adoption of HDMI 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 during which we
received all of the royalties associated with HDMI adopters’ agreements, in
2007, the HDMI founders reallocated the royalties to reflect each founder’s
relative contribution of intellectual property to the HDMI specification. We no
longer receive 100% of these royalties.
 
 We intend
to promote and continue to be involved and actively participate in other
standard setting initiatives. For example, we also recently joined the Serial
Port Memory Technology Working Group (SPMTWG) to develop and promote a new
memory technology. Accordingly, we may license additional elements of our
intellectual property to others for use in implementing, developing, promoting
or adopting standards in our target markets, in certain circumstances at little
or no cost. This may make it easier for others to compete with us in such
markets. In addition, even if we receive license fees and/or royalties in
connection with the licensing of our intellectual property, there can be no
assurance that such license fees and/or royalties will adequately compensate us
for having to license our intellectual property.
 
 Our success
depends in part on our relationships with Sunplus and other strategic
partners.
 
 We have
entered into and expect to continue to enter into, strategic partnerships with
third parties. In February 2007, we entered into a licensing agreement with
Sunplus Technology, which grants us the rights to use and further develop
advanced intellectual property (“IP”) technology. We believe that the IP
licensed under this agreement will enhance our ability to develop DTV technology
and other consumer product offerings. but the success of the arrangement depends
upon our successful integration of the operations of the former sci-worx, which
will be critical to our ability to develop products based on the licensed IP.
The success of this strategic relationship also depends upon the continued
market acceptance of our HDTV and consumer products. There is no assurance that
we will be successful in integrating the operations of sci-worx or in developing
successful products based on the Sunplus technology. While our relationship with
Sunplus and other strategic partners are designed to drive revenue growth and
adoption of our technologies and industry standards promulgated by us and also
reduce our research and development expenses, there is no guarantee that these
strategic partnerships will be successful. Negotiating and performing under
these strategic partnerships involves significant time and expense; we may not
realize anticipated increases in revenue, standards adoption or cost savings;
and these strategic partnerships may make it easier for the third parties to
compete with us; any of which may have a negative effect our business and
results of operations.
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  Our success
depends on managing our relationship with Intel.
 
 Intel has
a dominant role in many of the markets in which we compete, such as PCs and
storage and is a growing presence in the CE market. We have a multi-faceted
relationship with Intel that is complex and requires significant management
attention, including:
 
 •
              Intel
      and Silicon Image have been parties to business cooperation
      agreements;
 
 •
              Intel
      and Silicon Image are parties to a patent
  cross-license;
 
 •
              Intel
      and Silicon Image worked together to develop
  HDCP;
 
 •
              an
      Intel subsidiary has the exclusive right to license HDCP, of which we are
      a licensee;
 
 •
              Intel
      and Silicon Image were two of the promoters of the
  DDWG;
 
 •
              Intel
      is a promoter of the SATA 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 SATA by
      making it widely available in its chipsets and motherboards, which could
      affect demand for our products;
 
 •
              we
      believe that Intel has the market presence to affect adoption of HDMI by
      either endorsing complementary technology or promulgating a competing
      standard, which could affect demand for our
  products;
 
 •
              Intel
      may potentially integrate the functionality of our products, including
      SATA, DVI, or HDMI into its own chips and chipsets, thereby displacing
      demand for some of our products;
 
 •
              Intel
      may design new technologies that would require us to re-design our
      products for compatibility, thus increasing our R&D expense and
      reducing our revenue;
 
 •
              Intel’s
      technology, including its 845G chipset, may lower barriers to entry for
      other parties who may enter the market and compete with us;
      and
 
 •
              Intel
      may enter into or continue relationships with our competitors that can put
      us at a relative disadvantage.
 
 Our
cooperation and competition with Intel can lead to positive benefits, if managed
effectively. If our relationship with Intel is not managed effectively, it could
seriously harm our business, negatively affect our revenue and increase our
operating expenses.
 
