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 March 31, 2009OR£
            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
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





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  R No £





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
March 31, 2009, there were 74,758,237 shares outstanding of the registrant’s
Common Stock, $0.001 par value per share.














Silicon
Image, Inc.


Form
10-Q for the quarter ended March 31, 2009





Table of Contents





Part I Financial Information (Unaudited)
            3Item 1 Financial Statements
            3Condensed Consolidated Balance Sheets as of March 31, 2009 and
      December 31, 2008
            4Condensed Consolidated Statements of Operations for the three
      months ended March 31, 2009 and 2008
            4Condensed Consolidated Statements of Cash Flows for the three
      months ended March 31, 2009 and 2008
            5Notes to Condensed Consolidated Financial
      Statements
            6Item 2 Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            16Item 3 Quantitative and Qualitative Disclosures About Market
      Risk
            21Item 4 Controls and Procedures
            22Part II Other Information
            22Item 1 Legal Proceedings
            22Item 1A Risk Factors
            22Item 2 Unregistered Sales of Equity Securities and Use of
      Proceeds
            38Item 3 Defaults Upon Senior Securities
            38Item 4 Submission of Matters to a Vote of Security
      Holders
            38Item 5 Other Information
            38Item 6 Exhibits
            38Signature
            39




EXHIBIT 10.03


EXHIBIT 10.04


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)








March
      31, 2009
            
            
            December
      31, 2008AssetsCurrent
      Assets:Cash
      and cash equivalents
            
            $
            21,099
            
            
            $
            95,414Short-term
      investments
            
            
            147,908
            
            
            
            89,591Accounts
      receivable, net of allowances for doubtful accounts
              $1,390
      at March 31, 2009 and $1,778 at December 31, 2008
            
            
            17,505
            
            
            
            5,922Inventories
            
            
            12,249
            
            
            
            12,775Prepaid
      expenses and other current assets
            
            
            21,621
            
            
            
            15,275Deferred
      income taxes
            
            
            6,252
            
            
            
            6,665Total
      current assets
            
            
            226,634
            
            
            
            225,642Property
      and equipment, net
            
            
            17,527
            
            
            
            19,394Goodwill
            
            
            -
            
            
            
            19,210Intangible
      assets, net
            
            
            31,448
            
            
            
            32,921Deferred
      income taxes, non-current
            
            
            19,584
            
            
            
            28,193Other
      assets
            
            
            984
            
            
            
            1,181Total
      assets
            
            $
            296,177
            
            
            $
            326,541Liabilities
      and Stockholders’ EquityCurrent
      Liabilities:Accounts
      payable
            
            $
            10,692
            
            
            $
            7,278Accrued
      and other liabilities
            
            
            20,566
            
            
            
            23,023Deferred
      license revenue
            
            
            3,530
            
            
            
            2,348Deferred
      margin on sales to distributors
            
            
            3,127
            
            
            
            6,881Total
      current liabilities
            
            
            37,915
            
            
            
            39,530Other
      long-term liabilities
            
            
            8,304
            
            
            
            8,064Total
      liabilities
            
            
            46,219
            
            
            
            47,594Commitments
      and contingencies (See Note 9)Stockholders’
      Equity:Common
      stock
            
            
            92
            
            
            
            92Additional
      paid-in capital
            
            
            446,840
            
            
            
            442,228Treasury
      stock and receivable
            
            
            (106,500
            )
            
            
            (106,276
            )Accumulated
      deficit
            
            
            (90,359
            )
            
            
            (57,030
            )Accumulated
      other comprehensive loss
            
            
            (115
            )
            
            
            (67
            )Total
      stockholders’ equity
            
            
            249,958
            
            
            
            278,947Total
      liabilities and stockholders’ equity
            
            $
            296,177
            
            
            $
            326,541













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 March 31,2009
              
              
              2008Revenue:Product
              
              $
              34,595
              
              
              $
              57,187Licensing
              
              
              5,917
              
              
              
              9,926Total
      revenue
              
              
              40,512
              
              
              
              67,113Cost
      of revenue and operating expenses:Cost
      of product revenue
              
              
              18,219
              
              
              
              27,788Cost
      of license revenue
              
              
              196
              
              
              
              349Research
      and development
              
              
              17,734
              
              
              
              21,542Selling,
      general and administrative
              
              
              13,715
              
              
              
              18,318Impairment
      of goodwill (Note 15)
              
              
              19,210
              
              
              
              -Amortization
      of intangible assets
              
              
              1,473
              
              
              
              1,587Restructuring
      expense (Note 5)
              
              
              759
              
              
              
              -Total
      cost of revenue and operating expenses
              
              
              71,306
              
              
              
              69,584Loss
      from operations
              
              
              (30,794
              )
              
              
              (2,471
              )Interest
      income and other, net
              
              
              939
              
              
              
              1,916Loss
      before provision for income taxes
              
              
              (29,855
              )
              
              
              (555
              )Provision
      for income taxes
              
              
              3,474
              
              
              
              7Net
      loss
              
              $
              (33,329
              )
              
              $
              (562
              )Net
      loss per share – basic and diluted
              
              $
              (0.45
              )
              
              $
              (0.01
              )Weighted
      average shares  - basic and diluted
              
              
              74,421
              
              
              
              80,987





See
accompanying Notes to Condensed Consolidated Financial Statements.





4
 Table of Contents


Silicon
Image, Inc.
 Condensed Consolidated Statements of Cash Flows
 (in
thousands)
 (unaudited)
 Three
      Months Ended March 31,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (33,329
                )
                
                $
                (562
                )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
                
                
                2,281
                
                
                
                2,722Provision
      for doubtful accounts
                
                
                27
                
                
                
                265Gain
      on recovery of accounts receivable previously written off
                
                
                (107
                )
                
                
                -Amortization/(accretion)
      of investment premium/(discount)
                
                
                829
                
                
                
                (43
                )Amortization
      of intangible assets
                
                
                1,473
                
                
                
                1,587Impairment
      of goodwill
                
                
                19,210
                
                
                
                -Stock-based
      compensation expense
                
                
                3,565
                
                
                
                4,023Tax
      deficiency from employee based compensation plans
                
                
                (580
                )
                
                
                (647
                )Excess
      tax benefits from employee stock transactions
                
                
                (8
                )
                
                
                (42
                )Deferred
      income taxes
                
                
                9,022
                
                
                
                (774
                )Loss
      on disposal of property and equipment
                
                
                199
                
                
                
                7Gain
      on derivative transactions
                
                
                (22
                )
                
                
                -Realized
      loss/(gain) on sale of short-term investments
                
                
                15
                
                
                
                (49
                )Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (11,541
                )
                
                
                (6,022
                )Inventories
                
                
                526
                
                
                
                6,082Prepaid
      expenses and other assets
                
                
                (6,081
                )
                
                
                1,582Accounts
      payable
                
                
                2,720
                
                
                
                199Accrued
      and other liabilities
                
                
                (1,141
                )
                
                
                (1,327
                )Deferred
      revenue
                
                
                1,182
                
                
                
                1,111Deferred
      margin on sales to distributors
                
                
                (3,754
                )
                
                
                (983
                )Cash
      provided by (used in) operating activities
                
                
                (15,514
                )
                
                
                7,129Cash
      flows from investing activities:Purchases
      of short-term investments
                
                
                (93,453
                )
                
                
                (75,134
                )Proceeds
      from sales of short-term investments
                
                
                34,460
                
                
                
                118,265Purchases
      of property and equipment
                
                
                (491
                )
                
                
                (2,597
                )Proceeds
      from sale of property and equipment
                
                
                97
                
                
                
                -Cash
      provided by (used in) investing activities
                
                
                (59,387
                )
                
                
                40,534Cash
      flows from financing activities:Proceeds
      from issuances of common stock, net
                
                
                1,627
                
                
                
                1,838Payments
      for vendor financed software and intangibles purchased
                
                
                (625
                )
                
                
                -Excess
      tax benefits from employee stock transactions
                
                
                8
                
                
                
                42Repurchase
      of restricted stock units for income tax withholding
                
                
                (224
                )
                
                
                -Repurchase
      of common stock
                
                
                -
                
                
                
                (62,000
                )Cash
      provided by (used in) financing activities
                
                
                786
                
                
                
                (60,120
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (200
                )
                
                
                139Net
      decrease in cash and cash equivalents
                
                
                (74,315
                )
                
                
                (12,318
                )Cash
      and cash equivalents — beginning of period
                
                
                95,414
                
                
                
                137,822Cash
      and cash equivalents — end of period
                
                $
                21,099
                
                
                
                125,504Supplemental
      cash flow information:Restricted
      stock units vested
                
                $
                625
                
                
                $
                -Cash
      payment for income taxes, net of refunds
                
                $
                655
                
                
                $
                222Unrealized
      net gain on short-term investments
                
                $
                169
                
                
                $
                57Property
      and equipment purchased but not paid for
                
                $
                323
                
                
                $
                515
  See
accompanying Notes to Condensed Consolidated Financial
Statements.








