##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from                    to                   .
 Commission file number: 000-26887
 Silicon Image, Inc.
  Delaware
    
    77-0396307(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1060 East Arques Avenue
Sunnyvale, California 94085
 (408) 616-4000
 þ o
  þ o o
 o þ




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##### 



Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three Months Ended
March 31, 2007
 Table of Contents
 Part I Financial Information (Unaudited)Item 1 Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4 Controls and Procedures
    
    
    26Part II Other InformationItem 1 Legal Proceedings
    
    
   26Item 1A Risk Factors
    
    
    27Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3 Defaults Upon Senior Securities
    
    
    46Item 4 Submission of Matters to a Vote of Security Holders
    
    
    46Item 5 Other Information
    
    
    46Item 6 Exhibits
    
    
    47Signatures
    
    
    48EXHIBIT 10.02EXHIBIT 10.04EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Silicon Image, Inc.
 
 Condensed Consolidated Balance Sheets
 (in thousands)
 (unaudited)
 March 31,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    78,649
    
    
    $
    81,921Short-term investments
    
    
    145,376
    
    
    
    168,724Accounts receivable, net of allowances for doubtful accounts of $1,217 in 2007 and $235 in 2006
    
    
    33,226
    
    
    
    39,931Inventories, net
    
    
    24,551
    
    
    
    28,287Prepaid expenses and other current assets
    
    
    9,381
    
    
    
    4,895Deferred income taxes
    
    
    10,075
    
    
    
    12,793Total current assets
    
    
    301,258
    
    
    
    336,551Property and equipment, net
    
    
    21,896
    
    
    
    18,431Goodwill
    
    
    19,131
    
    
    
    13,021Intangible assets, net
    
    
    2,603
    
    
    
    78Deferred income taxes, non-current
    
    
    14,770
    
    
    
    10,580Other assets
    
    
    11,836
    
    
    
    1,570Total assets
    
    $
    371,494
    
    
    $
    380,231Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    12,216
    
    
    $
    14,187Accrued liabilities
    
    
    16,820
    
    
    
    37,308Deferred license revenue
    
    
    4,054
    
    
    
    5,264Deferred margin on sales to distributors
    
    
    15,849
    
    
    
    17,712Current liabilities
    
    
    48,939
    
    
    
    74,471Other long-term liabilities
    
    
    10,107
    
    
    
    538Total liabilities
    
    
    59,046
    
    
    
    75,009Commitments and contingencies (See Note 7)Stockholders equity:Common stock
    
    
    88
    
    
    
    87Additional paid-in capital
    
    
    395,147
    
    
    
    386,258Accumulated deficit
    
    
    (82,735
    )
    
    
    (80,964
    )Accumulated other comprehensive loss
    
    
    (52
    )
    
    
    (159
    )Total stockholders equity
    
    
    312,448
    
    
    
    305,222Total liabilities and stockholders equity
    
    $
    371,494
    
    
    $
    380,231
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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Income
 (in thousands, except per share amounts)
 (unaudited)
 Three Months Ended March 31,2007
    
    
    2006Revenue:Product
    
    $
    55,666
    
    
    $
    53,280Development, licensing and royalties
    
    
    13,453
    
    
    
    5,819Total revenue
    
    
    69,119
    
    
    
    59,099Cost of revenue and operating expenses:Cost of revenue (1)
    
    
    30,758
    
    
    
    25,348Research and development (2)
    
    
    17,195
    
    
    
    15,566Selling, general and administrative (3)
    
    
    17,131
    
    
    
    15,389Amortization of intangible assets
    
    
    615
    
    
    
    274Patent assertion costs
    
    
    13
    
    
    
    72Total cost of revenue and operating expenses
    
    
    65,712
    
    
    
    56,649Income from operations
    
    
    3,407
    
    
    
    2,450Interest income and other, net
    
    
    3,026
    
    
    
    1,538Income before provision for income taxes
    
    
    6,433
    
    
    