 We have granted
Intel rights with respect to our intellectual property, which could allow Intel
to develop products that compete with ours or otherwise reduce the value
of our intellectual property.
 
 We
entered into a patent cross-license agreement with Intel in which each of us
granted the other a license to use the patents filed by the grantor prior to a
specified date, except for identified types of products. We believe that the
scope of our license to Intel excludes our current products and anticipated
future products. Intel could, however, exercise its rights under this agreement
to use our patents to develop and market other products that compete with ours,
without payment to us. Additionally, Intel’s rights to our patents could reduce
the value of our patents to any third-party who otherwise might be interested in
acquiring rights to use our patents in such products. Finally, Intel could
endorse competing products, including a competing digital interface, or develop
its own proprietary digital interface. Any of these actions could substantially
harm our business and results of operations.
 
 We 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
  37
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  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.
 
 On
January 31, 2007, we filed a lawsuit in the United States District Court for the
Northern District of California against Analogix Semiconductor, Inc.
(“Analogix”). The complaint charges Analogix with copyright infringement,
misappropriation of trade secrets and unfair competition under California law.
The lawsuit alleges that Analogix, without authorization and in violation of our
intellectual property rights, copied and used our proprietary register maps by
gaining unauthorized access to our proprietary and confidential information,
violated our copyright protection and unfairly competed with Silicon Image in
the marketplace.  In addition to seeking monetary damages in an amount
to be determined at trial, we seek an injunction barring Analogix from
misappropriation of Silicon Image’s trade secrets.  On June 18, 2007,
Analogix filed a counterclaim alleging that we breached a confidentiality
agreement by purportedly disclosing Analogix’s confidential information within
the Company. The court has set a trial date for September 29, 2008.
 
 On June
11, 2008, Analogix filed a lawsuit in the United States District Court for the
Northern District of California against Silicon Image alleging violations of the
Sherman Act Sections 1 and 2, Cartwright Act, and Section 17200 of the
California Business and Professions Code.  The complaint seeks
monetary damages and injunctive relief.  The complaint alleges that
Silicon Image, and co-defendants HDMI Licensing, LLC and Simplay Labs, LLC,
conspired with the founders of the HDMI Consortium in violation of the antitrust
laws.  Specifically, the complaint claims that the defendants and the
founders of the HDMI Consortium have created certain structural advantages and
engaged in anti-competitive conduct for the purpose of monopolizing the markets
for HDMI Solutions and Discrete HDMI Solutions.  Silicon Image
believes the HDMI Consortium is pro-competitive, bringing critical technology to
the market and enabling hundreds of adopters to supply HDMI-enabled
products.  We intend to vigorously contest Analogix’s claims. 
The court has yet to set a trial date.
 
 This
and other litigation initiated by us may be expensive and time-consuming and may
divert our resources and the attention of our executives.
 
 Any
potential intellectual property litigation against us or in which we become
involved could also force us to do one or more of the following:
 
 •
              stop
      selling products or using technology that contains the allegedly
      infringing intellectual property;
 
 •
              attempt
      to obtain a license to the relevant intellectual property, which license
      may not be available on reasonable terms or at all;
  and
 
 •
              attempt
      to redesign products that contain the allegedly infringing intellectual
      property.
 
 If we
take any of these actions, we may be unable to manufacture and sell our
products. We may be exposed to liability for monetary damages, the extent of
which would be very difficult to accurately predict. In addition, we may be
exposed to customer claims, for potential indemnity obligations and to customer
dissatisfaction and a discontinuance of purchases of our products while the
litigation is pending. Any of these consequences could substantially harm our
business and results of operations.
 
 We have entered
into and may again be required to enter into, patent or other intellectual
property cross-licenses.
 
 Many
companies have significant patent portfolios or key specific patents, or other
intellectual property in areas in which we compete. Many of these companies
appear to have policies of imposing cross-licenses on other participants in
their markets, which may include areas in which we compete. As a result, we have
been required, either under pressure of litigation or by significant vendors or
customers, to enter into cross licenses or non-assertion agreements relating to
patents or other intellectual property. This
  38
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  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 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.
 