5
 Table of Contents





Silicon
Image, Inc.


Notes to Condensed Consolidated Financial Statements


March
31, 2009


(unaudited)





1.
Basis of Presentation





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of Silicon Image, Inc. (the “Company”, “Silicon Image”,
“we” or “our”) included herein have been prepared on a basis consistent with our
December 31, 2008 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 March 31, 2009 and the related consolidated statements of operations and cash
flows for the three months ended March 31, 2009 and 2008. 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, 2008. Financial results for the three months
ended March 31, 2009 are not necessarily indicative of future financial
results.





Certain
presentation of prior period amounts has been reclassified to conform to the
current period presentation. None of the changes impacts the Company’s
previously reported consolidated financial condition, results of operations, or
cash flows.




2.
Recent Accounting Pronouncements





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) will significantly
change 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 g1oodwill), measured at fair value at the
acquisition date; requires acquisition-related expenses and restructuring costs
to be recognized separately from the business combination; 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 adoption of SFAS 141(R) is not expected
to have a significant impact on the Company’s consolidated financial statements
or financial position, but the nature and magnitude of the specific effects will
depend upon the nature, terms and size of the acquisitions the Company
consummates after the effective date.





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
adopted this standard effective January 1, 2009. The implementation of this
standard did not have a material impact on our 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’s adoption of FSP FAS 142-3
did not have a material impact on our consolidated financial
statements.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (the GAAP hierarchy). SFAS 162 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company’s adoption of SFAS 162 did
not have a material impact on our consolidated financial
statements.





In
November 2008, the FASB issued EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets”(EITF 08-7). EITF 08-7 addresses the accounting for
assets acquired in a business combination or asset acquisition that an entity
does not intend to actively use, otherwise referred to as a ‘defensive asset.’
EITF 08-7 requires defensive intangible assets to be initially accounted
for as a separate unit of accounting and not included as part of the cost of the
acquirer’s existing intangible asset(s) because it is separately identifiable.
EITF 08-7 also requires that defensive intangible assets be assigned a
useful life in accordance with paragraph 11 of SFAS 142 and is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company has adopted this standard effective January
1, 2009 and the Company’s adoption of this EITF did not have a material impact
on its consolidated financial statements.




In April 2009, the FASB issued FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change the FSP brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. FSP FAS 115-2
and FAS 124-2 is effective for interim and annual reporting periods ending after
June 15, 2009. The Company does not believe that the implementation of this
standard will have a material impact on its consolidated financial
statements.




In April 2009, the FASB issued FSP FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional guidance for estimating fair value
in accordance with FASB Statement No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This FSP emphasizes that even if there
has been a significant decrease in the volume and level of activity for the
asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. FSP FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, and is applied prospectively. The Company does not
believe that the implementation of this standard will have a material impact on
its consolidated financial statements.




In April 2009, the FASB issued FSP FAS FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is
effective for interim and annual reporting periods ending after June 15, 2009.
The Company does not believe that the implementation of this standard will have
a material impact on its consolidated financial
statements.
  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 our 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,
2008.








6
 Table of Contents








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, restricted stock units (RSU’s) and an
automatic grant program for non-employee board members pursuant to which such
individuals will receive option grants at designated intervals over their period
of board service. These awards are granted under various plans, all of which are
stockholder approved. Grants 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, we have 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 the shard-based awards discussed above.





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 March 31,2009
              
              
              2008Employee
      stock option plans:Expected
      life in years
              
              
              4.7
              
              
              
              4.8Expected
      volatility
              
              
              64.8
              %
              
              
              65.6
              %Risk-free
      interest rate
              
              
              1.9
              %
              
              
              2.6
              %Expected
      dividends
              
              none
              
              
              noneWeighted
      average fair value
              
              $
              1.71
              
              
              $
              2.48Employee
      Stock Purchase Plan:Expected
      life in years
              
              
              0.5
              
              
              
              0.5Expected
      volatility
              
              
              96.0
              %
              
              
              78.1
              %Risk-free
      interest rate
              
              
              1.2
              %
              
              
              3.50
              %Expected
      dividends
              
              none
              
              
              noneWeighted
      average fair value
              
              $
              1.31
              
              
              $
              1.63




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 March 31, 2009, the Company’s
employees purchased 544,629 shares of common stock under the ESPP program. At
March 31, 2009, the Company had $514,000 of total unrecognized compensation
expense, net of estimated forfeitures under the ESPP program. The unamortized
compensation expense will be amortized on a straight-line basis over a period of
approximately 0.4 year.





7
 Table of Contents





Stock
Options Activity





The
following is a summary of option activity for the Company’s Stock Option Plans
excluding Restricted Stock Units (in thousands, except weighted averages
exercise price):


Number
      of Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term in Years
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2008
              
              
              13,849
              
              
              $
              8.65
              
              
              
              6.09
              
              
              $
              2,396Granted
              
              
              11
              
              
              
              3.16Exercised
              
              
              (15
              )
              
              
              0.56Forfeitures
      and cancellations
              
              
              (481
              )
              
              
              8.76Outstanding
      at March 31, 2009
              
              
              13,364
              
              
              $
              8.65
              
              
              
              5.80
              
              
              $
              672Vested
      and expected to vest at March 31, 2009
              
              
              12,779
              
              
              $
              8.70
              
              
              
              5.70
              
              
              $
              672Exercisable
      at March 31, 2009
              
              
              10,260
              
              
              $
              8.86
              
              
              
              5.21
              
              
              $
              672





At March 31, 2009, the Company had $16.7 million  of total
unrecognized compensation expense, net of estimated forfeitures related to stock
options. The unamortized compensation expense will be amortized on a
straight-line basis over a weighted average period of approximately 2.15
years.





Restricted
Stock Units




The RSUs typically vest ratably over a certain period of time, subject to the
employee’s continuing service to the Company over that period. RSUs granted to
non-executive employees typically vest over a four-year period. RSUs granted to
executives typically vest a period of between one and  four years or
upon the achievement of certain performance milestones.





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 March 31, 2009 is as follows: (in
thousands):


Number
      of shares
              
              
              Weighted
      Average Remaining Contractual Term in Years
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2008
              
              
              3,712
              
              
              
              1.24
              
              
              $
              15,591Granted
              
              
              655Vested
              
              
              (199
              )Forfeitures
      and cancellations
              
              
              (345
              )Outstanding
      at March 31, 2009
              
              
              3,823
              
              
              
              1.22
              
              
              $
              9,176Ending
      vested and expected to vest at March 31, 2009
              
              
              1,604
              
              
              
              1.43
              
              
              $
              3,849





Purchases
of Equity Securities




The
Company repurchased shares of stock from employees upon the vesting of the RSUs
that were granted under the Company’s equity incentive plan to satisfy the
employees’ minimum statutory tax withholding requirement as follows: (in
thousands, except total number of shares repurchased and price per
share):








Period
            
            Total
      Number of Shares Repurchased
            
            
            Price
      Per Share
            
            
            Total
      ValueFebruary
      17, 2009
            
            
            69,030
            
            
            $
            3.16
            
            
            $
            219March
      17, 2009
            
            
            2,015
            
            
            $
            2.36
            
            
            $
            5Total
            
            
            71,045
            
            
            
            
            
            
            $
            224





The Company will continue to repurchase
shares of stock from employees as their RSUs vest to satisfy the employees’
minimum statutory tax withholding requirement.