    3,988Provision for income taxes
    
    
    3,517
    
    
    
    1,636Net income
    
    $
    2,916
    
    
    $
    2,352Net income per share  basic
    
    $
    0.03
    
    
    $
    0.03Net income per share  diluted
    
    $
    0.03
    
    
    $
    0.03Weighted average shares  basic
    
    
    86,825
    
    
    
    80,986Weighted average shares  diluted
    
    
    89,549
    
    
    
    85,398
 
 (1) Includes stock compensation expense
    
    $
    346
    
    
    $
    628(2) Includes stock compensation expense
    
    $
    2,308
    
    
    $
    2,812(3) Includes stock compensation expense
    
    $
    1,378
    
    
    $
    3,843
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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Three Months Ended March 31,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    2,916
    
    
    $
    2,352Adjustments to reconcile net income to cash provided by (used in) operating activities:Depreciation and amortization
    
    
    2,266
    
    
    
    1,620Amortization of intangible assets
    
    
    615
    
    
    
    274Provision for doubtful accounts
    
    
    892
    
    
    
    Stock-based compensation expense
    
    
    4,032
    
    
    
    7,283Income tax benefit (deficiency) from employee based compensation plans
    
    
    (179
    )
    
    
    2,401Excess tax benefit from employee stock transactions
    
    
    (385
    )
    
    
    (1,356
    )Realized gain on sale of investments
    
    
    (23
    )
    
    
    Amortization (accretion) of investment premium (discount)
    
    
    (99
    )
    
    
    83Changes in assets and liabilities:Accounts receivable
    
    
    9,487
    
    
    
    (7,198
    )Inventories
    
    
    3,927
    
    
    
    (967
    )Prepaid expenses and other assets
    
    
    (4,463
    )
    
    
    123Deferred income taxes
    
    
    438
    
    
    
    Accounts payable
    
    
    (3,816
    )
    
    
    2,657Accrued liabilities and deferred license revenue
    
    
    (20,293
    )
    
    
    (1,540
    )Deferred margin on sales to distributors
    
    
    (1,863
    )
    
    
    5,256Cash provided by (used in) operating activities
    
    
    (6,548
    )
    
    
    10,988Cash flows from investing activities:Purchases of short-term investments
    
    
    (18,657
    )
    
    
    (34,983
    )Proceeds from sales of short-term investments
    
    
    42,232
    
    
    
    12,052Business acquisition, net of cash acquired
    
    
    (13,751
    )
    
    
    Purchase of intellectual property
    
    
    (10,000
    )
    
    
    Purchases of property and equipment
    
    
    (1,973
    )
    
    
    (1,525
    )Cash used in investing activities
    
    
    (2,149
    )
    
    
    (24,456
    )Cash flows from financing activities:Proceeds from issuances of common stock, net
    
    
    5,038
    
    
    
    5,384Excess tax benefits from employee stock transactions
    
    
    385
    
    
    
    1,356Repayments of debt and capital lease obligations
    
    
    
    
    
    
    (56
    )Cash provided by financing activities
    
    
    5,423
    
    
    
    6,684Effect of exchange rate changes on cash and cash equivalents
    
    
    2
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (3,272
    )
    
    
    (6,784
    )Cash and cash equivalents  beginning of period
    
    
    81,921
    
    
    
    77,877Cash and cash equivalents  end of period
    
    $
    78,649
    
    
    $
    71,093Supplemental cash flow information:Cash payment for interest
    
    $
    
    
    
    $
    4Cash payment for income taxes
    
    
    15,509
    
    
    
    Unrealized loss on investment security
    
    
    (105
    )
    
    
    (135
    )Property and equipment purchased but not paid for
    
    
    2,175
    
    
    
    Increase in restricted cash and related long-term liability associated with ongoing
litigation
    
    $
    
    
    