 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. Our success also depends on our ability to identify, attract
and retain qualified technical, sales, marketing, finance and managerial
personnel. Competition for qualified personnel is particularly intense in our
industry and in our location. This makes it difficult to retain our key
personnel and to recruit highly qualified personnel. We have experienced and may
continue to experience, difficulty in hiring and retaining candidates with
appropriate qualifications. To be successful, we need to hire candidates with
appropriate qualifications and retain our key executives and employees.
Replacing departing executive officers and key employees can involve
organizational disruption and uncertain timing.
 
 The
volatility of our stock price has had an impact on our ability to offer
competitive equity-based incentives to current and prospective employees,
thereby affecting our ability to attract and retain highly qualified technical
personnel. If these adverse conditions continue, we may not be able to hire or
retain highly qualified employees in the future and this could harm our
business. In addition, regulations adopted by The NASDAQ Stock Market requiring
shareholder approval for all stock option plans, as well as regulations adopted
by the New York Stock Exchange prohibiting NYSE member organizations from giving
a proxy to vote on equity compensation plans unless the beneficial owner of the
shares has given voting instructions, could make it more difficult for us to
grant options to employees in the future. In addition, SFAS No. 123R, Share Based Payment, requires
us to record compensation expense for options granted to employees. To the
extent that new regulations make it more difficult or expensive to grant options
to employees, we may incur increased cash compensation costs or find it
difficult to attract, retain and motivate employees, either of which could harm
our business.
 
 We had a material
weakness in internal control over financial reporting in 2005 which was
remediated in 2006. We cannot assure you that additional material
weaknesses will not be identified in the future. If our internal control over
financial reporting or disclosure controls and procedures are not effective, there
may be errors in our financial statements that could require a restatement or
our filings may not be timely and investors may lose confidence in our
reported financial information, which could lead to a decline in our
stock price.
 
 Section
404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness
of our internal control over financial reporting as of the end of each year and
to include a management report assessing the effectiveness of our internal
control over financial reporting in each Annual Report on Form 10-K. Section 404
also requires our independent registered public accounting firm to report on,
our internal control over financial reporting.
 
 Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Over time, controls may
become inadequate because changes in conditions or deterioration in the degree
of compliance with policies or procedures may occur. In addition, we may
reassess the implementation or testing of certain of our current controls as a
result of the 2007 release of Public Company Accounting Oversight Board Auditing
Standard No. 5, which may lead to modifications in such controls. These
modifications could affect the overall effectiveness or evaluation of the
control system in the future by us or our
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  independent
registered public accounting firm. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
 
 As a
result, we cannot assure you that significant deficiencies or material
weaknesses in our internal control over financial reporting will not be
identified in the future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their implementation,
could result in significant deficiencies or material weaknesses, cause us to
fail to timely meet our periodic reporting obligations, or result in material
misstatements in our financial statements. Any such failure could also adversely
affect the results of periodic management evaluations and annual auditor
attestation reports regarding disclosure controls and the effectiveness of our
internal control over financial reporting required under Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence
of a material weakness could result in errors in our financial statements that
could result in a restatement of financial statements, cause us to fail to
timely meet our reporting obligations and cause investors to lose confidence in
our reported financial information, leading to a decline in our stock
price.
 
 We have
experienced transitions in our management team, our board of directors
and our
independent registered public accounting firm in the past and may continue to do so
in the future.
 
 We have
experienced a number of transitions with respect to our board of directors,
executive officers and our independent registered public accounting firm in
recent quarters, including the following:
 
 •
              In
      January 2005, Steve Laub (who replaced David Lee in November 2004)
      resigned from the positions of chief executive officer and president and
      from the board of directors, Steve Tirado was appointed as chief executive
      officer and president and to the board as well and Chris Paisley was
      appointed chairman of the board of
directors.
 