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 Table of Contents




Stock-based
Compensation Expense





The table
below shows total stock-based compensation expense included in the Condensed
Consolidated Statements of Operations for the three months ended March 31, 2009
and 2008 (in thousands):


Three Months
      Ended March 31,2009
              
              
              2008Cost
      of sales
              
              $
              199
              
              
              $
              350Research
      and development
              
              
              1,374
              
              
              
              1,234Selling,
      general and administrative
              
              
              1,992
              
              
              
              2,439Income
      tax benefit
              
              
              (613
              )
              
              
              (1,033
              )$
              2,952
              
              
              $
              2,990


5.
Restructuring and Asset Impairment Charges





During
2008, the Company’s management approved restructuring plans to improve the
effectiveness and efficiency of its operating model as part of its program to
pursue continuous improvement. A portion of these programs involve other action
which do not result in restructuring charges, such as better utilization of
assets, reduced spending, and organizational efficiencies. During the year ended
December 31, 2008, the Company incurred $5.9 million in restructuring charges.
These charges included $4.6 million related to employee severance and
benefit arrangements due to the termination of employees and a charge of $1.1
million to accelerate the depreciation of certain long-lived assets as a result
of management’s decision to discontinue the use of such assets. For the
three-month period ended March 31, 2009, the Company incurred $0.7 million in
restructuring charges mainly relating to employee severance and benefit
arrangements due to terminations.  The Company paid out $1.9 million
during the three-month period ended March 31, 2009 and the Company expects to
complete the payouts under the restructuring programs by the end
of  2009.




The table
below presents restructuring activity for the three-month period ended
March 31, 2009 (in thousands):




Employee
      Severance and Benefits
            
            
            Operating
      Lease Termination
            
            
            TotalAccrued
      restructuring balance as of December 31, 2008
            
            $
            3,252
            
            
            $
            200
            
            
            $
            3,452Additional
      accruals
            
            
            654
            
            
            
            22
            
            
            
            676Cash
      payments
            
            
            (1,806
            )
            
            
            (127
            )
            
            
            (1,933
            )Accrued
      restructuring balance as of March 31, 2009
            
            $
            2,100
            
            
            $
            95
            
            
            $
            2,195





The operating lease accruals have been reflected as restructuring expense in the
consolidated statements of operations. The remaining accrual as of March 31,
2009 relates to severance benefits the Company expects to payout in the next
6 months and operating lease termination costs over the remaining lease
terms of between 2 and 3 years.






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 Table of Contents


6.
Comprehensive Loss





The
components of comprehensive loss, net of related taxes, are as follows (in
thousands):


Three
      Months Ended March 31,2009
              
              
              2008Net
      loss
              
              $
              (33,329
              )
              
              $
              (562
              )Change
      in unrealized value of investments
              
              
              169
              
              
              
              57Effective
      portion of cashflow hedges
              
              
              46
              
              
              
              -Foreign
      currency translation adjustments
              
              
              (262
              )
              
              
              144Total
      comprehensive loss
              
              $
              (33,376
              )
              
              $
              (361
              )






7.
Net Loss Per Share





Basic and
diluted net loss per share is computed using the weighted-average number of
common shares outstanding during the period, excluding shares subject to
repurchase. The following table sets forth the computation of basic and diluted
net loss per share (in thousands, except per share amounts):


Three
      Months Ended March 31,2009
              
              
              2008Net
      loss
              
              $
              (33,329
              )
              
              $
              (562
              )Weighted
      average shares – basic and diluted
              
              
              74,421
              
              
              
              80,987Net
      loss per share – basic and diluted
              
              $
              (0.45
              )
              
              $
              (0.01
              )




The securities that were anti-dilutive
and excluded from the net loss per share calculations were approximately 13.9
million and  13.3 million for the three months ended March 31,
2009 and 2008, respectively.





8.
Balance Sheet Components




March
      31, 2009
            
            
            December
      31, 2008(in
      thousands)Inventories:Raw
      materials
            
            $
            5,414
            
            
            $
            4,962Work
      in process
            
            
            1,623
            
            
            
            545Finished
      goods
            
            
            5,212
            
            
            
            7,268Total
      inventories
            
            $
            12,249
            
            
            $
            12,775Property
      and equipmentComputers
      and software
            
            $
            24,426
            
            
            $
            24,250Equipment
            
            
            24,848
            
            
            
            25,059Furniture
      and fixtures
            
            
            2,650
            
            
            
            2,70151,924
            
            
            
            52,010Less:
      accumulated depreciation
            
            
            (34,397
            )
            
            
            (32,616
            )Total
      property and equipment, net
            
            $
            17,527
            
            
            $
            19,394Accrued
      liabilities:Accrued
      payroll and related expenses
            
            $
            3,575
            
            
            $
            5,359Accrued
      restructuring
            
            
            2,195
            
            
            
            3,452Software
      and IP commitments
            
            
            1,250
            
            
            
            2,500Amounts
      due to customers
            
            
            4,044
            
            
            
            1,966Bonus
      accrual
            
            
            -
            
            
            
            1,556Accrued
      and other liabilities
            
            
            9,502
            
            
            
            8,190Total
      accrued liabilities
            
            $
            20,566
            
            
            $
            23,023




9.
Commitments and Contingencies





Legal
Proceedings





On
December 7, 2001, the Company and certain of its 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 the Company’s stock
in its 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, the Company, 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, which was withdrawn on October
10, 2008. 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 in March 2008.  Plaintiffs, the issuer defendants (including
the Company), the underwriter defendants, and the insurance carriers for the
defendants, have engaged in mediation and settlement
negotiations.  The parties have reached a settlement agreement, which
was submitted to the District Court for preliminary approval on April 2,
2009.  As part of this settlement, the Company’s insurance carrier has
agreed to assume the Company’s entire payment obligation under the terms of the
settlement.  Although the parties have reached a settlement agreement,
there can be no guarantee that it will be finalized or receive approval from the
District Court.  The Company believes that it has meritorious defenses
to these claims.  If the settlement is not approved by the District
Court and the litigation continues against the Company, the Company would
continue to defend against this action vigorously.








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 Table of Contents





On July
31, 2007, the Company received a demand on behalf of alleged shareholder Vanessa
Simmonds that its board of directors prosecute a claim against the underwriters
of its 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 the Company’s 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 the Company as a
nominal defendant, contains no claims against the Company and seeks no relief
from it.  This lawsuit is one of more than fifty similar actions filed
in the same court.  On July 25, 2008, the underwriter defendants in
the various actions filed a joint motion to dismiss the complaints for failure
to state a claim.  In addition, certain issuer defendants in the
various actions filed a joint motion to dismiss the complaints for failure to
state a claim.  The parties entered into a stipulation, entered as an
order by the court that the Company is not required to answer or otherwise
respond to the amended complaint.  Accordingly, the Company did not
join the motion to dismiss filed by certain issuers.    On
March 12, 2009, the court dismissed the complaint in this lawsuit with
prejudice.  On April 10, 2009, the plaintiff filed a notice of appeal
of the District Court’s order.





In
January 2005, the Company and certain of its 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 the Company and certain of its
officers and directors made alleged misstatements of material facts and violated
certain provisions of Sections 20(a) and 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. Final judgment was entered in favor
of defendants on September 25, 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 the Company’s 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 14, 2005, the Company received a preliminary notification that the
Securities and Exchange Commission had commenced a formal investigation
involving trading in its securities. On February 14, 2005, through the Company’s
legal counsel, it 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. The
Company is not aware of any further actions taken by the SEC in this matter. The
Company intends to continue to fully cooperate with the SEC in the event that
any further actions are necessary.





In
addition, the Company has been named as defendants in a number of judicial and
administrative proceedings incidental to its business and may be named again
from time to time.





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





Guarantees





Certain
of the licensing agreements indemnify the Company’s customers for any expenses
or liabilities resulting from claimed infringements of third party patents,
trademarks or copyrights by its 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,
the Company has not paid any such claims or been required to defend any lawsuits
with respect to any claim.





Contractual
Obligations and Off-Balance Sheet Arrangements





The table
below represents the Company’s future minimum payments under its operating
leases and non-inventory purchase commitments outstanding at March 31, 2009 (in
thousands):







Contractual
      obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 yearsOperating
      lease obligations
            
            $
            6,875
            
            
            $
            3,402
            
            
            $
            3,355
            
            
            $
            118
            
            
            $
            -Software
      purchase commitment
            
            
            315
            
            
            
            105
            
            
            
            210
            
            
            
            -
            
            
            
            -Total
      contractual obligations
            
            $
            7,190
            
            
            $
            3,507
            
            
            $
            3,565
            
            
            $
            118
            
            
            $
            -





The amounts above exclude liabilities under FASB Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes”, as the Company is unable to reasonably estimate the
ultimate amount or timing of settlement.