    $
    61
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Silicon Image, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 March 31, 2007
 (unaudited)
 1. Basis of Presentation
    2. Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value
Option for Financial Assets and Financial Liabilities
 3. Stock-Based Compensation
 1995 Equity Incentive Plan (the 1995 Plan)
  1999 Equity Incentive Plan (the 1999 Plan)
 st st
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Non-plan options
  1999 Employee Stock Purchase Plan (ESPP)
  SFAS No. 123(R)
 Accounting for Stock Issued to Employees Accounting for Stock-based Compensation.
 Share-Based Payment
 Determining Fair Value
 Valuation and amortization method
 Expected Term
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Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
  Three Months EndedMarch 31, 2007
    
    March 31, 2006Employee stock option plans:Expected life in years
    
    
    4.9
    
    
    
    5.0Expected volatility
    
    
    75.2
    %
    
    
    90.0
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    4.6
    %Expected dividends
    
    none
    
    noneWeighted average fair value
    
    $
    6.35
    
    
    $
    7.31Employee Stock Purchase Plan:Expected life in years
    
    
    0.5
    
    
    
    1.3Expected volatility
    
    
    51.0
    %
    
    
    57.0
    %Risk-free interest rate
    
    
    5.2
    %
    
    
    4.7
    %Expected dividends
    
    none
    
    noneWeighted average fair value
    
    $
    3.62
    
    
    $
    4.75
  Change in forfeiture rate
 Stock-based Compensation Expense
  Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Cost of sales
    
    $
    346
    
    
    $
    628Research and development
    
    
    2,308
    
    
    
    2,812Selling, general and administrative
    
    
    1,378
    
    
    
    3,843Income tax effect
    
    
    (1,247
    )
    
    
    (2,986
    )$
    2,785
    
    
    $
    4,297
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Stock Options and Awards Activity
  Weighted AverageWeighted Average
    
    
    RemainingNumber of
    
    
    Exercise Price per
    
    
    Contractual Term in
    
    
    AggregateShares
    
    
    share
    
    
    Years
    
    
    Intrinsic ValueOutstanding at December 31, 2006
    
    
    16,254
    
    
    $
    8.95
    
    
    
    6.80
    
    
    $
    69,956Granted
    
    
    2,205
    
    
    
    9.94Exercised
    
    
    (643
    )
    
    
    4.89Forfeitures and cancellations
    
    
    (727
    )
    
    
    11.15Outstanding at March 31, 2007
    
    
    17,089
    
    
    $
    9.14
    
    
    
    7.08
    
    
    $
    22,612Vested and expected to vest at March 31, 2007
    
    
    15,968
    
    
    $
    9.05
    
    
    
    6.95
    
    
    $
    22,485Exercisable at March 31, 2007
    
    
    9,331
    
    
    $
    8.11
    
    
    
    5.87
    
    
    $
    20,531
   4. Comprehensive Income
  Three Months Ended March 31,2007
    
    
    2006Net income
    
    $
    2,916
    
    
    $
    2,352Change in unrealized value on investments
    
    
    (105
    )
    
    
    (135
    )Total comprehensive income
    
    $
    2,811
    
    
    $
    2,217
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5. Net Income Per Share
  Three Months Ended March 31,2007
    
    
    2006Net income
    
    $
    2,916
    
    
    $
    2,352Weighted average shares
    
    
    86,825
    
    
    
    80,988Unvested common shares subject to repurchase
    
    
    
    
    
    
    (2
    )Weighted average shares  basic
    
    
    86,825
    
    
    
    80,986Weighted average shares  diluted
    
    
    89,549
    
    
    
    85,398Net income per share  basic
    
    $
    0.03
    
    
    $
    0.03Net income per share  diluted
    
    $
    0.03
    
    
    $
    0.03
  Three Months Ended March 31,2007
    
    
    2006Weighted-average common shares for basic net income
per share
    
    
    86,825
    
    
    
    80,986Weighted-average dilutive stock options outstanding
under the treasury stock method
    