 •
              In
      February 2005, Jaime Garcia-Meza was appointed as vice president of our
      storage business.
 
 •
              In
      April 2005, Robert C. Gargus retired from the position of chief financial
      officer and Darrel Slack was appointed as his
  successor.
 
 •
              In
      April 2005, four of our then independent outside directors, David Courtney
      (chairman of the audit committee), Keith McAuliffe, Chris Paisley
      (chairman of the board) and Richard Sanquini, resigned from our board of
      directors and board committees.
 
 •
              In
      April 2005, Darrel Slack, our then chief financial officer, was elected to
      our board of directors.
 
 •
              In
      May 2005, Masood Jabbar and Peter Hanelt were elected to our board of
      directors.
 
 •
              In
      June 2005, David Lee did not stand for re-election as a director at our
      annual meeting of stockholders and accordingly, Dr. Lee resigned from our
      board of directors.
 
 •
              In
      June 2005, PricewaterhouseCoopers LLP resigned as our independent
      registered public accounting firm. In July 2005, we appointed Deloitte
      & Touche LLP as our new independent registered public accounting
      firm.
 
 •
              In
      August 2005, Darrel Slack began a personal leave of
    absence.
 
 •
              In
      August 2005, Dale Brown resigned from the positions of chief accounting
      officer and corporate controller.
 
 •
              In
      August 2005, Robert Freeman was appointed as interim chief financial
      officer and chief accounting
officer.
 
 •
              In
      September 2005, Darrel Slack resigned from the position of chief financial
      officer and from our board of directors and the board of directors of HDMI
      Licensing, LLC, our wholly-owned
subsidiary.
 
 •
              In
      October 2005, William George was elected to our board of
      directors.
 
 •
              In
      October 2005, Robert Bagheri resigned from the position of executive vice
      president of operations.
 
 •
              In
      October 2005, John LeMoncheck, then vice president, consumer electronics
      and PC/display, left Silicon
Image.
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 Table of Contents
  
 •
              In
      October 2005, John Shin was appointed as interim vice president, consumer
      electronics and PC/display businesses and served in that position until
      February 2006. Mr. Shin serves as vice president of engineering and has
      held that position since October
2003.
 
 •
              In
      November 2005, Robert Freeman’s position changed from interim chief
      financial officer to chief financial
officer.
 
 •
              In
      December 2005, William Raduchel was elected to our board of
      directors.
 
 •
              In
      January 2006, Dale Zimmerman was appointed as our vice president of
      worldwide marketing.
 
 •
              In
      February 2006, John Hodge was elected to our board of
      directors.
 
 •
              In
      September 2006, Patrick Reutens resigned from the position of chief legal
      officer.
 
 •
              In
      January 2007, Edward Lopez was appointed as our chief legal
      officer.
 
 •
              In
      February 2007, David Hodges advised our board of directors that he decided
      to retire and he did not stand for reelection to our board of directors
      when his term expired at our 2007 Annual Meeting of
      Stockholders.
 
 •
              In
      April 2007, Robert R. Freeman, announced his intention to retire from his
      position as Chief Financial
Officer.
 
 •
              In
      April 2007, Rob Valiton resigned from his position as vice president of
      worldwide sales and Sal Cobar was appointed as his
    successor.
 
 •
              In
      July 2007, Paul Dal Santo was appointed as Chief Operating
      Officer.
 
 •
              In
      October 2007, Robert Freeman resigned from his position as chief financial
      officer and Harold Covert was appointed as his
  successor.
 
 Such past
and future transitions may continue to result in disruptions in our operations
and require additional costs.
 
 We have been and
may continue to become the target of securities class action suits and
derivative suits which could result in substantial costs and divert management
attention and resources.
 
