Table of
Contents


UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM 10-Q
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      quarterly period ended: September 30, 2009ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
 
 For
the transition period from
                          
to
 
 Commission
File Number: 000-26887
 
 Silicon
Image, Inc.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              
              77-0396307(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer I.D. Number)
 
 1060
East Arques Avenue, Sunnyvale, California 94085
 (Address
of principal executive office)(Zip Code)
 
 (408)
616-4000
 (Registrant’s
telephone number, including area code)
 
 N/A
 (Former
name, former address and former fiscal year,
 if
changed since last report)
 
 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.  YesxNoo
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).  YesoNox
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. 
See the definitions of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer    x
              Accelerated
      filer   oNon-accelerated
      filer   o
              Smaller
      reporting company   o(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).  YesoNox
 
 CLASS
              
              OUTSTANDING
      AT September  30, 2009Common
      Stock, $0.001 par value
              
              75,241,093











Silicon
Image, Inc.


Form
10-Q for the quarter ended September 30, 2009








Table of Contents




Part I Financial Information
      (Unaudited)Item 1 Financial
      Statements
            3Condensed Consolidated Balance
      Sheets as of September 30, 2009 and December 31,
      2008
            3Condensed Consolidated Statements of
      Operations for the three and nine months ended September 30, 2009 and
      2008
            4Condensed Consolidated Statements
      of Cash Flows for the nine months ended September 30, 2009 and
      2008
            5Notes to Condensed
      Consolidated Financial Statements
            6Item 2 Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            30Item 3 Quantitative and
      Qualitative Disclosures About Market Risk
            43Item 4 Controls
      and Procedures
            44Part II Other
      Information
            45Item 1 Legal
      Proceedings
            45Item 1A Risk
      Factors
            45Item 2 Unregistered Sales of
      Equity Securities and Use of Proceeds
            61Item 3 Defaults Upon Senior
      Securities
            61Item 4 Submission of Matters to a
      Vote of Security Holders
            61Item 5 Other
      Information
            61Item 6
      Exhibits
            61Signature
            62





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)








September
      30, 2009
            
            
            December
      31, 2008AssetsCurrent
      Assets:Cash
      and cash equivalents
            
            $
            27,883
            
            
            $
            95,414Short-term
      investments
            
            
            125,335
            
            
            
            89,591Accounts
      receivable, net of allowances for doubtful accounts
              $1,563 at
      September 30, 2009 and $1,778 at December 31, 2008
            
            
            24,454
            
            
            
            5,922Inventories
            
            
            12,538
            
            
            
            12,775Prepaid
      expenses and other current assets
            
            
            17,417
            
            
            
            15,275Deferred
      income taxes
            
            
            6,731
            
            
            
            6,665Total
      current assets
            
            
            214,358
            
            
            
            225,642Property
      and equipment, net
            
            
            15,125
            
            
            
            19,394Intangible
      assets, net
            
            
            28,503
            
            
            
            32,921Deferred
      income taxes, non-current
            
            
            22,591
            
            
            
            28,193Goodwill
            
            
            -
            
            
            
            19,210Other
      assets
            
            
            719
            
            
            
            1,181Total
      assets
            
            $
            281,296
            
            
            $
            326,541Liabilities
      and Stockholders’ EquityCurrent
      Liabilities:Accounts
      payable
            
            $
            13,570
            
            
            $
            7,278Accrued
      and other current liabilities
            
            
            18,178
            
            
            
            23,023Deferred
      license revenue
            
            
            4,299
            
            
            
            2,348Deferred
      margin on sales to distributors
            
            
            2,628
            
            
            
            6,881Total
      current liabilities
            
            
            38,675
            
            
            
            39,530Other
      long-term liabilities
            
            
            9,259
            
            
            
            8,064Total
      liabilities
            
            
            47,934
            
            
            
            47,594Commitments
      and contingencies (See Note9)Stockholders’
      Equity:Common
      stock
            
            
            93
            
            
            
            92Treasury
      stock
            
            
            (106,556
            )
            
            
            (106,276
            )Additional
      paid-in capital
            
            
            458,484
            
            
            
            442,228Accumulated
      deficit
            
            
            (119,199
            )
            
            
            (57,030
            )Accumulated
      other comprehensive income (loss)
            
            
            540
            
            
            
            (67
            )Total
      stockholders’ equity
            
            
            233,362
            
            
            
            278,947Total
      liabilities and stockholders’ equity
            
            $
            281,296
            
            
            $
            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 September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenue:Product
            
            $
            30,716
            
            
            $
            64,974
            
            
            $
            94,747
            
            
            $
            183,997Licensing
            
            
            6,440
            
            
            
            12,802
            
            
            
            20,257
            
            
            
            30,975Total
      revenue
            
            
            37,156
            
            
            
            77,776
            
            
            
            115,004
            
            
            
            214,972Cost
      of revenue and operating expenses:Cost
      of product revenue (1)
            
            
            16,801
            
            
            
            31,518
            
            
            
            52,284
            
            
            
            87,921Cost
      of licensing revenue
            
            
            156
            
            
            
            223
            
            
            
            626
            
            
            
            1,064Research
      and development (2)
            
            
            17,807
            
            
            
            20,714
            
            
            
            53,160
            
            
            
            64,554Selling,
      general and administrative (3)
            
            
            17,222
            
            
            
            17,468
            
            
            
            43,615
            
            
            
            54,853Amortization
      of intangible assets
            
            
            1,473
            
            
            
            1,587
            
            
            
            4,419
            
            
            
            4,761Restructuring
      expense (Note 5)
            
            
            348
            
            
            
            1,876
            
            
            
            8,205
            
            
            
            1,876Goodwill
      impairment (Note 15)
            
            
            -
            
            
            
            -
            
            
            
            19,210
            
            
            
            -Total
      cost of revenue and operating expenses
            
            
            53,807
            
            
            
            73,386
            
            
            
            181,519
            
            
            
            215,029Income
      (loss) from operations
            
            
            (16,651
            )
            
            
            4,390
            
            
            
            (66,515
            )
            
            
            (57
            )Interest
      income and other, net
            
            
            696
            
            
            
            1,798
            
            
            
            2,233
            
            
            
            5,094Income
      (loss) before provision for income taxes
            
            
            (15,955
            )
            
            
            6,188
            
            
            
            (64,282
            )
            
            
            5,037Income
      tax  expense (benefit)
            
            
            (444
            )
            
            
            114
            
            
            
            (2,113
            )
            
            
            (13
            )Net
      income (loss)
            
            $
            (15,511
            )
            
            $
            6,074
            
            
            $
            (62,169
            )
            
            $
            5,050Net
      income (loss) per share – basic and diluted
            
            $
            (0.21
            )
            
            $
            0.08
            
            
            $
            (0.83
            )
            
            $
            0.07Weighted
      average shares – basic
            
            
            75,053
            
            
            
            73,861
            
            
            
            74,763
            
            
            
            76,088Weighted
      average shares – diluted
            
            
            75,053
            
            
            
            75,334
            
            
            
            74,763
            
            
            
            77,185(1)
      Includes stock-based compensation expense
            
            $
            363
            
            
            $
            351
            
            
            $
            806
            
            
            $
            1,132(2)
      Includes stock-based compensation expense
            
            
            2,374
            
            
            
            1,753
            
            
            
            5,365
            
            
            
            5,200(3)
      Includes stock-based compensation expense
            
            
            4,911
            
            
            
            2,004
            
            
            
            9,255
            
            
            
            8,057
















See
accompanying Notes to Condensed Consolidated Financial Statements.








4
 Table of
Contents





Silicon
Image, Inc.


Condensed Consolidated Statements of Cash Flows


(in
thousands)


(unaudited)




Nine
      Months Ended September 30,2009
            
            
            2008Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (62,169
            )
            
            $
            5,050Adjustments
      to reconcile net income (loss) to cash provided by (used in) operating
      activities:Impairment
      of goodwill
            
            
            19,210
            
            
            
            -Stock-based
      compensation expense
            
            
            15,426
            
            
            
            14,389Depreciation
            
            
            6,814
            
            
            
            7,894Deferred
      income taxes
            
            
            5,536
            
            
            
            (5,306
            )Amortization
      of intangible assets
            
            
            4,419
            
            
            
            4,761Amortization
      of investment premium
            
            
            2,351
            
            
            
            768Non-cash
      restructuring expenses
            
            
            226
            
            
            
            459Loss
      on disposal and retirement of property and equipment
            
            
            178
            
            
            
            562Provision
      for doubtful accounts
            
            
            42
            
            
            
            621Tax
      deficiency from employee stock-based compensation plans
            
            
            (1,711
            )
            
            
            (475
            )Gain
      on derivative transactions
            
            
            (211
            )
            
            
            -Excess
      tax benefits from employee stock transactions
            
            
            (32
            )
            
            
            (527
            )Realized
      gain on sale of short-term investments
            
            
            -
            
            
            
            (106
            )Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (18,543
            )
            
            
            (2,835
            )Inventories
            
            
            237
            
            
            
            3,695Prepaid
      expenses and other current assets
            
            
            (1,437
            )
            
            
            4,167Accounts
      payable
            
            
            7,403
            
            
            
            4,590Accrued
      and other current liabilities
            
            
            (3,669
            )
            
            
            (7,090
            )Deferred
      license revenue
            
            
            1,951
            
            
            
            (815
            )Deferred
      margin on sales to distributors
            
            
            (4,253
            )
            
            
            (2,551
            )Cash
      provided by (used in) operating activities
            
            
            (28,232
            )
            
            
            27,251Cash
      flows from investing activities:Proceeds
      from sales of short-term investments
            
            
            110,716
            
            
            
            171,231Purchases
      of short-term investments
            
            
            (148,592
            )
            
            
            (188,443
            )Purchases
      of property and equipment
            
            
            (2,855
            )
            
            
            (6,028
            )Proceeds
      from sale of property and equipment
            
            
            120
            
            
            
            -Cash
      used in investing activities
            
            
            (40,611
            )
            
            
            (23,240
            )Cash
      flows from financing activities:Proceeds
      from issuances of common stock, net
            
            
            2,543
            
            
            
            4,748Excess
      tax benefits from employee stock transactions
            
            
            32
            
            
            
            527Payments
      for vendor financed software and intangibles purchased
            
            
            (1,250
            )
            
            
            (6,153
            )Repurchase
      of restricted stock units for income tax withholding
            
            
            (280
            )
            
            
            -Repurchase
      of common stock
            
            
            -
            
            
            
            (68,180
            )Cash
      provided by (used in) financing activities
            
            
            1,045
            
            
            
            (69,058
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            267
            
            
            
            (407
            )Net
      decrease in cash and cash equivalents
            
            
            (67,531
            )
            
            
            (65,454
            )Cash
      and cash equivalents — beginning of period
            
            
            95,414
            
            
            
            137,822Cash
      and cash equivalents — end of period
            
            $
            27,883
            
            
            
            72,368Supplemental
      cash flow information:Net
      cash payment (refund) for income taxes
            
            $
            (4,766
            )
            
            $
            1,924Restricted
      stock units vested
            
            $
            780
            
            
            $
            -Unrealized
      net gain (loss) on short-term investments
            
            $
            220
            
            
            $
            (399
            )Property
      and equipment purchased but not paid for
            
            $
            167
            
            
            $
            302





See
accompanying Notes to Condensed Consolidated Financial Statements.




5
 
 Table of
Contents


Silicon
Image, Inc.


Notes to Condensed Consolidated Financial Statements


September
30, 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 September 30, 2009 and December 31, 2008, the related consolidated statements
of operations for the three and nine months ended September 30, 2009 and
2008,  and the related consolidated statements of cash flows for the
nine months ended September 30, 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.  The Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2009 are not
necessarily indicative of future operating results to be expected for the fiscal
year ending December 31, 2009.








2.
Recent Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standard Codification (“ASC”) No. 105, Generally Accepted Accounting
Principles (“GAAP”) (“ASC 105” or “FASB Codification”), previously
referred to as  Statement of Financial Accounting Standard (“SFAS”)
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No 162(“SFAS 168”).The effective date for
use of the FASB Codification is for interim and annual periods ending after
September 15, 2009. Companies should account for the adoption of the
guidance on a prospective basis. Effective July 1, 2009, the Company adopted the
FASB Codification and its adoption did not have a material impact on its
consolidated financial statements. The Company has appropriately updated its
disclosures with the appropriate FASB Codification references during the
three months ended September 30, 2009.  As such, all the notes to the
condensed consolidated financial statements below as well as the critical
accounting policies in the Management’s Discussion and Analysis section have
been updated with the appropriate FASB Codification
references.





In
December 2007, the FASB issued ASC No. 805, Business Combinations (“ASC
805”), previously referred to as  SFAS 141 (revised 2007), Business Combinations. ASC 805 will
significantly change current practices regarding business combinations. Among
the more significant changes, ASC 805 expands the definition of a business and a
business combination; requires the acquirer to recognize the assets acquired,
liabilities assumed and noncontrolling interests (including goodwill), measured
at fair value at the acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the business combination;
and requires in-process research and development to be capitalized at fair value
as an indefinite-lived intangible asset. ASC 805 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company adopted the provisions of ASC 805 on January 1, 2009 and the
adoption did not have a significant impact on the Company’s consolidated
financial statements. However, if the Company enters into material business
combinations in the future, a transaction may significantly impact the Company’s
consolidated financial statements as compared to the Company’s previous
acquisitions accounted for under prior GAAP requirements, due to the changes
described above.




In
December 2007, the FASB issued ASC No. 810-10-65, Transition Related to Noncontrolling
Interests in Consolidated Financial Statement(“ASC 810-10-65”),
previously referred to asSFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements— an amendment of Accounting
Research Bulletin (“ARB”) No. 51. ASC 810-10-65 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The Company adopted provisions under ASC 810-10-65 on January 1,
2009.  The Company does not currently have any non-controlling
interests in its subsidiaries, and accordingly the adoption of this standard did
not have a material impact on the Company’s consolidated financial
statements.