    
    2,724
    
    
    
    4,409Unvested common shares subject to repurchase
    
    
    
    
    
    
    3Total
    
    
    89,549
    
    
    
    85,398
 6. Balance Sheet Components
 March 31,
    
    
    December 31,2007
    
    
    2006Inventories:Raw materials
    
    $
    6,619
    
    
    $
    7,908Work in process
    
    
    3,052
    
    
    
    2,712Finished goods
    
    
    14,880
    
    
    
    17,667Total inventories
    
    $
    24,551
    
    
    $
    28,287Property and equipmentComputers and software
    
    $
    24,902
    
    
    $
    22,432Equipment
    
    
    28,547
    
    
    
    25,836Furniture and fixtures
    
    
    3,616
    
    
    
    3,06857,065
    
    
    
    51,336Less: accumulated depreciation
    
    
    (35,169
    )
    
    
    (32,905
    )Total property and equipment, net
    
    $
    21,896
    
    
    $
    18,431Accrued liabilities:Accrued payroll and related expenses
    
    $
    4,798
    
    
    $
    4,921Accrued legal fees
    
    
    1,501
    
    
    
    1,022Warranty accrual
    
    
    61
    
    
    
    60Bonus accrual
    
    
    
    
    
    
    8,718Accrued income taxes
    
    
    
    
    
    
    12,683Accrued and other liabilities
    
    
    10,460
    
    
    
    9,904Total accrued liabilities
    
    $
    16,820
    
    
    $
    37,308
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March 31,
    
    
    December 31,2007
    
    
    2006Balance at January 1
    
    $
    60
    
    
    $
    382Provision for warranties issued during the period
    
    
    4
    
    
    
    30Reductions to pre-existing warranties
    
    
    
    
    
    
    (314
    )Cash and other settlements made during the period
    
    
    (3
    )
    
    
    (38
    )Balance
    
    $
    61
    
    
    $
    60
 7. Commitments and Contingencies
     11




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8. Customer and Geographic Information
  Three Months Ended March 31,2007
    
    
    2006Taiwan
    
    $
    12,246
    
    
    $
    14,741Japan
    
    
    24,082
    
    
    
    14,768United States
    
    
    13,381
    
    
    
    12,816Korea
    
    
    3,883
    
    
    
    5,420Hong Kong
    
    
    2,609
    
    
    
    2,045Europe
    
    
    6,975
    
    
    
    3,881Other
    
    
    5,943
    
    
    
    5,428Total revenue
    
    $
    69,119
    
    
    $
    59,099
  Three Months Ended March 31,2007
    
    
    2006Consumer Electronics (1)
    
    $
    49,025
    
    
    $
    35,392Personal Computer (1)
    
    
    11,095
    
    
    
    13,306Storage (1)
    
    
    8,999
    
    
    
    10,401Total revenue
    
    $
    69,119
    
    
    $
    59,099
 
 (1)
    
    Includes development, licensing and royalty revenue 12




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Three Months Ended March 31,2007
    
    
    2006Consumer Electronics
    
    $
    40,297
    
    
    $
    31,942Personal Computer
    
    
    9,721
    
    
    
    12,819Storage
    
    
    5,648
    
    
    
    8,519Development, licensing and royalty revenue
    
    
    13,453
    
    
    
    5,819Total revenue
    
    $
    69,119
    
    
    $
    59,099
     9. Provision for Income Taxes
      13




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10. Business Acquisition
    January 3, 2007Cash
    
    $
    2,015Accounts receivable, net of allowances for doubtful accounts
    
    
    2,598Unbilled accounts receivable
    
    
    1,077Inventories, net
    
    
    191Other current assets
    
    
    661Property and equipment, net
    
    
    1,583Intangible assets, net
    
    
    3,140Other long-term assets
    
    
    38Deferred tax assets
    
    
    1,910Total assets acquired
    
    $
    13,213Accounts payable
    
    $
    548Accrued liabilities
    
    
    1,131Other current liabilities
    
    
    1,509Total
liabilities assumed
    
    $
    3,188
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Net tangible assets acquired
    