 Securities
class action suits and derivative suits are often brought against companies,
particularly technology companies, following periods of volatility in the market
price of their securities. Defending against these suits, even if meritless, can
result in substantial costs to us and could divert the attention of our
management. On December 7, 2001, we and certain of our officers and directors
were named as defendants along with the underwriters of the Company’s initial
public offering, in a securities class action lawsuit. The lawsuit alleges that
the defendants participated in a scheme to inflate the price of our stock in our
initial public offering and in the aftermarket through a series of misstatements
and omissions associated with the offering. The lawsuit is one of several
hundred similar cases pending in the Southern District of New York that have
been consolidated by the court. In February 2003, the District Court issued an
order denying a motion to dismiss by all defendants on common issues of law. In
July 2003, we, along with over 300 other issuers named as defendants, agreed to
a settlement of this litigation with plaintiffs. While the parties’ request for
court approval of the settlement was pending, in December 2006 the United States
Court of Appeals for the Second Circuit reversed the District Court’s
determination that six focus cases could be certified as class actions. In April
2007, the Second Circuit denied plaintiffs’ petition for rehearing, but
acknowledged that the District Court might certify a more limited class. At a
June 26, 2007 status conference, the Court terminated the proposed settlement as
stipulated among the parties. Plaintiffs filed an amended complaint on August
14, 2007. On September 27, 2007, plaintiffs filed a motion for class
certification in the six focus cases. The court has not yet decided the class
certification motion. On November 13, 2007 defendants in the six focus cases
field a motion to dismiss the complaint for failure to state a claim, which the
district court denied on March 8, 2008.
 
 We and
certain of our officers have also been named as defendants in a securities class
action captioned “Curry v. Silicon Image, Inc., Steve Tirado and Robert Gargus,”
commenced on January 31, 2005. Plaintiffs filed the action on behalf of a
putative class of stockholders who purchased Silicon Image stock between October
19, 2004 and January 24, 2005. The lawsuit alleged that Silicon Image and
certain of our officers and directors violated securities laws and made alleged
misstatements of material facts. For more information, please see Part I, Item I
of this report. Uncertainties inherent in litigation prevent us from predicting
the outcome of this
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  litigation
and while it remains pending it may divert management attention, cause us to
incur unanticipated expenses and consume other 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.
 
 Our
operations are headquartered in the San Francisco Bay Area, which is susceptible
to earthquakes. TSMC, the outside foundry that produces the majority of our
semiconductor products, is located in Taiwan. Siliconware Precision Industries
Co. Ltd (“SPIL”), Advanced Semiconductor Engineering, or ASE, one of the
subcontractors that assemble and test our semiconductor products, is also
located in Taiwan. For the three and six months ended June 30, 2008, customers
and distributors located in Japan generated 29.8% and 30.5% of our revenue,
respectively and customers and distributors located in Taiwan generated 19.5%
and 20.0% of our revenue, respectively. For the three and six months ended June
30, 2007, customers and distributors located in Japan generated 34.7% of our
revenue in each period and customers and distributors located in Taiwan
generated 19.9% and 18.9% 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.
 
 Terrorist attacks
or war could lead to 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 currently has troops in Iraq and in Afghanistan. In addition, the current
nuclear arms crises in North Korea and Iran could escalate into armed
hostilities or war. Acts of terrorism or armed hostilities may disrupt or result
in instability in the general economy and financial markets and in consumer
demand for the OEM’s products that incorporate our products. Disruptions and
instability in the general economy could reduce demand for our products or
disrupt the operations of our customers, suppliers, distributors and
contractors, many of whom are located in Asia, which would in turn adversely
affect our operations and results of operations. Disruptions and instability in
financial markets could adversely affect our stock price. Armed hostilities or
war in South Korea could disrupt the operations of the research and development
contractors we utilize there, which would adversely affect our research and
development capabilities and ability to timely develop and introduce new
products and product improvements.
 
 Changes in
environmental rules and regulations could increase our costs and reduce our
revenue.
 