6
 Table of
Contents


In March
2008, the FASB issued ASC No. 815-10-65, Transition Related to Disclosures
about Derivative Instruments and Hedging Activities (“ASC 815-10-65”),
previously referred to as SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133, 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 ASC No. 815, Derivatives and Hedging(“ASC
815”), previously referred to as 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. ASC 815 also
requires disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. Per ASC 815-10-65, the additional disclosures
about derivatives and hedging activities mentioned above are required for
financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption
encouraged.  The Company adopted the provisions mentioned above
effective January 1, 2009 and its  adoption did not have a material
impact on its consolidated financial statements.
  In April
2009, the FASB issued ASC No. 320-10-65, Transition Related to Recognition
and Presentation of Other-Than-Temporary Impairments(“ASC 320-10-65”),
previously referred to as  FASB Staff Position (“FSP”) FAS 115-2 and
FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. ASC 320-10-65 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 ASC 320-10-65 brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. ASC 320-10-65
is effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted this FSP effective April 1, 2009 and the Company’s
adoption did not have a material impact on its consolidated financial
statements.




In April
2009, the FASB issued ASC No. 820-10-35, Fair Value Measurements and
Disclosures – Subsequent Measurement (“ASC 820-10-35”), which discusses
the provisions related to the determination of fair value when the volume and
level of activity for the asset or liability have significantly decreased, which
was previously discussed in FSP SFAS 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. ASC
820-10-35 provides additional guidance for estimating fair value when the volume
and level of activity for the asset or liability have significantly decreased.
ASC 820-10-35 also includes guidance on identifying circumstances that indicate
a transaction is not orderly. ASC 820-10-35 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. In
accordance with FASB ASC No. 820-10-65, Transition Related to FASB Statement
No. 157-4,” the above provisions are effective for interim and annual
reporting periods ending after June 15, 2009, and is applied
prospectively.  The Company adopted the provisions relating to
determining the fair value when the volume and level of activity for the asset
or liability have significantly decreased and identifying transactions that are
not orderly under ASC 820-10-35  effective April 1, 2009 and its
adoption did not have a material impact on its consolidated financial
statements.




In April
2009, the FASB issued ASC No. 805-10-35, Business Combinations Subsequent
Measurement (“ASC 805-10-35”), which discusses the accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies, which was previously discussed in FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies. ASC 805-10-35 addresses application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The provisions under ASC 805-10-35 relating to assets acquired and
liabilities assumed in a business combination that arise from contingencies are
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The Company adopted the provisions of ASC 805 on
January 1, 2009 and the adoption did not have a significant impact on the
Company’s consolidated financial statements. However, if the Company enters into
material business combinations in the future, a transaction may significantly
impact the Company’s consolidated financial statements as compared to the
Company’s previous acquisitions, accounted for under prior GAAP requirements,
due to the changes described above.


7
 
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Contents


In May
2009, the FASB issued ASC No. 855, Subsequent Events(“ASC
855”), previously referred to as SFAS No. 165, Subsequent Events. ASC 855
should be applied to the accounting for and disclosure of subsequent events.
This Statement does not apply to subsequent events or transactions that are
within the scope of other applicable GAAP that provide different guidance on the
accounting treatment for subsequent events or transactions.  ASC 855
would apply to both interim financial statements and annual financial
statements. The objective of ASC 855 is to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In
particular, this Statement sets forth: 1) The period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; 2) The circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and, 3) The disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. ASC 855 is
effective for interim or annual financial periods ending after June 15, 2009.
The Company adopted this standard effective April 1, 2009 and the Company’s
adoption did not have a material impact on its consolidated financial
statements.
 
 In
October 2009, the FASB issued Accounting Standard Update No. 2009-13 on Topic
605, Revenue Recognition–
Multiple Deliverable Revenue Arrangements – a consensus of the FASB Emerging
Issues Task Force.The objective of this Update is to address the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than as a combined
unit. Vendors often provide multiple products or services to their customers.
Those deliverables often are provided at different points in time or over
different time periods. This Update provides amendments to the criteria in
Subtopic 605-25 for separating consideration in multiple-deliverable
arrangements. The amendments in this Update establish a selling price hierarchy
for determining the selling price of a deliverable. The selling price used for
each deliverable will be based on vendor specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor specific objective
evidence nor third-party evidence is available. The amendments in this Update
also will replace the term fair value in the revenue allocation
guidance with selling price to clarify that the allocation of revenue is based
on entity-specific assumptions rather than assumptions of a marketplace
participant. This update is effective for fiscal years beginning on or after
June 15, 2010.  The Company is currently evaluating the impact, if
any, of this new accounting update  on its consolidated financial
statements.





3.
Significant Accounting Policies





The
preparation of financial statements in conformity with generally accepted
accounting principles requires the Company 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, restructuring liability, and legal matters. The condensed consolidated
financial statements include the accounts of Silicon Image, Inc. and its
subsidiaries after elimination of all inter-company balances and
transactions.





Revenue
Recognition





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery or performance has occurred, the sales price is fixed or determinable
and collectability is reasonably assured.





Revenue from products sold directly to end-users, or to
distributors that do not receive price concessions and rights of return, is
generally recognized when title and risk of loss has passed to the buyer which
typically occurs upon shipment. All shipping costs are charged to cost of
product revenue.





Revenue
from products sold to distributors with agreements allowing for stock
rotations are generally recognized upon shipment.  Reserves for
stock rotations are estimated based primarily on historical experience and
provided for at the time of shipment.




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For
products sold to distributors with agreements allowing for price concessions and
stock rotation rights/product returns, the Company recognizes revenue based on
its best estimate of when the distributor sold the product to its customer. The
Company’s estimate of such distributor sell-through is based on point of sales
reports received from the distributor which establishes a customer, quantity and
final price. Revenue is not recognized upon the Company’s shipment of the
product to the distributor, since, due to certain forms of price concessions,
the sales price is not substantially fixed or determinable at the time of
shipment. Price concessions are recorded when incurred, which is generally at
the time the distributor sells the product to its customer. Additionally, these
distributors have stock rotation rights permitting them to return products to
the Company, up to a specified amount for a given period of time. Revenue is
earned when the distributor reports that it has sold product to its customer, at
which time our sales price to the distributor is fixed. Once the Company
receives the point of sales reports from the distributor, it has satisfied all
the requirements for revenue recognition and any product returns/stock rotation
and price concession rights that the distributor has under its distributor
agreement with the Company are exhausted. Pursuant to the Company’s distributor
agreements, older, end-of-life and certain other products are generally sold
with no right of return and are not eligible for price concessions. For these
products, revenue is recognized upon shipment and title transfer assuming all
other revenue recognition criteria are met.




At the time of shipment to
distributors, the Company records a trade receivable for the selling price since
there is a legally enforceable right to payment, relieves inventory for the
carrying value of goods shipped since legal title has passed to the distributor
and records the gross margin in “deferred margin on sale to distributors”, a
component of current liabilities in its consolidated balance sheet. Deferred
margin on the sale to distributor effectively represents the gross margin on the
sale to the distributor. However, the amount of gross margin the Company
recognizes in future periods will be less than the originally recorded deferred
margin on sales to distributor as a result of negotiated price concessions. The
Company sells each item in its product price book to all of its distributors
worldwide at a relatively uniform list price. However, distributors resell our
products to end customers at a very broad range of individually negotiated price
points based on customer, product, quantity, geography, competitive pricing and
other factors. The majority of the Company’s distributors’ resale is priced at a
discount from the list price. Often, under these circumstances, the Company
remits back to the distributor a portion of their original purchase price after
the resale transaction is completed. Thus, a portion of the “deferred margin on
the sale to distributor” balance represents a portion of distributor’s original
purchase price that will be remitted back to the distributor in the future. The
wide range and variability of negotiated price concessions granted to the
distributors does not allow the Company to accurately estimate the portion of
the balance in the deferred margin on the sale to distributors that will be
remitted back to the distributors. The Company reduces deferred margin by
anticipated or determinable future price concessions.




The Company derives revenue from
the license of its internally developed intellectual property (IP). The Company
enters into IP licensing agreements that generally provide licensees the right
to incorporate its IP components in their products with terms and conditions
that vary by licensee. Revenue earned under contracts with the Company’s
licensees is classified as licensing revenue. The Company’s license fee
arrangements generally include multiple deliverables and for multiple
deliverable arrangements it follows the guidance in FASB ASC No. 605-25-25,
Multiple-Element Arrangements
Revenue Recognition, previously discussed in Emerging Issues Task Force
(EITF) 00-21, Revenue
Arrangements with Multiple Deliverables, to determine
whether there is more than one unit of accounting. To the extent that the
deliverables are separable into multiple units of accounting, the Company
allocates the total fee on such arrangements to the individual units of
accounting using the residual method, if objective and reliable evidence of fair
value does not exist for delivered elements. The Company then recognizes revenue
for each unit of accounting depending on the nature of the deliverable(s)
comprising the unit of accounting in accordance with the revenue recognition
criteria mentioned above.





The IP
licensing agreements generally include a nonexclusive license for the underlying
IP. Fees under these agreements generally include (a) license fees relating
to our IP, (b) support, typically for one year; and (c) royalties
payable following the sale by our licensees of products incorporating the
licensed technology. The license for the Company’s IP has standalone value and
can be used by the licensee without support. Further, objective and reliable
evidence of fair value exists for support. Accordingly, license and support fees
are each treated as separate units of accounting.




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Certain
licensing agreements provide for royalty payments based on agreed upon royalty
rates. Such rates can be fixed or variable depending on the terms of the
agreement. The amount of revenue the Company recognizes is determined based on a
time period or on the agreed-upon royalty rate, extended by the number of units
shipped by the customer. To determine the number of units shipped, the Company
relies upon actual royalty reports from its customers when available and rely
upon estimates in lieu of actual royalty reports when it has a sufficient
history of receiving royalties from a specific customer for it to make an
estimate based on available information from the licensee such as quantities
held, manufactured and other information. These estimates for royalties
necessarily involve the application of management judgment. As a result of the
Company’s use of estimates, period-to-period numbers are “trued-up” in the
following period to reflect actual units shipped. In cases where royalty reports
and other information are not available to allow the Company to estimate royalty
revenue, the Company recognizes revenue only when royalty reports are
received.




For
contracts related to licenses of the Company’s technology that involve
significant modification, customization or engineering services, the Company
recognizes revenue in accordance with the provisions of FASB ASC No. 605-35-25,
Construction-Type and
Production-Type Contracts Revenue  Recognition, previously
discussed in Statement of Position (SOP) 81-1, Accounting for Performance
of Construction-Type and
Certain Production-Type Contracts.Revenues derived from such license
contracts are accounted for using the percentage-of-completion
method.





The
Company determines progress to completion based on input measures using
labor-hours incurred by its engineers. The amount of revenue recognized is based
on the total contract fees and the percentage of completion achieved. Estimates
of total project requirements are based on prior experience of customization,
delivery and acceptance of the same or similar technology and are reviewed and
updated regularly by management. If there is significant uncertainty about
customer acceptance, or the time to complete the development or the deliverables
by either party, the Company applies the completed contract method. If
application of the percentage-of-completion method results in recognizable
revenue prior to an invoicing event under a customer contract, the Company
recognizes the revenue and records an unbilled receivable assuming
collectability is reasonably assured. Amounts invoiced to the Company’s
customers in excess of recognizable revenues are recorded as deferred
revenue.





Stock-based
Compensation




The Company accounts for stock-based
compensation in accordance with the provisions of FASB No. ASC 718-10-30, Stock Compensation Initial
Measurement,previously discussed in SFAS No. 123R,
“Share-Based Payment,”
which requires the measurement and recognition of compensation expense for all
stock-based awards made to employees, directors including employee stock
options, restricted stock units (“RSUs”), performance share awards and employee
stock purchases under the Company’s Employee Stock Purchase Plan (“ESPP”) based
on estimated fair values.  Following the provisions of FASB ASC No.
718-50-25, Employee Share
Purchase Plans Recognition,previously discussed inSFAS 123R,  the Company’s
ESPP is considered a compensatory plan, therefore, the Company is required to
recognize compensation cost for grants made under the ESPP.   The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option award approach,
which incorporates various assumptions including volatility, risk-free interest
rate, expected life, and dividend yield. Management estimates volatility for a
given option grant by evaluating the historical volatility of the period
immediately preceding the option grant date that is at least equal in length to
the option’s expected term. Consideration is also given to unusual events
(either historical or projected) or other factors that might suggest that
historical volatility will not be a good indicator of future volatility. The
expected life of an award is based on historical experience and on the terms and
conditions of the stock awards granted to employees, as well as the potential
effect from options that had not been exercised at the time. In accordance with
FASB ASC No. 718-10-35,
Subsequent Measurement of Stock Compensation,previously discussed in
SFAS 123R,the
Company recognizes stock-based compensation expense, net of estimated
forfeitures, on a straight-line basis for all share-based payment awards over
the requisite service periods of the awards, which is generally the vesting
period or the remaining service (vesting) period.




10
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Financial
Instruments




The
Company accounts for its investments in debt securities under FASB ASC No.
320-10-25, Investments in Debt
and Equity Securities Recognition, previously discussed in SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities. Management determines the
appropriate classification of such securities at the time of purchase and
reevaluates such classification as of each balance sheet date. The investments
are adjusted for amortization of premiums and discounts to maturity and such
amortization is included in interest income. The Company follows the guidance
provided by FASB ASC No. 320-10-35, Subsequent Measurement of
Investments in Debt and Equity, previously discussed in  FSP
115-1/124-1 and EITF No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, to assess whether its investments with unrealized loss
positions are other than temporarily impaired. The Company complies with the
presentation and disclosure requirements of the other-than-temporary impairment
for debt securities as discussed in FASB ASC No. 320-10-65, Transition Related to Recognition
and Presentation of Other-Than-Temporary Impairments,previously
referred to as FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments.Realized
gains and losses and declines in value judged to be other than temporary are
determined based on the specific identification method and are reported in the
consolidated statements of income. Factors considered in determining whether a
loss is temporary include the length of time and extent to which fair value has
been less than the cost basis, the financial condition and near-term prospects
of the investee, and our intent and ability to hold the investment for a period
of time sufficient to allow for any anticipated recovery in market
value.




The
classification of the Company’s investments into cash equivalents and short term
investments is in accordance with FASB ASC No. 305-10-20, Cash and Cash Equivalents Glossary,previously discussed in SFAS 95, Statement of Cash Flows. Cash
equivalents have maturities of three months or less from the date of purchase.
Short-term investments consist of commercial paper, United States government
agency obligations, corporate/municipal notes and bonds. These securities have
maturities greater than three months from the date of purchase.