    $
    6,885Goodwill
    
    
    6,110Others
    
    
    41Intangible assets and other:Core developed technology
    
    
    970Customer relationships
    
    
    810Contractual backlog
    
    
    1,36016,176Direct acquisition costs
    
    
    410Purchase price
    
    $
    15,766
  Intangible Assets.
 Goodwill and Other
Intangibles
  AccumulatedGross Amount
    
    
    Amortization
    
    
    Net book valueIntangible assets and other:Core developed technology
    
    $
    970
    
    
    $
    93
    
    
    $
    877Customer relationships
    
    
    810
    
    
    
    81
    
    
    
    729Contractual backlog
    
    
    1,360
    
    
    
    363
    
    
    
    997Total
    
    $
    3,140
    
    
    $
    537
    
    
    $
    2,603
 11. Investment in Intellectual Property
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12. Related party transactions
       
 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. HDMI 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
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TM
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Standards Innovation
  New Initiatives
     Future Technology Directions
  Business Development Background
   ®
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There are risks to our global strategy
 Commitments, Contingencies and Concentrations
   Critical Accounting Policies
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Results of Operations
 REVENUE
 Three months ended March 31,2007
    
    
    2006
    
    
    Change(dollars in thousands)Product revenue
    
    $
    55,666
    
    
    $
    53,280
    
    
    
    4.5
    %Development, licensing and
royalty revenue
    
    
    13,453
    
    
    
    5,819
    
    
    
    131.2
    %Total revenue
    
    $
    69,119
    
    
    $
    59,099
    
    
    
    17.0
    %
 Three months ended March 31,2007
    
    
    2006
    
    
    Change(dollars in thousands)Consumer Electronics (1)
    
    $
    49,025
    
    
    $
    35,392
    
    
    
    38.5
    %Personal Computers (1)
    
    
    11,095
    
    
    
    13,306
    
    
    
    -16.6
    %Storage (1)
    
    
    8,999
    
    
    
    10,401
    
    
    
    -13.5
    %Total revenue
    
    $
    69,119
    
    
    $
    59,099
    
    
    
    17.0
    %
 
 (1)
    
    Includes development, licensing and royalty revenue Three months ended March 31,2007
    
    
    2006
    
    
    ChangeConsumer Electronics
    
    $
    40,297
    
    
    $
    31,942
    
    
    
    26.2
    %Personal Computer
    
    
    9,721
    
    
    
    12,819
    
    
    
    -24.2
    %Storage
    
    
    5,648
    
    
    
    8,519
    
    
    
    -33.7
    %Development, licensing and royalty revenue
    
    
    13,453
    
    
    
    5,819
    
    
    
    131.2
    %Total revenue
    
    $
    69,119
    
    
    $
    59,099
    
    
    
    17.0
    %
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COST OF REVENUE AND GROSS PROFIT
 Three months ended March 31,2007
    
    2006
    
    Change(dollars in thousands)Cost of revenue (1)
    
    $
    30,758
    
    
    $
    25,348
    
    
    
    21.3
    %Total gross profit
    
    
    38,361
    
    
    
    33,751
    
    
    
    13.7
    %Gross profit margin
    
    
    55.5
    %
    
    
    57.1
    %(1) Includes stock-based compensation expense
    
    $
    346
    
    
    $
    628
   OPERATING EXPENSES
 Three months ended March 31,2007
    
    2006
    
    Change(dollars in thousands)Research and development (1)
    
    $
    17,195
    
    
    $
    15,566
    
    
    
    10.5
    %Percentage of total revenue
    
    
    24.9
    %
    
    
    26.3
    %(1) Includes stock-based compensation expense
    
    $
    2,308
    
    
    $
    2,812
 Research and Development (R&D).
 Three months ended March 31,2007
    
    2006
    
    Change(dollars in thousands)Selling, general and administrative (2)
    