11
 Table of Contents




10.
Customer and Geographic Information





The
Company operates in one reportable operating segment, semiconductors and IP
solutions for the secure storage, distribution and presentation of
high-definition content. The Company’s Chief Executive Officer, who is
considered to be the Company’s chief operating decision maker, reviews financial
information presented on one operating segment basis for purposes of making
operating decisions and assessing financial performance.





Revenue





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


Three
      Months Ended March 31,2009
              
              
              2008Taiwan
              
              $
              10,718
              
              
              $
              12,147Japan
              
              
              10,111
              
              
              
              19,286United
      States
              
              
              7,188
              
              
              
              13,311Europe
              
              
              5,662
              
              
              
              8,162Hong
      Kong
              
              
              3,245
              
              
              
              5,467Korea
              
              
              227
              
              
              
              3,869Other
              
              
              3,361
              
              
              
              4,871Total
      revenue
              
              $
              40,512
              
              
              $
              67,113


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


Three
      Months Ended March 31,2009
              
              
              2008Product
      revenue
              
              $
              34,595
              
              
              $
              57,187Licensing
              
              
              5,917
              
              
              
              9,926Total
      revenue
              
              $
              40,512
              
              
              $
              67,113


Three
      Months Ended March 31,2009
              
              
              2008Consumer
      Electronics (1)
              
              $
              33,476
              
              
              $
              49,535Personal
      Computer (1)
              
              
              3,207
              
              
              
              11,169Storage
      (1)
              
              
              3,829
              
              
              
              6,409Total
      revenue
              
              $
              40,512
              
              
              $
              67,113
 (1)
Includes development, licensing and royalty revenue (collectively
"licensing")
  Three
      Months Ended March 31,2009
                
                
                2008Consumer
      Electronics
                
                $
                27,576
                
                
                $
                42,452Personal
      Computer
                
                
                3,468
                
                
                
                10,007Storage
                
                
                3,551
                
                
                
                4,728Licensing
                
                
                5,917
                
                
                
                9,926Total
      revenue
                
                $
                40,512
                
                
                $
                67,113




For
the three months ended March 31, 2009, shipments to Weiking Industrial,
World Peace Industrial, Microtek Corporation generated 13.5%, 13.4% and 10.0% of
the Company’s revenue, respectively.  For the three months ended
March 31, 2008, shipments to World Peace Industrial, Microtek Corporation,
and Innotech Corporation generated 12.7%, 12.2% and 11.1% of the Company’s
revenue, respectively.





Property
and Equipment





The majority of the Company’s property
and equipment are located in the US.




12
 Table of Contents


11.
Provision for Income Taxes





For the
three months ended March 31, 2009, the Company recorded a provision for income
taxes of $3.5 million. The effective tax rate for the three months ended March
31, 2009 was (11.6%) and was based on the Company’s projected taxable income for
2009, plus certain discrete items recorded during the quarter. As of March 31,
2009, the Company had gross tax affected unrecognized tax benefits of $18.6
million of which $3.0 million, if recognized, would affect the effective tax
rate. The difference between the provision 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.





During
the three months ended March 31, 2009, the State of California legislature
enacted significant California tax law changes.  As a result of the enacted
legislation, the Company expects that in years 2011 and beyond, the
Company’s  income subject to tax in California will be less than under
prior tax law and accordingly its California deferred tax assets are less
likely to be realized.  The Company recorded a net discrete tax charge of
$9.4 million related to the re-measurement of the Company’s California deferred
tax assets to account for this change in tax law, as well as an increase in the
valuation allowance for the Company’s California deferred tax assets that
existed as of December 31, 2008.  The Company will continue to
assess its valuation allowance on its California deferred tax assets
in future periods.





For the three months ended March 31,
2008, the Company recorded a provision for income taxes of $7,000. The effective
tax rate for the three months ended March 31, 2008 was (1.3%) and was based on
the Company’s projected taxable income for 2008, plus certain discrete items
recorded during the quarter. The difference between the provision 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.





The
Company’s 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 months ended March 31, 2009 and March 31, 2008, included
approximately $85,000 and $92,000 of accrued interest related to unrecognized
tax benefits, respectively. The Company conducts business globally and, as a
result, the Company and its subsidiaries file income tax returns in various
jurisdictions throughout the world including with the U.S. federal and various
U.S. state jurisdictions as well as with various foreign jurisdictions. In the
normal course of business, the Company is subject to examination by taxing
authorities throughout the world. The Company remains subject to federal and
state examination for all years from 1996 and forward by virtue of the tax
attributes carrying forward from those years. The Company also remains subject
to examination in most foreign jurisdictions for all years since 2002 or the
year the Company began operations in those countries if later. The Company is
not aware of any material income tax examinations in progress at this
time.





12.
Investment in Intellectual Property





In
February 2007, the Company entered into an agreement with Sunplus Technology
Co., Ltd. (Sunplus) to license certain technology (Sunplus IP) from Sunplus for
$40.0 million. The purpose of this licensing agreement is to obtain advanced
technology for development of the Company's future products. The
agreement provides for the Company 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 March 31,
2009, the Company has paid Sunplus $38.1 million of the consideration for the
licensed technology and related deliverables and support. The Company is
required to pay the remaining $1.9 million in 2009.







13
 Table of Contents




13.
Fair Value Measurements





The
Company records its financial instruments that are accounted for under Statement
of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities,(“SFAS 115”), and derivative
contracts at fair value. The determination of fair value is based upon the fair
value framework established by SFAS No. 157, Fair Value Measurements,(“SFAS 157”). SFAS 157 provides that a fair value measurement
assumes that the transaction to sell an asset or transfer a liability occurs in
the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or liability. The
carrying value of the Company’s financial instruments including cash and cash
equivalents, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued compensation, and other accrued liabilities,
approximates fair market value due to the relatively short period of time to
maturity. The fair value of investments is determined using quoted market prices
for those securities or similar financial instruments.





The
Company’s 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 table
below sets forth the Company’s cash and cash equivalents and short-term
investments as of March 31, 2009, 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.





(dollars
      In thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Total
      fair valueCash
      and cash equivalents and short-term investments
            
            $
            13,777
            
            
            $
            141,376
            
            
            $
            -
            
            
            $
            155,153Derivative
      asset
            
            
            -
            
            
            
            68
            
            
            
            -
            
            
            
            68Total
            
            $
            13,777
            
            
            $
            141,444
            
            
            $
            -
            
            
            $
            155,221




Cash and cash equivalents and short term investments in the above table excludes
$13.8 million in cash held by the Company or in its accounts with investment
fund managers as of March 31, 2009. During the three months ended March 31,
2009, the Company held no direct investments in auction rate securities,
collateralized debt obligations, structured investment vehicles or
mortgage-backed securities.




The Company’s derivative instruments
are classified within Level 2 of the valuation hierarchy. The Company’s
derivatives are valued using internal models that use as their basis readily
observable market inputs, such as time value, forward interest rates, volatility
factors and foreign currency  exchange rates. Refer to Note 14 for more
discussion on derivative instruments.





The Company did not hold financial
assets and liabilities which were recorded at fair value in the Level 3 category
as of March 31, 2009.




Effective January 1, 2009, the Company fully adopted the provision of SFAS
157 by adopting the provisions relating to its nonfinancial assets and
liabilities. The Company adopted the provisions relating to financial assets and
liabilities in the prior year and its adoption of SFAS 157 relating to
nonfinancial assets and liabilities did not have a material impact on its
consolidated financial position, results of operations, or cash
flows.