The
Company complies with the provisions of FASB ASC No. 820, Fair Value Measurements and
Disclosures(“ASC 820”), previously referred to as SFAS No. 157, Fair Value Measurements in
measuring fair value and in disclosing fair value
measurements.   ASC 820 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements required under other accounting pronouncements. FASB ASC No.
820-10-35, Fair Value
Measurements and Disclosures- Subsequent Measurement(“ASC 820-10-35”),
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. ASC 820-10-35-3 also requires that a
fair value measurement reflect the assumptions market participants would use in
pricing an asset or liability based on the best information available.
Assumptions include the risks inherent in a particular valuation technique (such
as a pricing model) and/or the risks inherent in the inputs to the
model.





ASC
820-10-35 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1measurements) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value hierarchy under ASC
820-10-35  are described below:





Level
1   Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities;





Level
2   Quoted prices in markets that are not active or financial
instruments for which all significant inputs are observable, either directly or
indirectly;





Level
3   Prices or valuations that require inputs that are both
significant to the fair value measurement and unobservable.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.





When the
Company determines that the volume of activity for the asset or liability has
significantly decreased and/or it has identified transactions that are not
orderly, the Company complies with the provisions of ASC 820-10-65-4, previously
referred to as 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.





Further
information about the Company financial instruments can be found in Note 13
below.




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Derivative
Instruments





The
Company recognizes derivative instruments as either assets or liabilities and
measures those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. The Company accounts for derivative instruments in
accordance with FASB ASC No. 815-20-25 – Derivatives and Hedging
Recognition, previously discussed inSFAS
133 - Accounting for
Derivative Instruments and Hedging Activities. For a derivative
instrument designated as a cash flow hedge, the effective portion of the
derivative’s gain or loss is initially reported as a component of accumulated
other comprehensive income and subsequently reclassified into earnings when the
hedged exposure affects earnings. The ineffective portion of the gain (loss) is
reported immediately in other income (expense) on the Company’s consolidated
statement of operations.





Allowance
for Doubtful Accounts





The
Company reviews collectability of accounts receivable on an on-going basis and
provides an allowance for amounts it estimates will not be collectible. During
the Company’s review, it considers its historical experience, the age of the
receivable balance, the credit-worthiness of the customer and the reason for the
delinquency. Delinquent account balances are written-off after the Company has
determined that the likelihood of collection is remote. Write-offs to date have
not been material.





Inventories





The
Company records inventories at the lower of actual cost, determined on a
first-in first-out (FIFO) basis, or market. Actual cost approximates standard
cost, adjusted for variances between standard and actual. Standard costs are
determined based on the Company’s estimate of material costs, manufacturing
yields, costs to assemble, test and package its products and allocable indirect
costs. The Company records differences between standard costs and actual costs
as variances. These variances are analyzed and are either included on the
consolidated balance sheet or the consolidated statement of operations in
order to state the inventories at actual costs on a FIFO basis. Standard costs
are evaluated at least annually.





Provisions
are recorded for excess and obsolete inventory and are estimated based on a
comparison of the quantity and cost of inventory on hand to the Company’s
forecast of customer demand. Customer demand is dependent on many factors and
requires the Company to use significant judgment in its forecasting process. The
Company must also make assumptions regarding the rate at which new products will
be accepted in the marketplace and at which customers will transition from older
products to newer products. Generally, inventories in excess of six months
forecasted demand are written down to zero and the related provision is recorded
as a cost of revenue. Once a provision is established, it is maintained until
the product to which it relates is sold or otherwise disposed of, even if in
subsequent periods we forecast demand for the product.






Goodwill,
Intangible and Long-lived Assets





Consideration
paid in connection with acquisitions is required to be allocated to the assets,
including identifiable intangible assets and liabilities acquired. Acquired
assets and liabilities are recorded based on the Company’s estimate of fair
value, which requires significant judgment with respect to future cash flows and
discount rates.





For
certain long-lived assets, primarily fixed assets and identifiable intangible
assets, for example the Company’s IP acquired from Sunplus (refer to Notes 12
and 16 below), the Company is required to estimate the useful life of its asset
and recognize the cost as an expense over the useful life. The Company uses the
straight-line method to depreciate long-lived assets. The Company evaluates the
recoverability of its long-lived assets in accordance with FASB ASC No.
360-10-35, Subsequent
Measurement ofProperty,
Plant and Equipment,paragraphs 15-49, Impairment or Disposal of
Long-Lived Assets, previously discussed in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived
Assets.Whenever events or circumstances indicate that the carrying
amount of long-lived assets may not be recoverable, the Company compares the
carrying amount of long-lived assets to its projection of future undiscounted
cash flows, attributable to such assets. In the event that the carrying amount
exceeds the future undiscounted cash flows, the Company records an impairment
charge against income equal to the excess of the carrying amount over the
asset’s fair value. Predicting future cash flows attributable to a particular
asset is difficult and requires the use of significant judgment.





The
Company assigns the following useful lives to its fixed assets — three
years for computers and software, one to five years for equipment and five to
seven years for furniture and fixtures. Leasehold improvements and assets held
under capital leases are amortized on a straight-line basis over the shorter of
the lease term or the estimated useful life, which ranges from two to five
years. Depreciation expense was $6.8 million and $7.9 million for the
nine months ended September 30, 2009 and 2008, respectively.




12
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The Company periodically reviews
the carrying value of intangible assets not subject to amortization, including
goodwill, to determine whether impairment may exist. FASB ASC No. 350-20-35,
Subsequent Measurement
ofGoodwill, and
FASB ASC No. 350-30-35, Subsequent Measurement
ofGeneral Intangibles
Other Than Goodwill(“ASC 350-30-35”), whose provisions were previously
discussed in SFAS No. 142, Goodwill and Other Intangible
Assets, require 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. The Company has determined based on the criteria of FASB ASC No.
280-10-50, Segment Reporting
Disclosure, previously discussed in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information,that it has one reporting unit. 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, ASC 350-30-35 requires purchased other
intangible assets to be amortized over their useful lives unless these lives are
determined to be indefinite. Significant assumptions are inherent and highly
subjective in this process. During the nine months ended September 30, 2009, the
Company recognized an impairment loss on goodwill as a result of the periodic
review due to the presence of impairment indicators. Refer to Note 15 below for
further information.




Income
Taxes





The
Company must make certain estimates and judgments in determining income tax
expense for financial statement purposes. These estimates and judgments occur in
the calculation of tax credits, tax benefits and deductions and in the
calculation of certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and financial
statement purposes. Significant changes to these estimates may result in an
increase or decrease to our tax provision in the subsequent period when such a
change in estimate occurs.




Deferred
Tax Assets





The
Company accounts for deferred tax assets in accordance with the FASB ASC No.
740-10, Income Taxes
Recognition(“ASC 740-10”), previously discussed in
SFAS No. 109, Accounting for Income Taxes.
The Company uses an asset and liability approach, which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in its financial statements, but have not been
reflected in its taxable income. In general, a valuation allowance is
established to reduce deferred tax assets to their estimated realizable value,
if based on the weight of available evidence, it is more likely than not that
some portion, or all, of the deferred tax asset will not be realized. The
Company evaluates the realizability of the deferred tax assets quarterly and
will continue to assess the need for valuation allowances. In accordance with
paragraphs 25-17  and 30-7 of ASC 740-10, Basic Recognition
Threshold, the Company determines whether a tax position is more
likely than not to be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. The provisions under  paragraphs 25-17 and 30-7 of ASC
740-10 were previously discussed in FIN 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement
No. 109.





Guarantees,
Indemnifications and Warranty Liabilities





Certain
of the Company’s licensing agreements indemnify its customers for expenses or
liabilities resulting from claimed infringements of patent, trademark or
copyright by third parties related to the intellectual property content of our
products. Certain of these indemnification provisions are perpetual from
execution of the agreement and, in some instances; the maximum amount of
potential future indemnification is not limited. To date, the Company has not
paid any such claims or been required to defend any lawsuits with respect to a
claim.





At the
time of revenue recognition, the Company provides an accrual for estimated costs
(included in accrued liabilities in the accompanying consolidated balance
sheets) to be incurred pursuant to its warranty obligation. The Company’s
estimate is based primarily on historical experience.




13
 Table of
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Restructuring
Expenses





The
Company records provisions for workforce reduction costs and exit costs when
they are probable and estimable. Severance paid under ongoing benefit
arrangements is recorded in accordance with FASB ASC No. 712-10-25, Nonretirement Postemployment
Benefits Recognition, previously discussed in SFAS No. 112, Employers’ Accounting for
Postemployment Benefits. One-time termination benefits and contract
settlement and lease costs are recorded in accordance with FASB ASC No.
420-10-25, Exit or Disposal
Cost Obligations Recognition, previously discussed in SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. At each reporting date, the Company
evaluates its accruals related to workforce reduction charges, contract
settlement and lease costs and plant and equipment write downs to ensure that
these accruals are still appropriate. Restructuring expense accruals related to
future lease commitments on exited facilities included estimates, primarily
related to sublease income over the lease terms and other costs for vacated
properties. Increases or decreases to the accruals for changes in estimates are
classified as restructuring expenses in the consolidated statement of
operations.




Foreign
Currency Translation




The
Company accounts for foreign currency transactions in accordance with FASB ASC
No. 830-20, Foreign Currency
Transactions,and FASB ASC No. 830-30, Translation of Financial
Statements, previously discussed in SFAS No. 52, Foreign Currency Translation.
The Company determines the functional currency for its foreign subsidiaries by
reviewing the currencies in which their respective operating activities occur.
The functional currency for the Company’s foreign subsidiaries is the local
currency. Transaction gains and losses arising from activities in other than the
applicable functional currency are calculated using average exchange rates for
the applicable period and reported in the Company’s consolidated statement
of operations as a non-operating item in each year. Monetary balance sheet
items of the Company’s subsidiaries denominated in foreign currency are
translated using the exchange rate in effect on the balance sheet date and any
adjustments arising from re-measurements are included in other comprehensive
income.




Research
and Development





Research
and development costs are expensed as incurred. It is the Company’s policy to
record a reduction to research and development expense for funding received from
outside parties for research and development projects.






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.




14
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Valuation
and Expense Information Under Stock-based Compensation





Share-based
compensation expense recognized under FASB ASC No. 718-10-30, Initial Measurement of Stock
Compensation,previously discussed in SFAS 123(R), Share-Based Payment, consists
primarily of expenses for the share-based awards discussed above.




The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes- Merton option valuation model and the straight-line attribution
approach with the following weighted-average assumptions:


Three
      months ended September 30,
              
              
              Nine
      months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Employee
      stock option plans:Expected
      life in years
              
              none
              
              
              
              4.8
              
              
              
              4.7
              
              
              
              4.8Expected
      volatility
              
              none
              
              
              
              62.0
              %
              
              
              64.5
              %
              
              
              64.5
              %Risk-free
      interest rate
              
              none
              
              
              
              3.2
              %
              
              
              2.3
              %
              
              
              2.8
              %Expected
      dividends
              
              none
              
              
              none
              
              
              none
              
              
              noneWeighted
      average fair value
              
              none
              
              
              $
              3.19
              
              
              $
              1.37
              
              
              $
              2.82Employee
      Stock Purchase Plan:Expected
      life in years
              
              
              0.5
              
              
              
              0.5
              
              
              
              0.5
              
              
              
              0.5Expected
      volatility
              
              
              73.6
              %
              
              
              45.7
              %
              
              
              85.6
              %
              
              
              65.8
              %Risk-free
      interest rate
              
              
              0.4
              %
              
              
              2.1
              %
              
              
              0.8
              %
              
              
              3.0
              %Expected
      dividends
              
              none
              
              
              none
              
              
              none
              
              
              noneWeighted
      average fair value
              
              $
              0.94
              
              
              $
              2.01
              
              
              $
              1.03
              
              
              $
              1.77


The
Company did not grant any stock options during the three months ended September
30, 2009.





As
required by FASB ASC 718-10-35, Subsequent Measurement of Stock
Compensation, previously discussed in SFAS 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 September 30, 2009 and 2008, 342,416 and 358,311 shares were purchased
under the ESPP program, respectively. For the nine months ended
September 30, 2009 and 2008, the Company’s employees purchased 887,045 and
808,308 shares of common stock under the ESPP program, respectively. At
September 30, 2009, the Company had $378,000 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.




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Stock
Options Activity





The
following is a summary of activity under the Company’s stock option plans during
the nine months ended September 30, 2009, excluding RSUs (in thousands, except
weighted average exercise price):




Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Term in Years
            
            
            Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2008
            
            
            13,849
            
            
            $
            8.65
            
            
            
            6.09
            
            
            $
            2,396Granted
            
            
            111
            
            
            
            2.53Exercised
            
            
            (120
            )
            
            
            1.13Forfeitures
      and cancellations
            
            
            (1,683
            )
            
            
            8.52Outstanding
      at September 30, 2009
            
            
            12,157
            
            
            $
            8.68
            
            
            
            4.51
            
            
            $
            561Ending
      vested and expected to vest at September 30, 2009
            
            
            11,466
            
            
            $
            8.76
            
            
            
            4.33
            
            
            $
            561Exercisable
      at September 30, 2009
            
            
            10,256
            
            
            $
            8.98
            
            
            
            3.96
            
            
            $
            561





At
September 30, 2009, the total unrecognized compensation expense related to
options granted to employees under our share-based compensation plans was
approximately $7.7 million, net of estimated forfeitures. The unamortized
compensation expense will be amortized on a straight-line basis over a weighted
average period of approximately 2.0 years.





Restricted
Stock Units





The RSUs
that the Company grants to its employees 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 over a period of
between one and four years.





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.




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A summary
of activity with respect to the Company’s RSUs during the nine months ended
September 30, 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
            
            
            1,798Vested
            
            
            (255
            )Forfeitures
      and cancellations
            
            
            (2,531
            )Outstanding
      at September 30, 2009
            
            
            2,724
            
            
            
            1.42
            
            
            $
            6,619Ending
      vested and expected to vest at September 30, 2009
            
            
            1,920
            
            
            
            1.29
            
            
            $
            4,666





As of
September 30, 2009, the Company had $5.0 million of total unrecognized
compensation expense, net of estimated forfeitures, related to RSUs. The
unamortized compensation expense will be recognized on a straight-line basis,
and the weighted average estimated remaining life is 2.1 years.