    $
    17,131
    
    
    $
    15,389
    
    
    
    11.3
    %Percentage of total revenue
    
    
    24.8
    %
    
    
    26.0
    %(2) Includes stock-based compensation expense
    
    $
    1,378
    
    
    $
    3,843
 22




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##### Table of Contents



Selling, General and Administrative (SG&A)
 Three months ended March 31,2007
    
    2006
    
    Change(dollars in thousands)Amortization of intangible assets
    
    $
    615
    
    
    $
    274
    
    
    
    124.5
    %
 Amortization of Intangible Assets.
 Three months ended March 31,2007
    
    2006
    
    Change(dollars in thousands)Interest income and other, net
    
    $
    3,026
    
    
    $
    1,538
    
    
    
    96.7
    %
 Interest Income and other, net.
 Provision for Income Taxes.
 March 31,
    
    
    March 31,2007
    
    
    2006
    
    
    Change(dollars in thousands)Provision for income taxes
    
    $
    3,517
    
    
    $
    1,636
    
    
    
    115.0
    %
  There are risks to our global strategy
 Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109
  23




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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 March 31,
    
    
    March 31,2007
    
    
    2006
    
    
    Change(dollars in thousands)Total cash, cash equivalents and short-term investments
    
    $
    224,025
    
    
    $
    167,490
    
    
    $
    56,535Cash provided by (used in) operating activities
    
    
    (6,548
    )
    
    
    10,988
    
    
    
    (17,536
    )Cash used in investing activities
    
    
    (2,149
    )
    
    
    (24,456
    )
    
    
    22,307Cash provided by financing activities
    
    
    5,423
    
    
    
    6,684
    
    
    
    (1,261
    )Effect of exchange rate changes on cash & cash equivalents
    
    
    2
    
    
    
    
    
    
    
    2Net increase (decrease) in cash and cash
equivalents
    
    $
    (3,272
    )
    
    $
    (6,784
    )
    
    $
    3,512
 Cash, Cash Equivalents and Investments
  Operating Activities
  Investing Activities
  Financing Activities
   24




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##### Table of Contents



Commitments and Contractual Obligations
  Commitment and contractual obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsOperating lease obligations
    
    $
    10,792
    
    
    $
    3,637
    
    
    $
    4,505
    
    
    $
    2,650
    
    
    
    Inventory purchase obligations
    
    
    8,867
    
    
    
    8,867
    
    
    
    
    
    
    
    
    
    
    
    Intangibles purchase commitments
    
    
    37,283
    
    
    
    30,998
    
    
    
    6,285
    
    
    
    
    
    
    
    Minimum royalty obligation
    
    
    75
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    57,017
    
    
    $
    43,577
    
    
    $
    10,790
    
    
    $
    2,650
    
    
    $
    
 
 Unrecognized Tax Benefits
   Stock Repurchase Program
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk
  0.5%
    
    1.0%
    
    1.5%$437,000
    
    $874,000
    
    $1,310,000
 Foreign Currency Exchange Risk
  25




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
   26




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Item 1A. Risk Factors
  We operate in rapidly evolving markets, which makes it difficult to evaluate our future prospects.
  27




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Our annual and quarterly operating results may fluctuate significantly and are difficult to
predict.
  