14
 Table of Contents





14.  Derivative
Instruments





The
Company has operations in the United States, Europe and Asia, however, a
majority of its revenue, costs of revenue, expense and capital purchasing
activities are being transacted in U.S. Dollars. As a corporation with
international as well as domestic operations, the Company is exposed to changes
in foreign exchange rates. These exposures may change over time and could have a
material adverse impact on the Company’s financial results. Periodically, the
Company uses foreign currency forward contracts to hedge certain forecasted
foreign currency transactions relating to operating expenses. The Company does
not enter into derivatives for speculative or trading purposes. The Company uses
derivative instruments primarily to manage exposures to foreign currency
fluctuations on forecasted cash flows and balances primarily denominated in
Euro. The Company’s primary objective in holding derivatives is to reduce the
volatility of earnings and cash flows associated with changes in foreign
currency exchange rates. These derivatives are designated as cash flow hedges
and have maturities of less than one year. The effective portion of the
derivative’s gain or loss is initially reported as a component of accumulated
other comprehensive income and, upon occurrence of the forecasted transaction,
is subsequently reclassified into the line item in the consolidated statements
of operations to which the hedged transaction relates. The Company records any
ineffectiveness of the hedging instruments in other income (expense) on its
consolidated statements of operations.




The derivatives expose the Company  to credit and non performance
risks to the extent that the counterparties may be unable to meet the terms of
the agreement. The Company seeks to mitigate such risks by limiting the
counterparties to major financial institutions. In addition, the potential risk
of loss with any one counterparty resulting from this type of credit risk is
monitored. Management does not expect material losses as a result of defaults by
counterparties.





The table
below presents the fair value of the Company’s outstanding foreign currency
forwarded contracts and the related unrealized and realized gain  as
of and for the three months ended  March 31, 2009:


(dollars
      In thousands)
              
              Fair
      value
              
              
              Unrealized
      gain
              
              
              Realized
      gainDerivative
      asset
              
              $
              68
              
              
              $
              46
              
              
              $
              22Total
              
              $
              68
              
              
              $
              46
              
              
              $
              22




As of
March 31, 2009, the outstanding foreign currency forward contracts had a
notional value of $1.7 million and a fair value of $68,000. The Company recorded
an unrealized gain of $46,000 relating to effective cashflow hedges in
accumulated other comprehensive income as part of stockholders' equity in the
condensed consolidated balance sheet as of March 31, 2009.  The
Company recorded $22,000 gain relating to the ineffective cashflow hedges in
other income on its consolidated statement of operations for the three months
ended March 31, 2009.





15. Impairment of Goodwill and Other
Long-lived Assets





The
Company periodically reviews the carrying value of intangible assets not subject
to amortization, including goodwill, to determine whether impairment may exist.
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible
Assets, requires that goodwill and certain intangible assets be assessed
annually for impairment using fair value measurement techniques. Specifically,
goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is used to identify potential impairment by
comparing the fair value of a reporting unit with its carrying amount, including
goodwill. If the carrying amount of a reporting unit exceeds its fair value, the
second step of the goodwill impairment test is performed to measure the amount
of impairment loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting unit’s goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit’s
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair value of goodwill
is determined by comparing the fair value of the Company’s equity as of the date
of the impairment testing to the carrying amount of stockholders equity. The
impairment charge for other intangible assets not subject to amortization, for
which impairment indicators exists, consists of a comparison of the fair value
of the intangible asset with its carrying value. If the carrying
value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. Furthermore, SFAS 142
requires purchased other intangible assets to be amortized over their useful
lives unless these lives are determined to be indefinite. 
 The
Company has one reportable operating segment and the goodwill impairment testing
was done at the reporting unit level. In accordance with the current policy, the
Company conducted its annual goodwill impairment test on September 30, 2008 and
noted no impairment. During the three months ended March 31, 2009, the
Company assessed goodwill for impairment since it observed there were indicators
of impairment. The notable indicators were a sustained and significant decline
in the Company’s stock price, depressed market conditions and declining industry
trends. The Company’s stock price had been in a period of sustained decline and
the business climate had deteriorated substantially in the past three months.
Based on the results of the first step of the goodwill analysis, it was
determined that the Company’s net book value exceeded its estimated fair value.
As a result, the Company performed the second step of the impairment test to
determine the implied fair value of goodwill. Under step two, the difference
between the estimated fair value of the Company and the sum of the fair value of
the identified net assets results in the residual value of goodwill.
Specifically, the Company allocated the estimated fair value of the Company as
determined in the first step of the goodwill analysis to recognized and
unrecognized net assets, including allocations to intangible assets. Based on
the analysis performed under step two, there was no remaining implied value
attributable to goodwill and accordingly, the Company wrote off the entire
goodwill balance and recognized goodwill impairment charges of approximately
$19.2 million in the consolidated statement of operations under operating
expenses, “Impairment of Goodwill.”
 
 As required by Statement of Financial Accounting Standards No. 144 (“SFAS 144”),
Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company determined its long-lived
assets were not impaired as of March 31, 2009.





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 integrated and discrete 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 eco-system 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 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 digital interconnect core technology
for the mobile device market, including digital still cameras, HD camcorders,
portable media players and smart phones. We are also developing a personal
networking technology solution that will enable a consumer to access and display
digital content from and to the various devices in the consumer’s personal
domain.





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, 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.





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 52.0% of our revenue for the three months
ended March 31, 2009 and 53.9% of our revenue for the three months ended March
31, 2008. 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 months ended March 31, 2009 and 2008, 51.8% of our revenue was generated
through distributors. Our licensing revenue is not generated through
distributors, and to the extent licensing revenue increases faster than product
revenue, we would expect a decrease in the percentage of our total revenue
generated through distributors.





A
significant portion of our revenue is generated from products sold overseas.
Sales to customers in Asia, including distributors, represented 68.4% of our
revenue for the three months ended March 31, 2009, and 67.9% for the three
months ended March 31, 2008. 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.






16
 Table of Contents






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,
2008.





Results
of Operations





REVENUE




Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Product
      revenue
              
              $
              34,595
              
              
              $
              57,187
              
              
              
              -39.5
              %Licensing
              
              
              5,917
              
              
              
              9,926
              
              
              
              -40.4
              %Total
      revenue
              
              $
              40,512
              
              
              $
              67,113
              
              
              
              -39.6
              %
 
 
 Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Consumer
      Electronics (1)
              
              $
              33,476
              
              
              $
              49,535
              
              
              
              -32.4
              %Personal
      Computers (1)
              
              
              3,207
              
              
              
              11,169
              
              
              
              -71.3
              %Storage
      (1)
              
              
              3,829
              
              
              
              6,409
              
              
              
              -40.3
              %Total
      revenue
              
              $
              40,512
              
              
              $
              67,113
              
              
              
              -39.6
              %
  (1)
Includes development, licensing and royalty revenue
 Three
      months ended March 31,2009
                
                
                2008
                
                
                Change(dollars
      in thousands)Consumer
      Electronics
                
                $
                27,576
                
                
                $
                42,452
                
                
                
                -35.0
                %Personal
      Computers
                
                
                3,468
                
                
                
                10,007
                
                
                
                -65.3
                %Storage
                
                
                3,551
                
                
                
                4,728
                
                
                
                -24.9
                %Licensing
                
                
                5,917
                
                
                
                9,926
                
                
                
                -40.4
                %Total
      revenue
                
                $
                40,512
                
                
                $
                67,113
                
                
                
                -39.6
                %


Total
revenue for the three months ended March 31, 2009 was $40.5 million and
represented a decline of 39.6% or $26.6 million from the same period last
year. The decrease in product revenue during the first quarter of 2009 as
compared to the same period last year was primarily due to declines in sales
across our product lines, especially for our Consumer Electronics (“CE”) and
Personal Computers (“PC”) products where we experienced decline in sales of
$14.9 million or 35.0%, and $6.5 million or 65.3%, respectively.





Revenues
from products sold into the CE market in the current quarter decreased by 35.0%
compared to the same period last year primarily due to lower revenues resulting
from our previously announced product transition, and increased competition and
recent
integration for discrete and integrated solutions from other
companies.  Weak consumer demand due to concerns about the economy has
continued to have a negative impact on our revenue.




The down turn in PC revenue was a result of continuing economic
recession and lower shipments of HDMI transmitters into traditional PC platforms
due to Intel’s integrated HDMI offering.  We expect several Mobile Internet
Device (MID) HDMI design wins in 2009, however these wins will represent a
smaller market than the traditional PC market.





The
transition period to newer products, coupled with the ongoing global
recession resulted in significantly lower revenue during the first quarter of
2009 compared to the same quarter of the previous year. Shipments decreased by
18.0% and average selling price was down 26.0% during the first quarter
2009 when compared to the shipments and selling prices in the same period last
year  primarily due to product mix as customers transition from HDMI
receivers to more cost effective Port Processors.  We expect continued
strong demand for Port Processors and our proprietary InstaPortTM technology
through the 2009/2010 design cycle.