Purchases
of Equity Securities





During
the nine months ended September 30, 2009, 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 for the weighted
average price per share):




Period
            
            Total
      Number of Shares Repurchased
            
            
            Weighted
      Average Price Per Share
            
            
            Total
      ValueThree
      months ended March 31, 2009
            
            
            71
            
            
            
            3.15
            
            
            $
            224Three
      months ended June 30, 2009
            
            
            7
            
            
            
            2.45
            
            
            $
            17Three
      months ended September 30, 2009
            
            
            14
            
            
            
            2.91
            
            
            $
            39Nine
      months ended September 30, 2009
            
            
            92
            
            
            
            
            
            
            $
            280




There
were no RSUs that vested in fiscal year 2008.  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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Stock-based
Compensation Expense





The table
below shows total stock-based compensation expense included in the Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and 2008 (in thousands):





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Cost
      of sales
            
            $
            363
            
            
            
            351
            
            
            $
            806
            
            
            
            1,132Research
      and development
            
            
            2,374
            
            
            
            1,753
            
            
            
            5,365
            
            
            
            5,200Selling,
      general and administrative
            
            
            4,911
            
            
            
            2,004
            
            
            
            9,255
            
            
            
            8,057Stock-based
      compensation expense before tax effects
            
            
            7,648
            
            
            
            4,108
            
            
            
            15,426
            
            
            
            14,389Income
      tax benefit
            
            
            (2,304
            )
            
            
            (1,354
            )
            
            
            (4,350
            )
            
            
            (4,443
            )Stock-based
      compensation expense after tax effects
            
            $
            5,344
            
            
            $
            2,754
            
            
            $
            11,076
            
            
            $
            9,946




Adjustments
during the three and nine months ended September 30, 2009





Subsequent
to the issuance of its June 2009 unaudited interim consolidated financial
statements, the Company identified errors in the calculation of stock-based
compensation expense for fiscal years 2008, 2007 and 2006, and for the three
months ended March 31, 2009 and the three and six months ended June 30, 2009.
The errors were identified after the Company’s third-party software provider
notified its clients, including the Company, that it made a change to how its
software program calculates stock-based compensation expense. Specifically, the
prior version of this software calculated stock-based compensation expense by
incorrectly applying a weighted average forfeiture rate to the vested portion of
stock option awards until the grant’s final vest date, rather than calculating
stock-based compensation expense based upon the actual vested portion of the
grant date fair value, resulting in an understatement of stock-based
compensation expense in certain periods prior to the grant’s final vest date.
Thus, this error relates to the timing of stock-based compensation expense
recognition.
  The
Company determined that the cumulative error from the understatement of
stock-based compensation expense related to the periods discussed above totaled
$2.5 million, net of tax effects through June 30, 2009. The impact of the errors
on fiscal years 2008, 2007 and 2006, is to decrease net income by $0.1 million,
$1.6 million and $1.0 million, respectively and for three months ended March 31,
2009 and three months ended June 30, 2009 to increase (decrease) net loss by
$0.1 million and ($0.3) million, respectively.
  Management
has determined that the impact of this error is not material to the previously
issued annual and interim unaudited consolidated financial statements using the
guidance of SEC Staff Accounting Bulletin No. 99 (“SAB 99”) and SAB 108.
Accordingly, the interim unaudited consolidated financial statements for the
three and nine months ended September 30, 2009 include the cumulative adjustment
to increase stock-based compensation expense by $2.5 million net of tax
effects, (or $0.03 per share)  to correct these errors. The Company
does not believe the correction of these errors is material to the consolidated
financial statements for the three and nine months ended September 30, 2009 and
does not believe that it will be material to the 2009 annual consolidated
financial statements.


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5.
Restructuring Charges





Ongoing Restructuring
Activities




For the
three and nine months ended September 30, 2009, we recorded restructuring
expense of approximately $0.4 million and $8.2 million, respectively. The amount
recorded during the three months ended September 30, 2009 primarily related to
the future lease commitments on exited facilities, net of sublease income and
impairment of certain fixed assets. The expense recorded for the nine months
ended September 30, 2009 primarily related the employee severance costs
associated with the Company’s fiscal year 2009 restructuring plan.




Fiscal
2009 Restructuring Plan




In June
2009, the Company’s management approved and announced a restructuring program,
which primarily included a reduction in force, to realign and focus the
Company’s resources on its core competencies and in order to better align its
revenues and expenses.




As of
September 30, 2009, approximately $5.6 million of the costs associated with this
restructuring program was unpaid. We expect that the severance-related charges
and other costs will be substantially paid during the first two quarters of
fiscal year 2010 and the facilities-related lease payments to be substantially
paid by November 2012.




Fiscal
2008 Restructuring Plan




As of
September 30, 2009, approximately $0.3 million of the costs associated with the
restructuring plan announced in December 2008 remained unpaid. We expect that
the severance-related charges and other costs will be substantially paid by the
end of fiscal year 2009 and the facilities-related lease payments to be
substantially paid by July 2011.




The table
below summarizes the Company’s restructuring activities for the nine months
ended September 30, 2009 (in thousands):





Employee
      Severance and Benefits
            
            
            Operating
      Lease Termination
            
            
            Impaired
      Fixed Assets
            
            
            TotalAccrued
      restructuring balance as of December 31, 2008
            
            $
            3,252
            
            
            $
            200
            
            
            $
            -
            
            
            $
            3,452Additional
      accruals
            
            
            7,565
            
            
            
            225
            
            
            
            226
            
            
            
            8,016Cash
      payments
            
            
            (5,177
            )
            
            
            (145
            )
            
            
            -
            
            
            
            (5,322
            )Non-cash
      charges and adjustments
            
            
            -
            
            
            
            -
            
            
            
            (226
            )
            
            
            (226
            )Accrued
      restructuring balance as of September 30, 2009
            
            $
            5,640
            
            
            $
            280
            
            
            $
            -
            
            
            $
            5,920




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6.
Comprehensive Income (Loss)





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





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      income (loss)
            
            $
            (15,511
            )
            
            $
            6,074
            
            
            $
            (62,169
            )
            
            $
            5,050Change
      in unrealized value of investments
            
            
            140
            
            
            
            (371
            )
            
            
            220
            
            
            
            (400
            )Foreign
      currency translation adjustments
            
            
            287
            
            
            
            (409
            )
            
            
            355
            
            
            
            (276
            )Effective
      portion of cash flow hedges
            
            
            3
            
            
            
            (284
            )
            
            
            32
            
            
            
            (284
            )Total
      comprehensive income (loss)
            
            $
            (15,081
            )
            
            $
            5,010
            
            
            $
            (61,562
            )
            
            $
            4,090







7.
Net Income (Loss) Per Share





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





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Numerator:Net
      income (loss)
            
            $
            (15,511
            )
            
            $
            6,074
            
            
            $
            (62,169
            )
            
            $
            5,050Denominator:Weighted
      average shares – basic
            
            
            75,053
            
            
            
            73,861
            
            
            
            74,763
            
            
            
            76,088Weighted
      average shares – diluted
            
            
            75,053
            
            
            
            75,334
            
            
            
            74,763
            
            
            
            77,185Net
      income (loss) per share – basic and diluted
            
            $
            (0.21
            )
            
            $
            0.08
            
            
            $
            (0.83
            )
            
            $
            0.07





The table
below is a reconciliation of the weighted-average common shares used to
calculate basic net income (loss) per share to the weighted-average common
shares used to calculate diluted net income (loss) per share (in
thousands):





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted-average
      common shares for basic net income (loss) per share
            
            
            75,053
            
            
            
            73,861
            
            
            
            74,763
            
            
            
            76,088Weighted-average
      dilutive stock options and restricted stock units outstanding under the
      treasury stock method
            
            
            -
            
            
            
            1,473
            
            
            
            -
            
            
            
            1,097Total
            
            
            75,053
            
            
            
            75,334
            
            
            
            74,763
            
            
            
            77,185





The
securities that were anti-dilutive and excluded from the net loss per share
calculations were approximately 13.8 million and 13.6 million for the three
and nine months ended September 30, 2009, respectively.  For the three
and nine months ended September 30, 2008, approximately 11.0  million
and 12.3 million outstanding stock options were excluded from the calculation of
diluted net income per share, respectively, because their inclusion would have
been anti-dilutive.





20
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8.
Balance Sheet Components





The table below shows the components of
the Company’s inventories, property and equipment and accrued and other current
liabilities (in thousands).





September
      30, 2009
            
            
            December
      31, 2008Inventories:Raw
      materials
            
            $
            4,429
            
            
            $
            4,962Work
      in process
            
            
            1,895
            
            
            
            545Finished
      goods
            
            
            6,214
            
            
            
            7,268Total
      inventories
            
            $
            12,538
            
            
            $
            12,775Property
      and equipmentComputers
      and software
            
            $
            23,065
            
            
            $
            24,250Equipment
            
            
            25,987
            
            
            
            25,059Furniture
      and fixtures
            
            
            2,738
            
            
            
            2,70151,790
            
            
            
            52,010Less:
      accumulated depreciation
            
            
            (36,665
            )
            
            
            (32,616
            )Total
      property and equipment, net
            
            $
            15,125
            
            
            $
            19,394Accrued
      and other current liabilities:Accrued
      payroll and related expenses
            
            $
            3,464
            
            
            $
            5,359Accrued
      restructuring
            
            
            5,920
            
            
            
            3,452Software
      and IP liability
            
            
            625
            
            
            
            2,500Amounts
      due to customers
            
            
            368
            
            
            
            1,966Bonus
      accrual
            
            
            -
            
            
            
            1,556Accrued
      and other current liabilities
            
            
            7,801
            
            
            
            8,190Total
      accrued liabilities
            
            $
            18,178
            
            
            $
            23,023


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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.  On June 10, 2009, the District Court granted preliminary
approval of the proposed settlement agreement.  After a September 10,
2009 hearing, the District Court gave final approval to the settlement on
October 5, 2009.





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, and thereafter the underwriter defendants’ filed
a cross appeal to a portion of the District Court’s order that dismissed thirty
(30) of the cases without prejudice following the moving issuers’ motion to
dismiss.  On May 27, 2009, the Ninth Circuit issued an order stating
that the cases were not selected for inclusion in the mediation program, and on
May 22, 2009 issued an order granting the parties’ joint motion filed on May 22,
2009 to consolidate the 54 appeals and 30 cross-appeals.  Under the
current schedule, the briefing will be completed on November 17,
2009.  No date has been set for oral argument in the Ninth
Circuit.





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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.  Oral argument was held on April
14, 2009.  On May 1, 2009, the Ninth Circuit issued an order affirming
the lower court’s final judgment, which dismissed the action with
prejudice.  The deadline for the plaintiffs to have filed a petition
for rehearing or rehearing en banc was May 15, 2009; no such petitions were
filed.





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 Company’s licensing agreements indemnify it’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 future minimum payments under the Company’s operating
leases outstanding at September 30, 2009 (in thousands):




Contractual
      obligations
            
            Total
            
            
            Less
      than 1 year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            More
      than 5 yearsOperating
      lease obligations
            
            $
            4,562
            
            
            $
            2,695
            
            
            $
            1,857
            
            
            $
            10
            
            
            $
            -





The
amounts above exclude liabilities under FASB ASC 740-10-25, “Income Taxes – Recognition
section,”paragraphs 5-17 –“Basic Recognition
Threshold,” previously contained in FIN 48 “Accounting for Uncertainty in
Income Taxes,” as the Company is unable to reasonably estimate the
ultimate amount or timing of settlement.








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 President and Chief Operating 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.




23
 Table of
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Revenue





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




Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Japan
            
            $
            11,957
            
            
            $
            12,516
            
            
            $
            31,782
            
            
            $
            52,697Taiwan
            
            
            9,063
            
            
            
            13,878
            
            
            
            29,282
            
            
            
            39,715United
      States
            
            
            6,392
            
            
            
            13,461
            
            
            
            22,654
            
            
            
            38,443Europe
            
            
            4,170
            
            
            
            5,470
            
            
            
            13,411
            
            
            
            22,367Hong
      Kong
            
            
            2,391
            
            
            
            12,364
            
            
            
            7,308
            
            
            
            25,340Korea
            
            
            1,566
            
            
            
            3,300
            
            
            
            3,692
            
            
            
            10,307Other
            
            
            1,617
            
            
            
            16,787
            
            
            
            6,875
            
            
            
            26,103Total
      revenue
            
            $
            37,156
            
            
            $
            77,776
            
            
            $
            115,004
            
            
            $
            214,972




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





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Consumer
      Electronics (1)
            
            $
            31,690
            
            
            $
            55,883
            
            
            $
            98,427
            
            
            $
            155,728Personal
      Computer (1)
            
            
            1,928
            
            
            
            11,713
            
            
            
            6,920
            
            
            
            34,640Storage
      (1)
            
            
            3,538
            
            
            
            10,180
            
            
            
            9,657
            
            
            
            24,604Total
      revenue
            
            $
            37,156
            
            
            $
            77,776
            
            
            $
            115,004
            
            
            $
            214,972(1)
      Includes development, licensing and royalty revenue (collectively "licensing revenue")





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Consumer
      Electronics
            
            $
            25,588
            
            
            $
            46,157
            
            
            $
            78,850
            
            
            $
            133,222Personal
      Computer
            
            
            1,800
            
            
            
            9,704
            
            
            
            6,968
            
            
            
            30,681Storage
            
            
            3,328
            
            
            
            9,113
            
            
            
            8,929
            
            
            
            20,094Licensing
      revenue
            
            
            6,440
            
            
            
            12,802
            
            
            
            20,257
            
            
            
            30,975Total
      revenue
            
            $
            37,156
            
            
            $
            77,776
            
            
            $
            115,004
            
            
            $
            214,972





For the
three months ended September 30, 2009, two customers represented 16.3% and
10.6% of the Company’s revenue. For the nine months ended September 30, 2009,
two customers each represented 12.8% and 10.3% of the Company’s revenue. At
September 30, 2009, three customers each represented 14.4%, 11.9% and 10.8% of
gross accounts receivable.





For the
three months ended September 30, 2008, four customers each
represented 12.4%, 12.0%, 11.0% and 10.2% of the Company’s revenue. For the
nine months ended September 30, 2008, four customers each represented 13.8%,
11.9%, 11.5% and 10.0% of the Company’s revenue.  At September 30,
2008, four customers each represented 13.2%, 13.1%, 13.1%, and 10.2% of gross
accounts receivable.