 Several
jurisdictions have implemented rules that would require that certain products,
including semiconductors, be made “green” which means that the products need to
be lead free and be free of certain banned substances. All of our products are
available to customers in a green format. While we believe that we are generally
in compliance with existing regulations, such environmental regulations are
subject to change and the jurisdictions may impose additional regulations which
could require us to incur costs to develop replacement products. These changes
will require us to incur cost or may take time or may not always be economically
or technically feasible, or may require disposal of non-compliant inventory. In
addition, any requirement to dispose or abate previously sold products would
require us to incur the costs of setting up and implementing such a
program.
 
 Provisions of our
charter documents and Delaware law could prevent or delay a change in control
and may reduce the market price of our common stock.
 
 Provisions
of our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition that a stockholder may consider favorable. These
provisions include:
 
 •
              authorizing
      the issuance of preferred stock without stockholder
    approval;
  42
 Table of Contents
  
 •
              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.
 
 Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
  Not
      applicable.
 
 Item 3. Defaults Upon Senior Securities
 
 Not
applicable.
 
  43
 Table of Contents
  Item 4. Submission of Matters to a Vote of Security
Holders
 
 We held
our 2008 Annual Meeting of Stockholders on May 21, 2008. The first matter voted
upon at the meeting was the election of two Class III directors to serve until
the 2011 Annual Meeting of Stockholders. At the meeting, Steve Tirade and
William Raduchel were elected as Class III directors, in an uncontested
election, by the following vote:
 
 
 
 Name
              
              Shares
      for
              
              
              Shares
      Against
              
              
              Shares
      Abstaining
              
              
              Shares
      Witheld
              
              
              Broker
                Non
      VotesSteve
      Tirado
              
              
              62,083,055
              
              
              
              -
              
              
              
              -
              
              
              
              4,992,599
              
              
              
              -William
      Raduchel
              
              
              61,915,201
              
              
              
              -
              
              
              
              -
              
              
              
              5,160,453
              
              
              
              -
 
 
 Our board
of directors consists of seven members and is divided into three classes, with
each class serving staggered three-year terms. The term of the Class I
directors, currently Peter Hanelt and William George, will expire at the 2009
Annual Meeting of Stockholders and the term of the Class II directors,
currently Masood Jabbar and John Hodge, will expire at the 2010 annual meeting
of stockholders.
 
 The
second matter voted upon at the meeting was the approval of the 2008 Equity
Incentive Plan to replace the 1999 Equity Incentive Plan. The 2008 Equity
Incentive Plan term commences on May 21, 2008 and will terminate on
May 21, 2018. At the meeting,  the 2008 Equity Incentive Plan was
approved by the following vote:
 
 
 Shares
      for
              
              
              Shares
      Against
              
              
              Shares
      Abstaining
              
              
              Shares
      Witheld
              
              
              Broker
                Non
      Votes2008
      Equity Incentive Plan
              
              
              24,735,080
              
              
              
              9,483,053
              
              
              
              224,419
              
              
              
              -
              
              
              
              32,633,102
 
 The third
matter voted upon at the meeting was the approval of the amendment of the 1999
Employee Stock Purchase Plan to extend term of the plan to August 15, 2018.
The extension of the plan was approved by the following vote:
 
 
 Shares
      for
              
              
              Shares
      Against
              
              
              Shares
      Abstaining
              
              
              Shares
      Witheld
              
              
              Broker
                Non
      Votes1999
      Employee Stock Purchase Plan
              
              
              32,676,038
              
              
              
              1,620,533
              
              
              
              145,981
              
              
              
              -
              
              
              
              32,633,102
 
 
 The
fourth matter voted upon at the meeting was the ratification of the appointment
of Deloitte & Touche LLP as Silicon Image’s independent registered public
accounting firm for the fiscal year ending December 31, 2008. At the meeting,
the appointment of Deloitte & Touche LLP as independent accountants was
ratified by the following vote:
 
 
 Shares
      for
              
              
              Shares
      Against
              
              
              Shares
      Abstaining
              
              
              Shares
      Witheld
              
              
              Broker
                Non
      VotesAppointment
      of Deloitte & Touche LLP
              
              
              66,071,222
              
              
              
              639,624
              
              
              
              364,808
              
              
              
              -
              
              
              
              -
 
 
 Item 5. Other Information
 
 Not
applicable.
 