We expect
revenues in the quarter ending June 30, 2009 to be flat to slightly higher
than the revenue in the first quarter of 2009.





From time
to time we enter into “direct agreements” for certain parts to certain
identified end customers with our distributors who previously had the rights for
price concessions and product returns. The “direct agreement” converts the
previously existing distributor relationship for these parts for identified
customers into a direct customer relationship whereby the distributor does not
have price protection or return rights. Revenue for these types of transactions
are recorded at the time of conversion of applicable products previously shipped
for which revenue had not been recognized upon shipment.  Thereafter,
revenue for products covered under the direct agreement is recognized upon
shipment.  For the three months ended March 31, 2009, we recorded $2.5
million in revenue related to the above mentioned conversion under this
arrangement. We did not enter into this type of arrangement in the same period
last year.






17
 Table of Contents





COST
OF REVENUE AND GROSS PROFIT




Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Cost
      of  product revenue (1)
              
              $
              18,219
              
              
              $
              27,788
              
              
              
              -34.4
              %Cost
      of licensing revenue
              
              
              196
              
              
              
              349
              
              
              
              -43.8
              %Total
      cost of revenue
              
              $
              18,415
              
              
              $
              28,137
              
              
              
              -34.6
              %Total
      gross profit
              
              $
              22,097
              
              
              $
              38,976
              
              
              
              -43.3
              %Gross
      profit as a percentage of total revenue
              
              
              54.5
              %
              
              
              58.1
              %


___________
 (1)
      Includes stock-based compensation expense
              
              $
              199
              
              
              $
              350


Cost of
revenue consists primarily of costs incurred to manufacture, assemble and test
our products, and costs to license our technology which involves modification,
customization or engineering services, as well as other overhead costs relating
to the aforementioned costs including stock-based compensation expense. Gross
margin, as a percentage of revenue was 54.5% and 58.1% for the three months
ended March 31, 2009 and 2008, respectively.  The decrease in gross
margin was a direct result of lower revenues and the implementation of cost
control measures that resulted to lower overall manufacturing costs. We expect
our gross margin to be within the 54%-55% range in the second quarter of
2009.





OPERATING
EXPENSES




Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Research
      and development (1)
              
              $
              17,734
              
              
              $
              21,542
              
              
              
              -17.7
              %Percentage
      of total revenue
              
              
              43.8
              %
              
              
              32.1
              %




(1)
      Includes stock-based compensation expense
              
              $
              1,374
              
              
              $
              1,234
 Research and Development (R&D).R&D expense consists primarily of
employee compensation, including stock compensation expense, and other related
costs and fees for independent contractors, the cost of software tools used for
designing and testing our products, and costs associated with prototype
materials. R&D expense for the three months ended March 31, 2009, included a
stock-based compensation expense of $1.4 million as compared to $1.2 million for
the same period in 2008. R&D expense decreased by 17.7% or $3.8 million im
the first quarter compared to the same quarter in prior year.  The
decrease was mainly driven by lower compensation and bonus expenses of $2.2
million and lower project related expenses of $1.2 million.  The
decrease in compensation expense was a result of reduced headcount due to the
restructuring activities completed in the third and fourth quarter of 2008. We
expect R&D expenses to be slightly higher in the second quarter of
2009.


Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Selling,
      general and administrative (1)
              
              $
              13,715
              
              
              $
              18,318
              
              
              
              -25.1
              %Percentage
      of total revenue
              
              
              33.9
              %
              
              
              27.3
              %
 ____________
 (1)
      Includes stock-based compensation expense
              
              $
              1,992
              
              
              $
              2,439
  Selling, General and Administrative (SG&A). SG&A expense consists
primarily of compensation, including stock-based compensation, sales
commissions, professional fees, and marketing and promotional expenses. SG&A
expense in the first quarter of 2009 was $4.6 million or 25.1% lower than what
was incurred in the same quarter of the prior year, primarily due to the
decrease in legal expenses of approximately $1.6 million, decrease in
compensation related expense of $0.6 million, decrease in stock-based
compensation of $0.5 million and commission expenses of $0.5 million, which were
generally attributed to the decrease in head count because of the reduction in
force implemented in the third and fourth quarter of 2008.  We expect
SG&A expenses to be slightly higher in the second quarter of
2009.




Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Amortization
      of intangible assets
              
              $
              1,473
              
              
              $
              1,587
              
              
              
              -7.2
              %Percentage
      of total revenue
              
              
              3.6
              %
              
              
              2.4
              %
  Amortization of Intangible Assets.The decrease in the amortization of
intangible assets is primarily due to the full amortization of certain
intangible assets related to the sci-worx acquisition.





Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Interest
      income and other, net
              
              $
              939
              
              
              $
              1,916
              
              
              
              -51.0
              %Percentage
      of total revenue
              
              
              2.3
              %
              
              
              2.9
              %


Interest Income and other, net.The net amount of interest income and other principally includes interest
income. The decrease was primarily due to lower interest rates and lower average
total cash balances.  We expect interest income to be flat in the
second quarter of 2009.




18
 Table of Contents


Three
      months ended March 31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Provision
      for income taxes
              
              $
              3,474
              
              
              $
              7
              
              
              
              49529
              %Percentage
      of total revenue
              
              
              8.6
              %
              
              
              0.0
              %
  Provision for Income Taxes.For the three months ended March 31, 2009, we
recorded a provision for income taxes of $3.5 million. The effective tax rate
for the three months ended March 31, 2009 was (11.6%) and was based on our
projected taxable income for 2009, plus certain discrete items recorded during
the quarter. As of March 31, 2009, we had gross tax affected unrecognized tax
benefits of $18.6 million of which $3.0 million, if recognized, would affect the
effective tax rate. The difference between the provision 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.





During
the three months ended March 31, 2009, the State of California legislature
enacted significant California tax law changes.  As a result of the enacted
legislation, we expect that in years 2011 and beyond our income subject to tax
in California will be less than under prior tax law and accordingly our
California deferred tax assets are less likely to be realized.  We recorded
a net discrete tax charge of $9.4 million related to the re-measurement of our
California deferred tax assets to account for this change in tax law, as well as
an increase in the valuation allowance for our California deferred tax assets
that existed as of December 31, 2008.  We will continue to assess our
valuation allowance on our California deferred tax assets in future
periods.




For the three months ended March 31, 2008, we recorded a provision for
income taxes of $7,000. The effective tax rate for the three months ended
March 31, 2008 was (1.3%) and was based on our projected taxable income for
2008, plus certain discrete items recorded during the quarter. The difference
between the provision 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.


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,
Investments and Working Capital. The table below summarizes our cash and
cash equivalents, investments and working capital and the related movements
(in thousands):




Three
      months ended March 31,2009
            
            
            2008
            
            
            Change(dollars
      in thousands)Cash
      and cash equivalents
            
            $
            21,009
            
            
            $
            125,504
            
            
            
            -83.3
            %Short-term  investments
            
            
            147,908
            
            
            
            68,910
            
            
            
            114.6
            %Total
      cash, cash equivalents and
    short-term  investments
            
            $
            168,917
            
            
            $
            194,414
            
            
            
            -13.1
            %Total
      current assets
            
            $
            226,634
            
            
            $
            251,654
            
            
            
            -9.9
            %Total
      current liabilities
            
            
            (37,915
            )
            
            
            (87,798
            )
            
            
            -56.8
            %Working
      capital
            
            $
            264,549
            
            
            $
            339,452
            
            
            
            -22.1
            %Cash
      provided by (used in) operating activities
            
            $
            (15,514
            )
            
            $
            7,129
            
            
            
            -317.6
            %Cash
      provided by (used in) in investing activities
            
            
            (59,387
            )
            
            
            40,534
            
            
            
            -246.5
            %Cash
      provided by (used in) financing activities
            
            
            786
            
            
            
            (60,120
            )
            
            
            -101.3
            %Effect
      of exchange rate changes on cash & cash equivalents
            
            
            (200
            )
            
            
            139
            
            
            
            -243.9
            %Net
      decrease in cash and cash equivalents
            
            $
            (74,315
            )
            
            $
            (12,318
            )
            
            
            503.3
            %




Our principal source of liquidity is cash provided by operations and exercises
of stock options. Cash and cash equivalents and short-term investments were
$168.9 million at March 31, 2009, a decrease of $25.5 million from $194.4
million at March 31, 2008. We believe our cash and cash equivalents, short-term
investments, combined with funds derived from sales of our products and
licensing will be sufficient to fund operations, capital expenditures, and
working capital needs through the next twelve months.