Property
and Equipment





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




24
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11.
Provision (Benefit) for Income Taxes





For the
three and nine months ended September 30, 2009, the Company recorded an income
tax benefit of $444,000 and $2.1 million, respectively. The effective tax rates
for the three and nine months ended September 30, 2009 were 2.8% and 3.3%,
respectively, and were based on our projected taxable income for 2009, 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, stock-based compensation expense, tax credits
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 for the three months ended March 31, 2009 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.





The
Company has concluded that it is more likely than not that as of September 30,
2009, the Company’s net deferred tax assets will be realized. In making its
conclusion, the Company considered all available evidence, both positive and
negative. Key components of the evaluation are the cumulative results of
operations in recent years, the nature of recent losses, and forecasts of a
return to profitability.A
significant negative factor in the evaluation is cumulative losses in recent
years and the Company may reach that position during fiscal year 2009. The
assessment of whether a valuation allowance is necessary will be made each
quarter by considering all of the positive and negative evidence in existence at
that time and, depending upon the nature and weighting of such evidence, a
substantial increase in the valuation allowance may be required to reduce the
deferred tax assets in the near term, which would result in a material charge to
income tax expense.





For the
three and nine months ended September 30, 2008, the Company recorded a provision
for income taxes of $114,000 and a benefit of ($13,000), respectively. The
effective tax rates for the three and nine months ended September 30, 2008 were
1.8% and (0.3%), respectively, and were based on the Company’s projected taxable
income for 2008, plus 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 Company had interest and
penalties of $100,000 and $273,000 for the three and nine months ended September
30, 2009, respectively, and approximately $141,000 and $339,000 for the three
and nine months ended September 30, 2008, 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.







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 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 September 30, 2009, the Company has
paid Sunplus $38.7 million of the consideration for the licensed technology and
related deliverables and support. The Company is required to pay the remaining
$1.3 million by the end of 2009. Refer to Note 16 for the subsequent event
discussion on this technology.





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13.
Fair Value Measurements





The
Company records its financial instruments that are accounted for under FASB ASC
No. 320-10-25, Recognition of
Investments in Debt and Equity Securities,previously discussed in SFAS
115, Accounting for Certain
Investments in Debt and Equity Securities, and derivative contracts under
FASB ASC No. 815, Derivatives
and Hedging, previously discussed in SFAS 133,Accounting for Derivative Instruments and Hedging Activities, at fair
value. The determination of fair value is based upon the fair value framework
established by FASB ASC No. 820-10-35, Fair Value Measurements and
Disclosures – Subsequent Measurement(“ASC 820-10-35”), previously
discussed in SFAS 157, Fair Value Measurements. ASC
820-10-35 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 and derivative asset as of September 30, 2009, which are measured at
fair value on a recurring basis by level within the fair value hierarchy. As
required by ASC 820-10-35, these are classified based on the lowest level of
input that is significant to the fair value measurement.





Fair
      value measurements using
            
            
            Assets(dollars
      In thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            at
      fair valueCash
      equivalents and short-term investments
            
            $
            5,550
            
            
            $
            120,226
            
            
            $
            -
            
            
            $
            125,776Derivative
      asset
            
            
            -
            
            
            
            243
            
            
            
            -
            
            
            
            243Total
            
            $
            5,550
            
            
            $
            120,469
            
            
            $
            -
            
            
            $
            126,019





Cash and
cash equivalents and short term investments in the above table excludes $27.4
million in cash held by the Company or in its accounts with investment fund
managers as of September 30, 2009. During the three and nine months ended
September 30, 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.





As of
September 30, 2009, the Company did not hold financial assets and liabilities
which were recorded at fair value in the Level 3 category.





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14.  Derivative
Instruments





The Company accounts for
derivative instruments in accordance with the provisions of FASB ASC No.
815-20-25,Derivatives
and Hedging – Hedging Recognition,previously discussed in
SFAS 133,Accounting
for Derivative Instruments and Hedging Activities. The Company recognizes
derivative instruments as either assets or liabilities and measures those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The Company’s derivatives are designated as cash flow hedges. For a
derivative instrument designated as a cash flow hedge, the effective portion of
the derivative’s gain  or loss is initially reported as a component of
accumulated other comprehensive income and subsequently reclassified into
earnings when the hedged exposure affects earnings. The ineffective portion of
the gain (loss) is reported immediately in other income (expense) on the
Company’s consolidated statement of operations.





Silicon Image is a global
company that is exposed to foreign currency exchange rate fluctuations in the
normal course of its business.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 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
amount of gain recognized in other comprehensive income (“OCI”) on effective
cashflow hedges as of September 30, 2009, the amount of gain reclassified from
accumulated OCI to operating expenses for the three and nine months ended
September 30, 2009, and the amount of gain recognized in income on ineffective
cashflow hedges for the three and nine months ended September 30, 2009 are
insignificant.





As of
September 30, 2009, the outstanding foreign currency forward contracts had a
notional value of approximately $4.6 million. The unrealized gain relating to
the effective cashflow hedges recorded in accumulated other comprehensive income
as part of stockholders' equity and prepaid expenses and other current
assets in the condensed consolidated balance sheet as of September 30, 2009
was insignificant.




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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.
FASB ASC No. 350-20-35, Subsequent Measurement of
Goodwill, and FASB ASC
No. 350-30-35, Subsequent
Measurement of General
Intangibles Other Than Goodwill, whose provisions were previously
discussed in SFAS 142, Goodwill and Other Intangible
Assets, require 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, FASB ASC 350-30-35 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 the 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 FASB ASC No.
360-10-35, Subsequent
Measurement of Property, Plant and
Equipment, paragraphs 15-49, Impairment or Disposal of Long-Lived
Assets,previously discussed in SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,the Company also made an impairment
evaluation of its long-lived assets and determined that its long-lived assets
were not impaired as of March 31, 2009. No impairment indicators were present
during the three months ended June 30, 2009 and September 30, 2009, hence, no
impairment loss was recognized in those periods.  Refer to Note 16 for
the subsequent event discussion on the impairment of Sunplus IP
technology.




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16.
Subsequent Events





The Company’s management evaluated
subsequent events through October 23, 2009, which is the date these financial
statements were available to be issued. The following events took place
subsequent to September 30, 2009.





On
October 18, 2009, the Company determined that, in light of certain changes to
its product strategy going forward, the intellectual property licensed from
Sunplus Technology Co., Ltd in February 2007 (the “Sunplus IP”) no longer aligns
with the Company’s product roadmap and therefore will not be used. The reason
for acquiring the Sunplus IP was to provide the Company with advanced technology
for the development of large scale integrated circuits, which included
comprehensive digital television system functionality. Given the Company’s
current product strategy, which is to continue to focus on discrete
semiconductor products and related intellectual property, the Sunplus IP no
longer aligns with the Company’s product roadmap. The change in the Company’s
product strategy was due to market place and related competitive dynamics. The
carrying value of such technology was $28.0 million as of September 30, 2009. In
connection with the decision to discontinue the use of the Sunplus IP, the
Company expects to incur a pre-tax impairment charge of $28.0 million during the
three months ending December 31, 2009.




Given the
Company’s decision regarding the Sunplus IP discussed above and its decision to
focus on discrete semiconductor products and related intellectual property, on
October 18, 2009, the Company also decided to restructure its research and
development operations resulting in the planned closure of its two sites in
Germany. The Company currently has approximately 150 employees in Germany
primarily focused on research and development activities. The Company plans to
complete the activities related to these site closures during the first half of
fiscal year 2010. The Company expects to record pre-tax restructuring charges in
the range of $14.0 to $16.0 million during the three months ending December 31,
2009, primarily related to employee severance
arrangements.  Substantially all of the charges are, or will be, cash
expenditures.




29
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Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations





This report contains forward-looking
statements within the meaning of Section 21E of the Exchange Act and
Section 27A of the Securities Act of 1933. These forward-looking statements
involve a number of risks and uncertainties, including those identified in the
section of this Form 10-Q entitled “Factors Affecting Future Results,” that may
cause actual results to differ materially from those discussed in, or implied
by, such forward-looking statements. Forward-looking statements within
this Form 10-Q are identified by words such as “believes,” “anticipates,”
“expects,” “intends,” “estimates,” “may,” “will” and variations of such words and
other similar expressions. However, these words are not the only means of
identifying such statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or circumstances
are forward-looking statements. We undertake no obligation to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-Q with the SEC. 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), mobile 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 license IP to
consumer electronics, computing, display, storage, mobile and network 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 and Blu-ray) players, digital and
personal video recorders (DVRs and PVRs), mobile devices, 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 have been, and are
likely to be in the future, significant contributors to broader standards
specifications such as the Serial ATA (SATA) specification for PC &
Enterprise storage applications.  We actively promote and participate
in working groups and consortiums to develop new standards such as the recently
announced MHDI working group chartered with creating a new High Definition
mobile video standard and the Serial Port Memory Technology (SPMT) consortium
which is working on serial connection standards for dynamic random access memory
(DRAM). 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, mobile, 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.


30
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Our
customers are equipment manufacturers in each of our target markets — Consumer
Electronics, Personal Computer, Mobile 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, Nokia, Samsung, Sharp, 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 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
headquartered in Sunnyvale, California. Our Internet website address is
www.SiliconImage.com. We are not including the information contained on our web
site as a part of, or incorporating it by reference into, this Quarterly Report
on Form 10-Q. 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 51.6% and 43.7% of our revenue for the three
and nine months ended September 30, 2009, respectively, compared to 52.4% and
54.7% of our revenue for the three and nine months ended September 30, 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 and nine months ended September 30, 2009, 22.5% and 33.1% of our revenue,
respectively, was generated through distributors, compared to 47.4% and 50.7% in
the comparable periods of 2008, respectively.  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 71.6% and 68.4%
of our revenue for the three and nine months ended September 30, 2009,
respectively and 75.7% and 71.7% for the three and nine months ended September
30, 2008, respectively. 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.





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 Table of
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Critical
Accounting Policies





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in our consolidated financial statements and
accompanying notes. We base our estimates on historical experience and all known
facts and circumstances that we believe are relevant. Actual results may differ
materially from our estimates. We believe the accounting policies discussed
below to be most critical to an understanding of our financial condition and
results of operations because they require us to make estimates, assumptions and
judgments about matters that are inherently uncertain.





Revenue
Recognition





We
recognize revenue when persuasive evidence of an arrangement exists, delivery or
performance has occurred, the sales price is fixed or determinable and
collectability is reasonably assured.





Revenue
from products sold directly to end-users, or to distributors that do not receive
price concessions and rights of return, is generally recognized when title and
risk of loss has passed to the buyer which typically occurs upon shipment. All
shipping costs are charged to cost of product revenue.





Revenue
from products sold to distributors with agreements allowing for stock
rotations are generally recognized upon shipment.  Reserves for
stock rotations are estimated based primarily on historical experience and
provided for at the time of shipment.





For
products sold to distributors with agreements allowing for price concessions and
stock rotation rights/product returns, we recognize revenue based on our best
estimate of when the distributor sells the product to its customer. Our estimate
of such distributor sell-through is based on point of sales reports received
from the distributor which establishes a customer, quantity and final price.
Revenue is not recognized upon our shipment of product to the distributor,
since, due to certain forms of price concessions, the sales price is not
substantially fixed or determinable at the time of shipment. Price concessions
are recorded when incurred, which is generally at the time the distributor sells
the product to its customer. Additionally, these distributors have stock
rotation rights permitting them to return products to us, up to a specified
amount for a given period of time. Revenue is earned when the distributor
reports that it has sold product to its customer, at which time our sales price
to the distributor is fixed. Once we receive the point of sales reports from a
distributor, it has satisfied all the requirements for revenue recognition and
any product returns/stock rotation and price concession rights that the
distributor has under its distributor agreement with Silicon Image are
exhausted. Pursuant to our distributor agreements, older, end-of-life and
certain other products are generally sold with no right of return and are not
eligible for price concessions. For these products, revenue is recognized upon
shipment and title transfer assuming all other revenue recognition criteria are
met.





At the time of shipment
to distributors, we record a trade receivable for the selling price since there
is a legally enforceable right to payment, relieve inventory for the carrying
value of goods shipped since legal title has passed to the distributor and
record the gross margin in “deferred margin on sale to distributors,” a
component of current liabilities in our consolidated balance sheets. Deferred
margin on the sale to distributor effectively represents the gross margin on the
sale to the distributor. However, the amount of gross margin we recognize in
future periods will be less than the originally recorded deferred margin on
sales to distributor as a result of negotiated price concessions. We sell each
item in our product price book to all of our distributors worldwide at a
relatively uniform list price. However, distributors resell our products to end
customers at a very broad range of individually negotiated price points based on
customer, product, quantity, geography, competitive pricing and other factors.
The majority of our distributors’ resale is priced at a discount from list
price. Often, under these circumstances, we remit back to the distributor a
portion of their original purchase price after the resale transaction is
completed. Thus, a portion of the “deferred margin on the sale to distributor”
balance represents a portion of distributors’ original purchase price that will
be remitted back to the distributor in the future. The wide range and
variability of negotiated price concessions granted to distributors does not
allow us to accurately estimate the portion of the balance in the deferred
margin on the sale to distributors line item that will be remitted back to the
distributors. We reduce deferred margin by anticipated or determinable future
price concessions.


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We derive
revenue from license of its internally developed intellectual property (IP). We
enter into IP licensing agreements that generally provide licensees the right to
incorporate our IP components in their products with terms and conditions that
vary by licensee. Revenue earned under contracts with our licensees is
classified as licensing revenue. Our license fee arrangements generally include
multiple deliverables and for multiple deliverable arrangements, we follow the
guidance in FASB ASC No. 605-25-25, Multiple-Element Arrangements
Recognition, previously discussed in EITF 00-21, Revenue Arrangements with
Multiple Deliverables, to determine
whether there is more than one unit of accounting. To the extent that the
deliverables are separable into multiple units of accounting, we allocate the
total fee on such arrangements to the individual units of accounting using the
residual method, if objective and reliable evidence of fair value does not exist
for delivered elements. We then recognize revenue for each unit of accounting
depending on the nature of the deliverable(s) comprising the unit of accounting
in accordance with the revenue criteria mentioned above.