  44
 Table of Contents
  Item 6. Exhibits
 
 (a)
Exhibits
 
 10.01*
              Employee
      Bonus plan (Incorporated by reference to Exhibit 99.01 to the
      Registrant’s current report on Form 8-K filed onApril 29,
      2008).10.02*
              2008
      Equity Incentive plan (Incorporated by reference to Exhibit 4.07 to
      the Registrant’s current report on Form S-8 filedon
      May 23, 2008).10.03*
              ESPP
      1999 Plan Document including UK Sub-Plan As Amended (Incorporated by
      reference to Exhibit 4.05 to theRegistrant’s
      current report on Form S-8 filed on May 23,
    2008).10.04*
              Enrollment
      forms, subscription agreements, notice of suspension, notice of withdrawal
      and joint election (for UKemployees)
      related to the Employee Stock Purchase Pla
                (incorporated
      by reference to Exhibit 10.04 to Registrant’sAnnual
      Report on Form 10-K filed with the Commission on February 27,
      2008).10.05*
              Forms
      of notice of grant of stock options and awards, notice of grant of stock
      bonus award, notice of grant of stockappreciation
      right award, employee and non-employee
                director
      of stock option agreement related to the 2008 EquityIncentive
      Plan.31.01
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.02
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.01**
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of theSarbanes-Oxley
      Act of 2002.32.02**
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of theSarbanes-Oxley
      Act of 2002.
 ____________
  *
              This
      exhibit is a management contract or compensatory plan or
      arrangement.
  **
              This
      exhibit is being furnished, rather than filed, and shall not be deemed
      incorporated by reference into any filing of the registrant, in accordance
      with Item 601 of Regulation S-K.
 
  45
 Table of Contents
  Signatures
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 Date:
      July 25, 2008
              /s/ Harold L. CovertHarold
      L. Covert
                Chief
      Financial Officer
                (Principal
      Financial Officer)
 
 
 
  46
 Table of Contents
  Exhibit
Index
 
 10.01*
              Employee
      Bonus plan (Incorporated by reference to Exhibit 99.01 to the
      Registrant’s current report on Form 8-K filed onApril 29,
      2008).10.02*
              2008
      Equity Incentive plan (Incorporated by reference to Exhibit 4.07 to
      the Registrant’s current report on Form S-8 filedon
      May 23, 2008).10.03*
              ESPP
      1999 Plan Document including UK Sub-Plan As Amended (Incorporated by
      reference to Exhibit 4.05 to theRegistrant’s
      current report on Form S-8 filed on May 23,
    2008).10.04*
              Enrollment
      forms, subscription agreements, notice of suspension, notice of withdrawal
      and joint election (for UKemployees)
      related to the Employee Stock Purchase Plan
                (incorporated
      by reference to Exhibit 10.04 to Registrant’sAnnual
      Report on Form 10-K filed with the Commission on February 27,
      2008).10.05*
              Forms
      of notice of grant of stock options and awards, notice of grant of stock
      bonus award, notice of grant of stockappreciation
      right award, employee and non-employee
                director
      of stock option agreement related to the 2008 EquityIncentive
      Plan.31.01
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.02
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.01**
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of theSarbanes-Oxley
      Act of 2002.32.02**
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of thearbanes-Oxley
      Act of 2002.
 ____________
 
 *
              This
      exhibit is a management contract or compensatory plan or
      arrangement.
 
 **
              This
      exhibit is being furnished, rather than filed, and shall not be deemed
      incorporated by reference into any filing of the registrant, in accordance
      with Item 601 of Regulation
S-K.
  47