The decrease in cash and cash
equivalents of $74.3 million for the three months ended March 31, 2009 was
primarily due to  net purchases of short-term investments of
approximately $58.9 million and $15.5 million used in operations, partially
offset by the cash provided by financing activities. During the first quarter of
2009, we purchased $93.4 million and sold $34.5 million of short-term
investments.  The $15.5 million used in operations was largely
attributable to the $33.3 million  net loss  incurred for
the three months ended March 31, 2009,  $2.6 million and $1.1 million
decreases in deferred revenues and accrued and other liabilities, respectively,
and $11.5 million and $6.1 million increases in accounts receivable
and prepaid and other assets, respectively, partially offset by the
impairment of goodwill of $19.2 million, stock-based compensation of $3.6
million, depreciation and amortization of intangible assets totaling to $3.8
million, increase of $2.7 million in accounts payable and
decrease in deferred income taxes of $9.0 million.










19
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Accounts Receivable, Net. The
table below summarizes our accounts receivable, net (in thousands):




March
      31,
              
              
              December
      31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Accounts
      receivable, net
              
              $
              17,505
              
              
              $
              5,922
              
              
              
              195.6
              %


Net
accounts receivable as of March 31, 2009 were $17.5 million, which represents 39
days of sales outstanding. This compares to 9 days of sales outstanding on
December 31, 2008. Accounts receivable as of March 31, 2009 more than doubled
compared to the balance as of December 31, 2008 primarily due to the linearity
of shipments. Shipments during the last quarter of 2008 were front-end loaded
whereas shipments in the first quarter of 2009 were back-end
loaded.





Inventory.The table below
shows our inventory (in thousands):


March
      31,
              
              
              December
      31,2009
              
              
              2008
              
              
              Change(dollars
      in thousands)Inventory
              
              $
              12,249
              
              
              $
              12,775
              
              
              
              -4.1
              %
  Our inventories are accounted for at the lower of cost or market. Inventory is
written down for 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 are charged to cost of sales. Inventory level remained relatively
flat because we are trying to keep low levels of inventory due to
unfavorable global economic climate.





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 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 development, licensing and royalty 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.








20
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Item 3. Quantitative and Qualitative Disclosures about Market
Risk





Interest
Rate Risk





A
sensitivity analysis was performed on our investment portfolio as of March 31,
2009. 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%$589,000
              
              $1,178,000
              
              $1,767,000


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.
Additionally, many 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. Cash balances held in foreign countries are subject to local banking
laws and may bear higher or lower risk than cash deposited in the United States.
The following represents the potential impact of a change in the value of
the U.S. dollar compared to the foreign currencies which we use in
our operations.  This sensitivity analysis aggregates our
three-month activity in foreign currencies translated to U.S. dollars, and
applies a change in the U.S. dollar value of 5.0%, 7.5% and
10.0%.


5.0%
              
              7.5%
              
              10.0%$408,000
              
              $612,000
              
              $816,000


Derivative
Instruments





We have
operations in the United States, Europe and Asia, however, a majority of our
revenue, costs of sales, expense and capital purchasing activities are being
transacted in U.S. Dollars. As a corporation with international as well as
domestic operations, we are exposed to changes in foreign exchange rates. These
exposures may change over time and could have a material adverse impact on our
financial results. Periodically, we use foreign currency forward contracts to
hedge certain forecasted foreign currency transactions relating to operating
expenses.  We do not enter into derivatives for speculative or trading
purposes. We use derivative instruments primarily to manage exposures to foreign
currency fluctuations on forecasted cash flows and balances primarily
denominated in Euro. Our primary objective in holding derivatives is to reduce
the volatility of earnings and cash flows associated with changes in foreign
currency exchange rates. These derivatives are designated as cash flow hedges
and have maturities of less than one year. The effective portion of the
derivative’s gain or loss is initially reported as a component of accumulated
other comprehensive income and, upon occurrence of the forecasted transaction,
is subsequently reclassified into the line item in the consolidated statements
of operations to which the hedged transaction relates. We record any
ineffectiveness of the hedging instruments in other income (expense) on our
consolidated statements of operations.





Our
derivatives expose us to credit and non performance risks to the extent that the
counterparties may be unable to meet the terms of the agreement. We seek to
mitigate such risks by limiting the counterparties to major financial
institutions. In addition, the potential risk of loss with any one counterparty
resulting from this type of credit risk is monitored. Management does not expect
material losses as a result of defaults by counterparties.





As of
March 31, 2009, the outstanding foreign exchange contracts had a total notional
value of $1.7 million and a fair value of $68,000.  See Note 14 to the
Consolidated Financial Statements.







21
 Table of Contents





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 first quarter of
fiscal 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


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, particularly given adverse domestic and global economic
conditions.





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.






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





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





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





•
            our
      ability to successfully manage our business in multiple markets such as
      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 has been and may continue to be significantly impacted by the recent
deterioration in worldwide economic conditions, and the current uncertainty in
the outlook for the global economy makes it more likely that our actual results
will differ materially from expectations.





Global
credit and financial markets have been experiencing extreme disruptions in
recent months, including severely diminished liquidity and credit availability,
declines in consumer confidence, declines in economic growth, increases in
unemployment rates, and uncertainty about economic stability. There can be no
assurance that there will not be further deterioration in credit and financial
markets and confidence in economic conditions.  These economic
uncertainties affect businesses such as ours in a number of ways, making it
difficult to accurately forecast and plan our future business activities. The
current tightening of credit in financial markets may lead consumers and
businesses to postpone spending, which may cause our customers to cancel,
decrease or delay their existing and future orders with us. In addition,
financial difficulties experienced by our suppliers or distributors could result
in product delays, increased accounts receivable defaults and inventory
challenges. The volatility in the credit markets has severely diminished
liquidity and capital availability.  Our CE product revenue, which
comprised approximately 68.1% and 63.3% of total revenue for the three months
ended March 31, 2009 and 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. Since the US
economy and other economies around the world have moved into a recession, the
demand for overall consumer electronics have been and may continue to be
adversely affected and therefore, demand for our CE, PC and storage products and
our operating results have been and may continue to be adversely affected as
well. We cannot predict the timing, strength or duration of any economic
disruption or subsequent economic recovery, worldwide, in the United States, in
our industry, or in the consumer electronics market. These and other economic
factors have had and may continue to have a material adverse effect on demand
for our CE, PC and storage products and on our financial condition and operating
results.





Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates. We may suffer losses in principal
if we are forced to sell securities that decline in market value due to changes
in interest rates. Recent adverse events in the global economy and in the credit
markets could negatively impact our return on investment for these debt
securities and thereby reduce the amount of cash and cash equivalents and
investments on our balance sheet.






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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 our technology 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 licensing mix of our revenue 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.





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 standards that we promote 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.




24
 Table of Contents




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 port and input processors, MHL
and LiquidHD 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. 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 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. 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 DVI or 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 either a 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 recognizes 100% of
the HDMI adopter royalty revenues.





25
 Table of Contents




We
may experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration, which may
result in reduced manufacturing yields, delays in product deliveries and
increased expenses.




To remain
competitive, we expect to continue to transition our semiconductor products to
increasingly smaller line width geometries. This transition requires us to
modify the manufacturing processes for our products and to redesign some
products as well as standard cells and other integrated circuit designs that we
may use in multiple products. We periodically evaluate the benefits, on a
product-by-product basis, of migrating to smaller geometry process technologies
to reduce our costs. Currently most of our products are manufactured in .18
micron and .13 micron, geometry processes. We are now designing a new
product in 65 nanometer process technology and planning for the transition to
smaller process geometries. In the past, we have experienced some difficulties
in shifting to smaller geometry process technologies or new manufacturing
processes, which resulted in reduced manufacturing yields, delays in product
deliveries and increased expenses. The transition to 65 nanometer geometry
process technology will result in significantly higher mask and prototyping
costs, as well as additional expenditures for engineering design tools and
related computer hardware. We may face similar difficulties, delays and expenses
as we continue to transition our products to smaller geometry
processes.