The IP
licensing agreements generally include a nonexclusive license for the underlying
IP. Fees under these agreements generally include (a) license fees relating
to our IP, (b) support, typically for one year; and (c) royalties
payable following the sale by our licensees of products incorporating the
licensed technology. The license of our IP has standalone value and can be used
by the licensee without support. Further, objective and reliable evidence of
fair value exists for support. Accordingly, license and support fees are each
treated as separate units of accounting.





Certain
licensing agreements provide for royalty payments based on agreed upon royalty
rates. Such rates can be fixed or variable depending on the terms of the
agreement. The amount of revenue we recognize is determined based on a time
period or on the agreed-upon royalty rate, extended by the number of units
shipped by the customer. To determine the number of units shipped, we rely upon
actual royalty reports from our customers when available and rely upon estimates
in lieu of actual royalty reports when we have a sufficient history of receiving
royalties from a specific customer for us to make an estimate based on available
information from the licensee such as quantities held, manufactured and other
information. These estimates for royalties necessarily involve the application
of management judgment. As a result of our use of estimates, period-to-period
numbers are “trued-up” in the following period to reflect actual units shipped.
In cases where royalty reports and other information are not available to allow
us to estimate royalty revenue, we recognize revenue only when royalty reports
are received.





For
contracts related to licenses of our technology that involve significant
modification, customization or engineering services, we recognize revenue in
accordance the provisions of FASB ASC No. 605-35-25, Construction-Type and
Production-Type Contracts Recognition, previously discussed in
SOP 81-1, Accounting for
Performance of
Construction-Type and Certain Production-Type Contracts.Revenues derived
from such license contracts are accounted for using the percentage-of-completion
method.





We
determine progress to completion based on input measures using labor-hours
incurred by our engineers. The amount of revenue recognized is based on the
total contract fees and the percentage of completion achieved. Estimates of
total project requirements are based on prior experience of customization,
delivery and acceptance of the same or similar technology and are reviewed and
updated regularly by management. If there is significant uncertainty about
customer acceptance, or the time to complete the development or the deliverables
by either party, we apply the completed contract method. If application of the
percentage-of-completion method results in recognizable revenue prior to an
invoicing event under a customer contract, we recognize the revenue and record
an unbilled receivable assuming collectability is reasonably assured. Amounts
invoiced to our customers in excess of recognizable revenues are recorded as
deferred revenue.




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Financial
Instruments





We
account for our investments in debt and equity securities under FASB ASC No.
320-10-25, Investments in Debt
and Equity Securities Recognition, previously discussed
in  SFAS 115, Accounting for Certain Investments in Debt and Equity
Securitiesand FASB ASC No. 320-10-35, Subsequent Measurement of Investments in Debt and Equity
Securities(“ASC 320-10-35”), previously discussed in FSP115-1/124-1 and
EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.Management determines the appropriate classification of such securities
at the time of purchase and reevaluates such classification as of each balance
sheet date. The investments are adjusted for amortization of premiums and
discounts to maturity and such amortization is included in interest income. We
follow the guidance provided by ASC 320-10-35 to assess whether our investments
with unrealized loss positions are other than temporarily
impaired.  We comply with the presentation and disclosure requirements
of the other-than-temporary impairment for debt securities as discussed in FASB
ASC No. 320-10-65, Transition
Related To Recognition and Presentation of Other-Than-Temporary
Impairments, previously discussed in FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. Realized gains and losses and declines
in value judged to be other than temporary are determined based on the specific
identification method and are reported in the statements of income. Factors
considered in determining whether a loss is temporary include the length of time
and extent to which fair value has been less than the cost basis, the financial
condition and near-term prospects of the investee, and our intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value. We place our investments in instruments that meet high
credit quality standards, as specified in our investment policy guidelines.
These guidelines also limit the amount of credit exposure to any one issue,
issuer or type of instrument.





The
longer the duration of our investment securities, the more susceptible they are
to changes in market interest rates and bond yields. As yields increase, those
securities purchased with a lower yield-at-cost show a mark-to-market unrealized
loss. All unrealized losses are due to changes in interest rates and bond
yields. We expect to realize the full value of all these investments upon
maturity or sale.





The
classification of our investments into cash equivalents and short term
investments is in accordance with FASB ASC No. 305-10-20, Cash and Cash Equivalents
Glossary, previously discussed in SFAS No. 95, Statement of Cash Flows.Cash
equivalents consist of short-term, highly liquid financial instruments with
insignificant interest rate risk that are readily convertible to cash and have
maturities of three months or less from the date of purchase. Short-term
investments consist of taxable commercial paper, United States government agency
obligations, corporate/municipal notes and bonds with high-credit quality and
money market preferred stock. These securities have maturities greater than
three months from the date of purchase.





We
believe all of the financial instruments’ recorded values approximate current
fair values because of their nature and respective durations. The fair value of
marketable securities is determined using quoted market prices for those
securities or similar financial instruments.





Derivative
Instruments





We
recognize derivative instruments as either assets or liabilities and measures
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. We account for derivative instruments in accordance with FASB ASC
No. 815-20-25 – Derivatives
and Hedging Recognition, previously discussed inSFAS
133 - Accounting for
Derivative Instruments and Hedging Activities. For a derivative
instrument designated as a cash flow hedge, the effective portion of the
derivative’s gain or loss is initially reported as a component of accumulated
other comprehensive income and subsequently reclassified into earnings when the
hedged exposure affects earnings. The ineffective portion of the gain (loss) is
reported immediately in other income (expense) on our consolidated statement of
operations.




Allowance
for Doubtful Accounts





We review
collectability of accounts receivable on an on-going basis and provide an
allowance for amounts we estimate will not be collectible. During our review, we
consider our historical experience, the age of the receivable balance, the
credit-worthiness of the customer and the reason for the delinquency. Delinquent
account balances are written-off after management has determined that the
likelihood of collection is remote. Write-offs to date have not been material.
While we endeavor to accurately estimate the allowance, we may record
unanticipated write-offs in the future.


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Inventories





We record
inventories at the lower of actual cost, determined on a first-in first-out
(FIFO) basis, or market. Actual cost approximates standard cost, adjusted for
variances between standard and actual. Standard costs are determined based on
our estimate of material costs, manufacturing yields, costs to assemble, test
and package our products and allocable indirect costs. We record differences
between standard costs and actual costs as variances. These variances are
analyzed and are either included on the consolidated balance sheet or the
consolidated statement of operations in order to state the inventories at actual
costs on a FIFO basis. Standard costs are evaluated at least
annually.





Provisions
are recorded for excess and obsolete inventory and are estimated based on a
comparison of the quantity and cost of inventory on hand to management’s
forecast of customer demand. Customer demand is dependent on many factors and
requires us to use significant judgment in our forecasting process. We must also
make assumptions regarding the rate at which new products will be accepted in
the marketplace and at which customers will transition from older products to
newer products. Generally, inventories in excess of six months demand are
written down to zero and the related provision is recorded as a cost of revenue.
Once a provision is established, it is maintained until the product to which it
relates is sold or otherwise disposed of, even if in subsequent periods we
forecast demand for the product.





Goodwill,
Intangible and Long-lived Assets





Consideration
paid in connection with acquisitions is required to be allocated to the assets,
including identifiable intangible assets and liabilities acquired. Acquired
assets and liabilities are recorded based on our estimate of fair value, which
requires significant judgment with respect to future cash flows and discount
rates.





For
certain long-lived assets, primarily fixed assets and identifiable intangible
assets, for example, our IP acquired from Sunplus (refer to Notes 12 and 16 in
our notes to the consolidated financial statements), we are required to estimate
the useful life of the asset and recognize its cost as an expense over the
useful life. We use the straight-line method to depreciate long-lived assets. We
evaluate the recoverability of our long-lived assets in accordance with FASB ASC
No. 360-10-35, Subsequent
Measurement of Property, Plant and Equipment,  paragraphs
15-49, Impairment or Disposal
of Long-Lived Assets,previously discussed in SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived
Assets.Whenever events or circumstances indicate that the carrying
amount of long-lived assets may not be recoverable, we compare the carrying
amount of long-lived assets to our projection of future undiscounted cash flows,
attributable to such assets. In the event that the carrying amount exceeds the
future undiscounted cash flows, we record an impairment charge against income
equal to the excess of the carrying amount over the asset’s fair value.
Predicting future cash flows attributable to a particular asset is difficult and
requires the use of significant judgment.





We assign
the following useful lives to our fixed assets — three years for computers
and software, one to five years for equipment and five to seven years for
furniture and fixtures. Leasehold improvements and assets held under capital
leases are amortized on a straight-line basis over the shorter of the lease term
or the estimated useful life, which ranges from two to five years. Depreciation
expense was $6.8 million and $7.9 million for the nine months ended
September 30, 2009 and 2008, respectively.


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We
periodically review the carrying value of intangible assets not subject to
amortization, including goodwill, to determine whether impairment may exist.
FASB ASC No. 350-20-35, Subsequent Measurement of
Goodwill, and FASB ASC No. 350-30-35, Subsequent Measurement of General
Intangibles Other Than Goodwill(“ASC 350-30-35”), whose provisions were
previously discussed in SFAS 142, Goodwill and Other Intangible
Assets, require 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. We have determined based on the criteria of FASB ASC No.
280-10-50,  Segment
Reporting Disclosure, previously discussed in SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, that we have one reporting unit for
this goodwill impairment assessment. 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
our 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,
ASC 350-30-35 requires purchased other intangible assets to be amortized over
their useful lives unless these lives are determined to be indefinite. During
the three months ended March 31, 2009, we recognized an impairment loss on
goodwill as a result of the periodic review due to the presence of impairment
indicators.





Income
Taxes





We make
certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of
tax credits, tax benefits and deductions and in the calculation of certain tax
assets and liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial statement purposes.
Significant changes to these estimates may result in an increase or decrease to
our tax provision in the subsequent period when such a change in estimate
occurs.





Deferred
Tax Assets





We
account for deferred tax assets in accordance with the FASB ASC No. 740-10,
Income Taxes Recognition(“ASC 740-10”), previously discussed in SFAS No. 109, Accounting for Income Taxes.
We use an asset and liability approach, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in our financial statements, but have not been
reflected in our taxable income. In general, a valuation allowance is
established to reduce deferred tax assets to their estimated realizable value,
if based on the weight of available evidence, it is more likely than not that
some portion, or all, of the deferred tax asset will not be realized. We
evaluate the realizability of the deferred tax assets quarterly and will
continue to assess the need for valuation allowances. In accordance with
paragraphs 25-17 and 30-7 of ASC 740-10, Basic Recognition
Threshold, we determine whether a tax position is more likely than
not to be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position.
The provisions under  paragraphs 25-17 and 30-7 of ASC 740-10
were previously discussed in FIN 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement
No. 109.




Legal
Matters





We are
subject to various legal proceedings and claims, either asserted or unasserted.
We evaluate, among other factors, the degree of probability of an unfavorable
outcome and reasonably estimate the amount of the loss. Significant judgment is
required in both the determination of the probability and as to whether an
exposure can be reasonably estimated. When we determine that it is probable that
a loss has been incurred, the effect is recorded promptly in the consolidated
financial statements. Although the outcome of these claims cannot be predicted
with certainty, we do not believe that any of the existing legal matters will
have a material adverse effect on our financial condition and results of
operations. However, significant changes in legal proceedings and claims or the
factors considered in the evaluation of those matters could have a material
adverse effect on our business, financial condition and results of
operations.




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Results
of Operations





REVENUE




Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Product
      revenue
            
            $
            30,716
            
            
            $
            64,974
            
            
            
            -52.7
            %
            
            $
            94,747
            
            
            $
            183,997
            
            
            
            -48.5
            %Licensing
      revenue
            
            
            6,440
            
            
            
            12,802
            
            
            
            -49.7
            %
            
            
            20,257
            
            
            
            30,975
            
            
            
            -34.6
            %Total
      revenue
            
            $
            37,156
            
            
            $
            77,776
            
            
            
            -52.2
            %
            
            $
            115,004
            
            
            $
            214,972
            
            
            
            -46.5
            %





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Consumer
      Electronics (1)
            
            $
            31,690
            
            
            $
            55,883
            
            
            
            -43.3
            %
            
            $
            98,427
            
            
            $
            155,728
            
            
            
            -36.8
            %Personal
      Computers (1)
            
            
            1,928
            
            
            
            11,713
            
            
            
            -83.5
            %
            
            
            6,920
            
            
            
            34,640
            
            
            
            -80.0
            %Storage
      (1)
            
            
            3,538
            
            
            
            10,180
            
            
            
            -65.2
            %
            
            
            9,657
            
            
            
            24,604
            
            
            
            -60.7
            %Total
      revenue
            
            $
            37,156
            
            
            $
            77,776
            
            
            
            -52.2
            %
            
            $
            115,004
            
            
            $
            214,972
            
            
            
            -46.5
            %(1)
      Includes development, licensing and royalty revenue (collectively "licensing revenue")





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Consumer
      Electronics
            
            $
            25,588
            
            
            $
            46,157
            
            
            
            -44.6
            %
            
            $
            78,850
            
            
            $
            133,222
            
            
            
            -40.8
            %Personal
      Computers
            
            
            1,800
            
            
            
            9,704
            
            
            
            -81.5
            %
            
            
            6,968
            
            
            
            30,681
            
            
            
            -77.3
            %Storage
            
            
            3,328
            
            
            
            9,113
            
            
            
            -63.5
            %
            
            
            8,929
            
            
            
            20,094
            
            
            
            -55.6
            %Licensing
      revenue
            
            
            6,440
            
            
            
            12,802
            
            
            
            -49.7
            %
            
            
            20,257
            
            
            
            30,975
            
            
            
            -34.6
            %Total
      revenue
            
            $
            37,156
            
            
            $
            77,776
            
            
            
            -52.2
            %
            
            $
            115,004
            
            
            $
            214,972
            
            
            
            -46.5
            %





Total revenue for the three and nine
months ended September 30, 2009 was $37.2 million and $115.0 million,
respectively and represented a decline of 52.2% or $40.6 million and 46.5%
or $100.0 million from the same periods in 2008, respectively. The decrease in
our overall revenue was driven primarily by the decrease in our product revenue
which decreased by 52.7% or $34.3 million and 48.5% or $89.3 million for the
three and nine months ended September 30, 2009, respectively, when compared to
the same periods in the prior year. Product shipments decreased by approximately
42.0% and 31.3% and average selling price declined by approximately 22.6%
and 26.8% during the three and nine months ended September 30, 2009,
respectively, when compared to the same periods last year primarily due to the
ongoing global recession, increased competition, product mix changes in the DTV
market and our ongoing product transition as customers transition from HDMI
receivers to more cost effective Port Processors.  We expect the revenue in
the quarter ending December 31, 2009 to be in the range of $34 million to $37
million.





We
also experienced significant declines in our licensing revenues for the three
and nine months ended September 30, 2009 as compared to the comparable periods
in 2008 primarily due to the fewer licensing arrangements we entered into during
2009 as compared to prior year.





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 agreements” convert the previously existing
distributor relationships for these parts for identified end customers into
direct customer relationships 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 agreements is recognized upon shipment.
 During the three months ended September 30, 2009, we did not generate
revenue from the above mentioned conversions under this arrangement. For the
nine months ended September 30, 2009, we recorded approximately $2.8 million in
revenue under this arrangement. We did not enter into similar type of
arrangement in the same periods last year.




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 Table of
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COST
OF REVENUE AND GROSS PROFIT





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Product
      cost of revenue (1)
            
            $
            16,801
            
            
            $
            31,518
            
            
            
            -46.7
            %
            
            $
            52,284
            
            
            $
            87,921
            
            
            
            -40.5
            %Licensing
      cost of revenue
            
            
            156
            
            
            
            223
            
            
            
            -30.0
            %
            
            
            626
            
            
            
            1,064
            
            
            
            -41.1
            %Total
      Cost of revenue
            
            
            16,957
            
            
            
            31,741
            
            
            
            -46.6
            %
            
            
            52,910
            
            
            
            88,985
            
            
            
            -40.5
            %Total
      gross profit
            
            
            20,199
            
            
            
            46,035
            
            
            
            -56.1
            %
            
            
            62,094
            
            
            
            125,987
            
            
            
            -50.7
            %Gross
      profit margin
            
            
            54.4
            %
            
            
            59.2
            %
            
            
            
            
            
            
            54.0
            %
            
            
            58.6
            %(1)
      Includes stock-based compensation expense
            
            $
            363
            
            
            $
            351
            
            
            
            
            
            
            $
            806
            
            
            $
            1,132





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 profit margin was 54.4% and 54.0% for the three and nine months ended
September 30, 2009, respectively, and 59.2% and 58.6% in the comparable periods
in 2008, respectively. Product mix, unfavorable variances and the impact of
fixed overhead with lower revenue volume during the three and nine months
ended September 30, 2009 were the primary reasons for the decrease in gross
margin as percentage of revenue. Consistent with the gross margin during
the three and nine months ended September 30, 2009, we expect our gross margin
to be within the 54%-55% range in the fourth quarter of 2009.








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OPERATING
EXPENSES





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Research
      and development (1)
            
            $
            17,807
            
            
            $
            20,714
            
            
            
            -14.0
            %
            
            $
            53,160
            
            
            $
            64,554
            
            
            
            -17.7
            %Percentage
      of total revenue
            
            
            47.9
            %
            
            
            26.6
            %
            
            
            
            
            
            
            46.2
            %
            
            
            30.0
            %(1)
      Includes stock-based compensation expense
            
            $
            2,374
            
            
            $
            1,753
            
            
            
            
            
            
            $
            5,365
            
            
            $
            5,200





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 and nine months ended September 30, 2009 included
stock-based compensation expense of approximately $2.4 million and $5.4 million,
respectively, as compared to $1.8 million and $5.2 million for the same periods
in 2008, respectively.  For the three months ended September 30, 2009,
approximately
$1.1 million of the $2.4 million stock-based compensation expense was related to
the cumulative adjustment pertaining to the errors we identified with respect to
the stock-based compensation expense as calculated by by our third-party
software (refer to discussion in Note 4 under Item 1 of Part
I).R&D expense decreased by $2.9 million and $11.4
million for the three and nine months ended September 30, 2009, respectively, as
compared to the same periods in prior year.  The decrease was mainly
driven by lower compensation related expenses and lower project related and
tape-out expenses, partially offset by the $1.1 million stock-based compensation
cummulative adjustment previously mentioned.  The decreases in these
expenses were primarily driven by the lower headcount due to the restructuring
activities completed in the second quarter of 2009 and third and fourth quarters
of 2008.  We expect R&D expenses to remain flat in the last
quarter of fiscal year 2009.




Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Selling,
      general and administrative (1)
            
            $
            17,222
            
            
            $
            17,468
            
            
            
            -1.4
            %
            
            $
            43,615
            
            
            $
            54,853
            
            
            
            -20.5
            %Percentage
      of total revenue
            
            
            46.4
            %
            
            
            22.5
            %
            
            
            
            
            
            
            37.9
            %
            
            
            25.5
            %(1)
      Includes stock-based compensation expense
            
            $
            4,911
            
            
            $
            2,004
            
            
            
            
            
            
            $
            9,255
            
            
            $
            8,057





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 for the three months ended
September 30, 2009 was relatively flat compared to the same period in prior
year. Had it not been for approximately $2.0 million in professional fees
incurred during the three months ended September 30, 2009 associated with a
potential strategic acquisition which we evaluated but decided not to
pursue,  the $1.2 million compensation package provided to the Chief
Executive Officer upon his resignation and the $2.6 million
cummulative adjustment pertaining to the errors we identified with respect to
the stock-based compensation expense as calculated by by our third-party
software (refer to discussion in Note 4 under Item 1 of Part I), SG&A
expense for the three months ended September 30, 2009 would have been lower by
approximately $6.0 million compared to what was incurred in the same period in
the prior year, a trend consistent with the movement in this expense for the
nine months ended September 30, 2009. SG&A expense for the nine months ended
September 30, 2009 was $11.2 million lower than what was incurred in the same
period in the prior year primarily due to lower compensation related expenses
and legal expenses, partially offset by the $2.8 million stock-based
compensation cummulative adjustment previously mentioned.  The
decreases in these expenses are mainly attributable to the decrease in head
count because of the reduction in forces implemented in the second quarter of
2009 and in the third and fourth quarters of 2008. We expect SG&A
expenses to remain flat in the last quarter of fiscal
year 2009.







39
 Table of
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Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Amortization
      of intangible assets
            
            $
            1,473
            
            
            $
            1,587
            
            
            
            -7.2
            %
            
            $
            4,419
            
            
            $
            4,761
            
            
            
            -7.2
            %Percentage
      of total revenue
            
            
            4.0
            %
            
            
            2.0
            %
            
            
            
            
            
            
            3.8
            %
            
            
            2.2
            %





Amortization of Intangible Assets.The decrease in the amortization of intangible assets was primarily due
to the complete amortization of certain intangible assets related to a 2007
acquisition.




Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Interest
      income and other, net
            
            $
            696
            
            
            $
            1,798
            
            
            
            -61.3
            %
            
            $
            2,233
            
            
            $
            5,094
            
            
            
            -56.2
            %Percentage
      of total revenue
            
            
            1.9
            %
            
            
            2.3
            %
            
            
            
            
            
            
            1.9
            %
            
            
            2.4
            %




Interest Income and
Other, net.The net amount of interest income and other primarily
includes interest income. The decrease was due to lower cash balances and lower
interest rate environment.





Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            Change(dollars
      in thousands)
            
            
            
            
            
            (dollars
      in thousands)Income
      tax expense (benefit)
            
            $
            (444
            )
            
            $
            114
            
            
            
            -489.5
            %
            
            $
            (2,113
            )
            
            $
            (13
            )
            
            
            16153.8
            %Percentage
      of total revenue
            
            
            -1.2
            %
            
            
            0.1
            %
            
            
            
            
            
            
            -1.8
            %
            
            
            0.0
            %





Provision (Benefit) for Income
Taxes.For the three and nine months ended September 30, 2009, we
recorded an income tax benefit of ($444,000) and ($2.1) million, respectively.
The effective tax rates for the three and nine months ended September 30, 2009
were 2.8% and 3.3%, respectively and was based on our projected taxable income
for 2009, 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, stock-based compensation
expense, tax credits 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 state 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 for the three months ended March 31,
2009 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.


40
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We have
concluded that it is more likely than not that as of September 30, 2009, our net
deferred tax assets will be realized. In making our conclusion, we considered
all available evidence, both positive and negative. Key components of the
evaluation are the cumulative results of operations in recent years, the nature
of recent losses, and forecasts of a return to profitability.A significant
negative factor in the evaluation is cumulative losses in recent years and we
may reach that position during fiscal year 2009. The assessment of whether a
valuation allowance is necessary will be made each quarter by considering all of
the positive and negative evidence in existence at that time and, depending upon
the nature and weighting of such evidence, a substantial increase in the
valuation allowance may be required to reduce the deferred tax assets in the
near term, which would result in a material charge to income tax
expense.




For
the three and nine months ended September 30, 2008, we recorded a provision for
income taxes of $114,000 and a benefit of ($13,000), respectively. The effective
tax rate for the three and nine months ended September 30, 2008 was 1.8% and
(0.3%), respectively, and were 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).





September
      30, 2009
            
            
            December
      31, 2008
            
            
            ChangeCash
      and cash equivalents
            
            $
            27,883
            
            
            $
            95,414
            
            
            
            -70.8
            %Short-term
      investments
            
            
            125,335
            
            
            
            89,591
            
            
            
            39.9
            %Total
      cash and cash equivalents and
      short-term  investments
            
            $
            153,218
            
            
            $
            185,005
            
            
            
            -17.2
            %Total
      current assets
            
            $
            214,357
            
            
            $
            225,642
            
            
            
            -5.0
            %Total
      current liabilities
            
            
            38,675
            
            
            
            39,530
            
            
            
            -2.2
            %Working
      capital
            
            $
            175,682
            
            
            $
            186,112
            
            
            
            -5.6
            %





Cash
and cash equivalents and short-term investments were $153.2 million at
September 30, 2009, a decrease of $31.8 million from $185.0 million at December
31, 2008. The decrease was primarily due to the cash used in operations for the
nine months ended September 30, 2009.





The
significant components of our working capital are cash and cash equivalents,
short-term investments, accounts receivable, prepaid expenses and other current
assets, inventories and deferred income taxes reduced by accounts payable,
accrued and other current liabilities, deferred license revenue, and deferred
margin on sales to distributors. Working capital at September 30, 2009 decreased
by approximately $10.4 million when compared to the working capital at December
31, 2008 primarily due to the decreases in cash and cash equivalents and
short-term investments and the increase in accounts payable and deferred license
revenue, partially offset by the increases in operating assets, such as accounts
receivable and prepaid expenses and other current assets and the decreases in
operating liabilities, such as deferred margin on sales to distributors and
accrued and other current liabilities.







41
 Table of
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Summary of Cash Flows. The
table below summarizes the cash and cash equivalents provided by (used in) in
our operating, investing and financing activities (in thousands).




Nine
      months ended September 30,2009
            
            
            2008
            
            
            ChangeCash
      provided by (used in) operating activities
            
            $
            (28,232
            )
            
            $
            27,251
            
            
            
            -203.6
            %Cash
      used in investing activities
            
            
            (40,611
            )
            
            
            (23,240
            )
            
            
            74.7
            %Cash
      provided by (used in) financing activities
            
            
            1,045
            
            
            
            (69,058
            )
            
            
            -101.5
            %Effect
      of exchange rate changes on cash & cash equivalents
            
            
            267
            
            
            
            (407
            )
            
            
            -165.6
            %Net
      decrease in cash and cash equivalents
            
            $
            (67,531
            )
            
            $
            (65,454
            )
            
            
            3.2
            %




During
the nine months ended September 30, 2009, cash and cash equivalents decreased by
$67.5 million. This decrease was the result of the cash used in our
operating and investing activities of $28.2 million and $40.6 million,
respectively, partially offset by the cash generated from our financing
activities of approximately $1.0 million.





Operating
Activities





The $28.2
million net cash used in operating activities during the nine months ended
September 30, 2009 was primarily due to the cash used for working capital
as a result of the increase in accounts receivable and prepaid expenses and
other current assets, and the decrease in accrued and other current liabilities
and deferred margin on sales to distributors, partially offset by the increase
in accounts payable and deferred license revenue.





Investing
Activities





The $40.6
million net cash used in investing activities during the nine months ended
September 30, 2009 was due primarily to net purchases of short-term
investments of approximately $37.9 million and net investment in property and
equipment of approximately $2.7 million. During the nine months ended September
30, 2009, we purchased $148.6 million and sold $110.7 million of short-term
investments.





Financing
Activities





The $1.0
million net cash generated from our financing activities during the nine
months ended September 30, 2009 was primarily due to the proceeds from
issuances of common stock of approximately $2.5 million, partially offset by
payments to vendor of financed software and intangibles purchased of
approximately $1.3 million and cash used to repurchase restricted stock units
for income tax withholding of approximately $0.2 million.




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




September
      30,
            
            
            December
      31,2009
            
            
            2008
            
            
            ChangeAccounts
      receivable, net
            
            $
            24,454
            
            
            $
            5,922
            
            
            
            312.9
            %





Net
accounts receivable as of September 30, 2009 were $24.5 million, which
represents 59 days of sales outstanding. This compares to 9 days of sales
outstanding on December 31, 2008. Accounts receivable as of September 30, 2009
significantly increased compared to the balance as of December 31, 2008
primarily due to the timing of shipments and collections of cash.








42
 Table of
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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.







Item 3. Quantitative and Qualitative Disclosures about Market
Risk





Interest
Rate Risk





A
sensitivity analysis was performed on our investment portfolio as of September
30, 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%$
      503,000
                
                
                
                $ 1,006,000
                
                
                
                $
      1,509,000


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.  As of September 30, 2009, cash held in foreign
countries was approximately $2.0 million. The following represents the
potential impact of a change in the value of the U.S. dollar compared to
the Euro, British Pound, Japanese Yen, Chinese Yuan, Taiwan Dollar and Korean
Won.  This sensitivity analysis aggregates our nine months activity in
these currencies, translated to U.S. dollars, and applies a change in the
U.S. dollar value of 5%, 7.5% and 10%.