We are
dependent on our relationships with our foundry subcontractors to transition to
smaller geometry processes successfully. We cannot assure you that the foundries
that we use will be able to effectively manage the transition in a timely
manner, or at all, or that we will be able to maintain our existing foundry
relationships or develop new ones. If any of our foundry subcontractors or we
experience significant delays in this transition or fail to efficiently
implement this transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of which could harm our
relationships with our customers and our results of operations.




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
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. Further, the
combination of our lengthy sales cycles coupled with worldwide economic
conditions could have a compounding negative impact on the results of our
operations.




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 customers may
not purchase anticipated levels of products, which can result in excess
inventories.





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.





26
 Table of Contents
  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 March 31,
2009, shipments to Weiking Industrial, World Peace Industrial, Microtek
Corporation generated 13.5%, 13.4% and 10.0% of our revenue,
respectively. For the three months ended March 31, 2008, shipments to
World Peace Industrial, Microtek Corporation, and Innotech Corporation generated
12.7%, 12.2% and 11.1% 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





•
            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 (“OEMs”) rely on third-party manufacturers or
distributors to provide inventory management and purchasing functions. For the
three months ended March 31, 2009 and 2008, distributors generated 51.8% of
our revenue. 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;





•
            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.






27
 Table of Contents




There
are risks to our global strategy.





In 2006,
we implemented a global strategy that involves maintaining operations in various
countries around the world. Since its implementation, we have begun to realize
certain operational benefits from our global strategy and our overall tax rate
has benefited favorably. The effectiveness of the strategy requires, in addition
to maintaining and increasing profitability, continued 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
these compliance requirements or fail to maintain supportive processes, our
ability to continue to realize the 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, 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.




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.






28
 Table of Contents
  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 one third party
semiconductor company overseas to produce substantially all of our semiconductor
products.   We also rely on outside assembly and test services to
test all of our semiconductor products. Our reliance on independent foundries,
assembly and test facilities involves a number of significant risks, including,
but not limited to:





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





•
            lack
      of guaranteed production capacity or product supply, 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.




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 manufacture our products or 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 on short notice to other customers who may be larger and
better financed than we are, or who have long-term agreements with our
sub-contractors, 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 sub-contractors, which would be
time-consuming, costly and difficult; there is no guarantee that we would be
able to identify and qualify such substitute sub-contractors on a timely basis
or obtain commercially reasonable terms from them. 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.






29
 Table of Contents




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 theUnited 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 months ended March 31, 2009 and 2008, approximately 82.2% and
80.2% 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;





•
            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.






30
 Table of Contents
  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.




We
generally enter into confidentiality agreements with our employees, consultants
and strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy, disclose, obtain or
use our products, services or technology without our authorization. Also,
current or former employees may seek employment with our business partners,
customers or competitors, and we cannot assure you that the confidential nature
of our proprietary information will be maintained in the course of such future
employment. Additionally, current, departing or former employees or third
parties could attempt to penetrate our computer systems and networks to
misappropriate our proprietary information and technology or interrupt our
business. Because the techniques used by computer hackers and others to access
or sabotage networks change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate, counter or ameliorate
these techniques. As a result, our technologies and processes may be
misappropriated, particularly in countries where laws may not protect our
proprietary rights as fully as in the United States.





Our products may contain technology provided to us by other parties such as
contractors, suppliers or customers. We may have little or no ability to
determine in advance whether such technology infringes the intellectual property
rights of a third party. Our contractors, suppliers and licensors may not be
required to indemnify us in the event that a claim of infringement is asserted
against us, or they may be required to indemnify us only up to a maximum amount,
above which we would be responsible for any further costs or damages. In
addition, we may have little or no ability to correct errors in the technology
provided by such contractors, suppliers and licensors, or to continue to develop
new generations of such technology. Accordingly, we may be dependent on their
ability and willingness to do so. In the event of a problem with such
technology, or in the event that our rights to use such technology become
impaired, we may be unable to ship our products containing such technology, and
may be unable to replace the technology with a suitable alternative within the
time frame needed by our customers.
   31
 Table of Contents
  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. Our
subsidiary no longer recognizes 100% of the HDMI adopter royalty
revenues.





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 is enhancing 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.




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.






32
 Table of Contents




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





We
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 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.





Any
potential intellectual property litigation against us or in which we become
involved may be expensive and time-consuming and may divert our resources and
the attention of our executives.  It could also force us to do one or
more of the following:





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





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





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





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





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





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





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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.




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.  While we have not had any material weaknesses in the
past three years, we cannot assure you that a material weakness
will not be identified in the future.





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. 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.






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We have
experienced transitions in our management team, our board of directors in the
past and may continue to do so in the future,
which could result in disruptions in our operations and require additional
costs.





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





•
            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.





•
            In
      October 2007, Harold L. Covert was appointed as chief financial
      officer.





•
            In
      October 2008, John Shin resigned from his position as vice president,
      strategic technology initiatives.





•
            In
      December 2008, Dale Zimmerman resigned from his position as vice president
      of worldwide marketing.





•
            In
      March 2009, Paul Dal Santo resigned from his position as Chief Operating
      Officer.





Any
future transitions may 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.   On January 31,
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 Silicon Image and certain of its
officers and directors violated securities laws and made alleged misstatements
of material facts. For more information, please see Part I, Item 3 of
this report.




35
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  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., or SPIL, Advanced Semiconductor Engineering, or
ASE, and Amkor Taiwan are subcontractors located in Taiwan that assemble and
test our semiconductor products. For the three months period ended
March 31, 2009 and 2008 customers and distributors located in Japan
generated 25.0 and 28.7%of our revenue, respectively, and customers and
distributors located in Taiwan generated 26.5% and 18.1% 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
tensions regarding nuclear arms 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 andDelawarelaw could
prevent or delay a change in control and
may reduce the market price of our common stock.





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





•
            authorizing
      the issuance of preferred stock without stockholder
    approval;





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





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





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





•
            prohibiting
      cumulative voting in the election of
directors;





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





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





•
            prohibiting
      stockholder actions by written
consent.





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




36
 Table of Contents
  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.






37
 Table of Contents




Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds (in thousands, except per share
amounts)





None




Item 3. Defaults Upon Senior Securities





Not
applicable.





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





None.





Item 5. Other Information





None.





Item 6. Exhibits





(a)
Exhibits





10.01*
            Silicon
      Image, Inc. Sales Compensation Plan for Vice President of Worldwide Sales
      for Fiscal Year 2009 (Incorporated by reference to Exhibit 99.01 to
      the Registrant’s current report on Form 8-K filed on March 28,
      200910.02*
            Confidential  Severance
      and General Release Agreement between Paul Dal Santo, the Registrant’s
      Chief Operating Officer and the Registrant dated March 31, 2009
      (Incorporated by reference to Exhibit 99.01 to the Registrant’s current
      report on Form 8-K filed on April 2, 2009).10.03*
            Employee
      Bonus Plan for Fiscal Year 200910.04*
            Supplemental
      Bonus Plan for Fiscal Year 200931.01
            Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      200231.02
            Certification
      of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
      200232.01**
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.02**
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


____________




*
              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.




38
 Table of Contents





Signature





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.





Dated:
      April 24, 2009
            Silicon
      Image, Inc.





/s/ Harold Covert


Harold
      Covert


Chief
      Financial Officer (Principal Financial
Officer)








39
 Table of Contents





Exhibit
Index


10.01*
            Silicon
      Image, Inc. Sales Compensation Plan for Vice President of Worldwide Sales
      for Fiscal Year 2009 (Incorporated by reference to Exhibit 99.01 to
      the Registrant’s current report on Form 8-K filed on March 28,
      200910.02*
            Confidential  Severance
      and General Release Agreement between Paul Dal Santo, the Registrant’s
      Chief Operating Officer and the Registrant dated March 31, 2009
      (Incorporated by reference to Exhibit 99.01 to the Registrant’s current
      report on Form 8-K filed on April 2, 2009).10.03*
            Employee
      Bonus Plan for Fiscal Year 200910.04*
            Supplemental
      Bonus Plan for Fiscal Year 200931.01
            Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      200231.02
            Certification
      of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
      200232.01**
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.02**
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


____________




*
                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.


40
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