5.0%
            
            
            
            7.5%
            
            
            
            10.0%$
      1,280,000
            
            
            
            $
      1,919,000
            
            
            
            $
      2,559,000




43
 Table of
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Derivative
Instruments





We have
operations in the United States, Europe and Asia, however, the majority of our
revenue, costs of sales, expense and capital purchasing activities are
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 ineffective
portion of the hedging instruments gain (loss) 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
September 30, 2009, the outstanding foreign exchange contracts had a total
notional value of $4.6 million.  See Note 14 to the Consolidated
Financial Statements.





Item 4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Based on
our management’s evaluation (with the participation of our president, chief
operating 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 third quarter of
fiscal 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





44
 Table of
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Part II. Other Information





Item 1. Legal Proceedings





Please
refer to Note 9 to our consolidated 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 many of 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 thecustomer;
      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.


•
            in order to address
      fluctuations in market demand, one-time sales opportunities and meet sales
      goals, we sometimes engage in heightened sales efforts during a given
      period that may adversely affect our sales in future
    periods.





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.




45
 Table of
Contents


Our future annual
and quarterly operating results are highly dependent upon how wellwe 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
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 68.9% and 68.6% of total revenue for the three and nine
months ended September 30, 2009, 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, as competitors reduce prices and offer products with greater levels of
integration, 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.




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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.




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 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.





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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.





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.




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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.





We depend on a
few key customers and the loss of any of them could significantlyreduce our
revenue.





Historically,
a relatively small number of customers and distributors have generated a
significant portion of our revenue. For the three months ended September 30,
2009, shipments to Microtek, Inc. and EDOM
Technology Company, Ltd. generated 16.3% and 10.6% of our
revenue, respectively. For the nine months ended September 30, 2009,
shipments to Microtek, Inc and Weikeng Industrial generated 12.8% and 10.3% of
our revenue, respectively.  For the three months ended September 30,
2008, shipments to Innotech Corporation, World Peace Industrial, Weikeng
Industrial and Microtek, Inc. generated 12.4%, 12.0%, 11.0% and 10.2% of our
revenue, respectively. For the nine months ended September 30, 2008, shipments
to World Peace Industrial, Innotech Corporation, Microtek, Inc. and Weikeng
Industrial accounted for 13.8%, 11.9%, 11.5% and 10.0% 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.




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We sell our
products through distributors, which limits our direct interaction
withour end
customers, therefore reducing our ability to forecast sales and increasing
thecomplexity 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 and nine months ended September 30, 2009, distributors generated 22.6% and
33.1% of our revenue, respectively. Sales to distributors accounted for 47.4%
and 50.7% of our revenue for the three and nine months ended September 30, 2008,
respectively.  Selling through distributors reduces our ability to
forecast sales and increases the complexity of our business, requiring us
to:





•
            manage
      a more complex supply chain;


•
            monitor
      and manage the level of inventory of our products at each
      distributor; •
            estimate
      the impact of credits, return rights, price protection and unsold
      inventory at
distributors; and,


•
            monitor
      the financial condition and credit-worthiness of our distributors, many of
      which are located outside of the United States and the majority of which
      are not publicly traded.





Since we
have limited ability to forecast inventory levels at our end customers, it is
possible that there may be significant build-up of inventories in the
distributor channel, with the OEM or the OEM’s contract manufacturer. Such a
buildup could result in a slowdown in orders, requests for returns from
customers, or requests to move out planned shipments. This could adversely
impact our revenues and profits.





Any
failure to manage these challenges could disrupt or reduce sales of our products
and unfavorably impact our financial results.





Our success
depends on the development and introduction of new products, which we may
not be able
to do in a timely manner because the process of developing high-speed
semiconductor
products is complex and costly.





The
development of new products is highly complex and we have experienced delays,
some of which exceeded one year, in the development and introduction of new
products on several occasions in the past. We have recently introduced new
products and will continue to introduce new products in the future. As our
products integrate new, more advanced functions, they become more complex and
increasingly difficult to design, manufacture and debug. Successful product
development and introduction depends on a number of factors, including, but not
limited to:





•
            accurate
      prediction of market requirements and the establishment of market
      standards and the evolution of existing standards, including enhancements
      or modifications to existing standards such as HDMI, HDCP, DVI, SATA I and
      SATA II;


•
            identification
      of customer needs where we can apply our innovation and skills to create
      new standards or areas for product differentiation that improve our
      overall competitiveness either in an existing market or in a new
      market;


•
            development
      of advanced technologies and capabilities and new products that satisfy
      customer requirements;


•
            competitors’
      and customers’ integration of the functionality of our products into their
      products, which puts pressure on us to continue to develop and introduce
      new products with new
functionality;


•
            timely
      completion and introduction of new product
  designs;


•
            management
      of product life cycles;


•
            use
      of leading-edge foundry processes, when use of such processes are required
      and achievement of high manufacturing yields and low cost
      testing;


•
            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.




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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.




Potential
Government Action – Governmental action against companies located in offshore
jurisdictions may lead to a reduction in the demand for our common
shares.





Recent federal and state legislation
has been proposed, and additional legislation may be proposed in the future
which, if enacted, could have an adverse tax impact on either Silicon Image or
our shareholders. For example, the ability to defer taxes as a result of
permanent investments offshore could be limited, thus raising the Company’s
effective tax rate.





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 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.





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The cyclical
nature of the semiconductor industry may create constrictions in ourfoundry, 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
allof 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





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.





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The complex
nature of our production process, which can reduce yields and
preventidentification 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 ourproducts and our
customers’ products are manufactured and sold outside of the UnitedStates.





A
substantial portion of our business is conducted outside of the United States.
As a result, we are subject to foreign business, political and economic risks.
Nearly all of our products are manufactured in Taiwan or elsewhere in Asia. For
the three and nine months ended September 30, 2009, approximately 82.8% and
80.3% 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.





The success of
our business depends upon our ability to adequately protect ourintellectual
property.





We rely
on a combination of patent, copyright, trademark, mask work and trade secret
laws, as well as nondisclosure agreements and other methods, to protect our
proprietary technologies. We have been issued patents and have a number of
pending patent applications. However, we cannot assure you that any patents will
be issued as a result of any applications or, if issued, that any claims allowed
will protect our technology. In addition, we do not file patent applications on
a worldwide basis, meaning we do not have patent protection in some
jurisdictions. It may be possible for a third-party, including our licensees, to
misappropriate our copyrighted material or trademarks. It is possible that
existing or future patents may be challenged, invalidated or circumvented and
effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in foreign countries. It may be possible for a
third-party to copy or otherwise obtain and use our products or technology
without authorization, develop similar technology independently or design around
our patents in the United States and in other jurisdictions. It is also possible
that some of our existing or new licensing relationships will enable other
parties to use our intellectual property to compete against us. Legal actions to
enforce intellectual property rights tend to be lengthy and expensive and the
outcome often is not predictable. As a result, despite our efforts and expenses,
we may be unable to prevent others from infringing upon or misappropriating our
intellectual property, which could harm our business. In addition, practicality
also limits our assertion of intellectual property rights. Patent litigation is
expensive and its results are often unpredictable. Assertion of intellectual
property rights often results in counterclaims for perceived violations of the
defendant’s intellectual property rights and/or antitrust claims. Certain
parties after receipt of an assertion of infringement will cut off all
commercial relationships with the party making the assertion, thus making
assertions against suppliers, customers and key business partners risky. If we
forgo making such claims, we may run the risk of creating legal and equitable
defenses for an infringer.




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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.





Our participation
in working groups for the development and promotion of industrystandards in our
target markets, including the Digital Visual Interface and HDMIspecifications,
requires us to license some of our intellectual property for free orunder specified
terms and conditions, which may make it easier for others to competewith 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.





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Our success
depends in part on our relationships with strategicpartners and use
of technologies





We have
entered into and expect to continue to enter into strategic partnerships with
third parties.  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.





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. Previously, we believed that the IP
licensed under this agreement was enhancing our ability to develop DTV
technology and other related consumer product offerings. Based on the Company’s
product strategy as of October 2009, the Sunplus IP does not align with our
product roadmap and during October 2009, the Company decided to write off its
investment in Sunplus IP. This decision was prompted by a change in our product
strategy due to market place and related competitive dynamics. Please also refer
to note 16 in our financial statements.





Our
success depends on managing our relationship with Intel.





Intel has
a dominant role in many of the markets in which we compete, such as PCs and
storage and is a growing presence in the CE market. We have a multi-faceted
relationship with Intel that is complex and requires significant management
attention, including:





•
            Intel
      and Silicon Image have been parties to business cooperation
      agreements;


•
            Intel
      and Silicon Image are parties to a patent
  cross-license;


•
            Intel
      and Silicon Image worked together to develop
  HDCP;


•
            an
      Intel subsidiary has the exclusive right to license HDCP, of which we are
      a licensee;


•
            Intel
      and Silicon Image were two of the promoters of the
  DDWG;


•
            Intel
      is a promoter of the SATA working group, of which we are a
      contributor;


•
            Intel
      is a supplier to us and a customer for our
  products;


•
            we
      believe that Intel has the market presence to drive adoption of SATA by
      making it widely available in its chipsets and motherboards, which could
      affect demand for our products;


•
            we
      believe that Intel has the market presence to affect adoption of HDMI by
      either endorsing complementary technology or promulgating a competing
      standard, which could affect demand for our
  products;


•
            Intel
      may potentially integrate the functionality of our products, including
      SATA, DVI, or HDMI into its own chips and chipsets, thereby displacing
      demand for some of our products;


•
            Intel
      may design new technologies that would require us to re-design our
      products for compatibility, thus increasing our R&D expense and
      reducing our revenue;


•
            Intel’s
      technology, including its 845G chipset, may lower barriers to entry for
      other parties who may enter the market and compete with
      us; and


•
            Intel
      may enter into or continue relationships with our competitors that can put
      us at a relative disadvantage.





Our
cooperation and competition with Intel can lead to positive benefits, if managed
effectively. If our relationship with Intel is not managed effectively, it could
seriously harm our business, negatively affect our revenue and increase our
operating expenses.





We have granted
Intel rights with respect to our intellectual property, which couldallow Intel to
develop products that compete with ours or otherwise reduce the
valueof 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.





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We may become
engaged in additional intellectual property litigation that could betime-consuming,
may be expensive to prosecute or defend and could adversely affectour 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 otherintellectual
property cross-licenses.





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





We
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.





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We must attract
and retain qualified personnel to be successful and competition forqualified
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, FASB ASC No. 718-10,
Stock Compensation,,
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
internalcontrol over
financial reporting or disclosure controls and procedures are noteffective, there
may be errors in our financial statements that could requirea restatement or
our filings may not be timely and investors may loseconfidence in our
reported financial information, which could lead to adecline in our
stock price.  While we have not identified any material weaknesses in
the past three years, we cannot assure you that amaterial 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 president and chief operating 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 doso 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, 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
      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.


•
            In
      September 2009, Steve Tirado resigned from his positions as chief
      executive officer and director and Hal Covert was appointed as president
      and 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 suitsand derivative
suits which could result in substantial costs and divert managementattention 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.





Our operations
and the operations of our significant customers, third-party waferfoundries and
third-party assembly and test subcontractors are located in areassusceptible 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 and nine months period ended
September 30, 2009 customers and distributors located in Japan generated 32.2%
and 27.6% of our revenue, respectively, and customers and distributors located
in Taiwan generated 24.4% and 25.4% of our revenue, respectively. For the three
and nine months ended September 30, 2008, customers and distributors located in
Japan accounted for 16.1% and 25.3% of our revenue, respectively and customers
and distributors located in Taiwan generated 17.8% and 19.2% 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.





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Terrorist attacks
or war could lead to economic instability and adversely affect ouroperations,
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
reduceour
revenue.





Several
jurisdictions have implemented rules that would require that certain products,
including semiconductors, be made “green,” which means that the products need to
be lead free and be free of certain banned substances. All of our products are
available to customers in a green format. While we believe that we are generally
in compliance with existing regulations, such environmental regulations are
subject to change and the jurisdictions may impose additional regulations which
could require us to incur costs to develop replacement products. These changes
will require us to incur cost or may take time or may not always be economically
or technically feasible, or may require disposal of non-compliant inventory. In
addition, any requirement to dispose or abate previously sold products would
require us to incur the costs of setting up and implementing such a
program.




Provisions of our
charter documents and Delaware law could prevent or delay a changein control and
may reduce the market price of our common stock.





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





•
            authorizing
      the issuance of preferred stock without stockholder
    approval;


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


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


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


•
            prohibiting
      cumulative voting in the election of
directors;


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


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


•
            prohibiting
      stockholder actions by written
consent.





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




The
price of our stock fluctuates substantially and may continue to do
so.





The stock
market has experienced extreme price and volume fluctuations that have affected
the market valuation of many technology companies, including Silicon Image.
These factors, as well as general economic and political conditions, may
materially and adversely affect the market price of our common stock in the
future. The market price of our common stock has fluctuated significantly and
may continue to fluctuate in response to a number of factors, including, but not
limited to:





•
            actual
      or anticipated changes in our operating
results;


•
            changes
      in expectations of our future financial
  performance;


•
            changes
      in market valuations of comparable companies in our
    markets;


•
            changes
      in market valuations or expectations of future financial performance of
      our vendors or customers;


•
            changes
      in our key executives and technical
  personnel; and


•
            announcements
      by us or our competitors of significant technical innovations, design
      wins, contracts, standards or
acquisitions.





Due to
these factors, the price of our stock may decline. In addition, the stock market
experiences volatility that is often unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to decline
regardless of our performance.




60
 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





None.





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





None.





Item 5. Other Information





None.





Item 6. Exhibits





(a)
Exhibits


3131.01
              Certification
      of Pricipal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002
 3131.02
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 20023232.01*
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
 3232.02*
              Certification
      of Pricipal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


____________





*
            This
      exhibit is being furnished, rather than filed, and shall not be deemed
      incorporated by reference into any filing of the registrant, in accordance
      with Item 601 of Regulation S-K.







61
 
 Table of
Contents


Signatures


Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




Date: October
      26, 2009
              Silicon
      Image, Inc.
    /s/
      Harold CovertHarold
      Covert
 President,
      Chief Operating Officer and Chief Financial
  Officer
   62


Exhibit
Index




3131.01
            Certification
      of Pricipal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002


3131.02
            Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 20023232.01*
            Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


3232.02*
            Certification
      of Pricipal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002










*
            This
      exhibit is being furnished, rather than filed, and shall not be deemed
      incorporated by reference into any filing of the registrant, in accordance
      with Item 601 of Regulation S-K.











63