    
    the growth, evolution and rate of adoption of industry standards for our key markets,
including consumer electronics, digital-ready PCs and displays, and storage devices and
systems;
    
    the fact that our licensing revenue is heavily dependent on a few key licensing
transactions being completed for any given period, the timing of which is not always
predictable and is especially susceptible to delay beyond the period in which completion is
expected, and our concentrated dependence on a few licensees in any period for substantial
portions of our expected licensing revenue and profits;
    
    the fact that our licensing revenue has been uneven and unpredictable over time, and is
expected to continue to be uneven and unpredictable for the foreseeable future, resulting in
considerable fluctuation in the amount of revenue recognized in a particular quarter;
    
    competitive pressures, such as the ability of competitors to successfully introduce
products that are more cost-effective or that offer greater functionality than our products,
including integration into their products of functionality offered by our products, the
prices set by competitors for their products, and the potential for alliances, combinations,
mergers and acquisitions among our competitors;
    
    average selling prices of our products, which are influenced by competition and
technological advancements, among other factors;
    
    government regulations regarding the timing and extent to which digital content must be
made available to consumers;
    
    the availability of other semiconductors or other key components that are required to
produce a complete solution for the customer; usually, we supply one of many necessary
components; and
    
    the cost of components for our products and prices charged by the third parties who
manufacture, assemble and test our products.
  Our future annual and quarterly operating results are highly dependent upon how well we manage our
business.
  
    
    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;
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
    
    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 implement our plans to transfer certain of our technology,
sales administration and procurement functions offshore to be closer to customers and
suppliers, lower our tax liability, and reduce certain costs.
  The licensing component of our business strategy increases business risk and volatility.
  We face intense competition in our markets, which may lead to reduced revenue from sales of our
products and increased losses.
   29




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Our success depends in part on demand for our new products.
  Demand for our consumer electronics products is dependent on continued adoption and widespread
implementation of the HDMI specification.
    30




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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 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.
   Our customer may not purchase anticipated levels of products, which can result in increased
inventory levels
  We depend on a few key customers and the loss of any of them could significantly reduce our
revenue.
  32




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##### Table of Contents




    
    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 select products manufactured by one of our competitors
for inclusion in their future product generations.
  We sell our products through distributors, which limits our direct interaction with our customers,
therefore reducing our ability to forecast sales and increasing the complexity of our business.
  
    
    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.
   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.
  
    
    accurate prediction of market requirements and evolving 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;
 33




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##### Table of Contents




    
    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 and achievement of high manufacturing yields and low cost testing;
    
    market acceptance of new products; and
    
    market acceptance of new architectures like SteelVine.
  There are risks to our global strategy
  We have made acquisitions in the past and may make acquisitions in the future, if advisable, and
these acquisitions involve numerous risks.
  
    
    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;
 34




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
    
    inability to successfully incorporate acquired technology and operations into our
business and maintain uniform standards, controls, policies and procedures;
    
    inability to commercialize acquired technology; and
    
    the need to take impairment charges or write-downs with respect to acquired assets.
  Our acquisition of sci-worx GmbH exposes us to a variety of risks.
  Industry cycles may strain our management and resources.
  
    
    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.
  The cyclical nature of the semiconductor industry may create constrictions in our foundry, test
and assembly capacity.
  We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our
products, which reduce our control over the production process.
  
    
    reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
 35




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##### Table of Contents




    
    lack of guaranteed production capacity or product supply, potentially resulting in higher inventory levels;
    
    lack of availability of, or delayed access to, next-generation or key process technologies; and
    
    limitations on our ability to transition to alternate sources if services are unavailable from primary suppliers.
  The complex nature of our production process, which can reduce yields and prevent identification
of problems until well into the production cycle or, in some cases, after the product has been
shipped.
    We face foreign business, political and economic risks because a majority of our products and our
customers products are manufactured and sold outside of the United States.
  
    
    political, social and economic instability;
 36




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
    
    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.
  37




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##### Table of Contents



The success of our business depends upon our ability to adequately protect our intellectual
property.
  Our participation in working groups for the development and promotion of industry standards in our
target markets, including the DVI, and HDMI specifications, requires us to license some of our
intellectual property for free or under specified terms and conditions, which may make it easier
for others to compete with us in such markets.
  
    
    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.
    
    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; and
    
    we have agreed to license specific elements of our intellectual property to other UDI
promoters and third parties who execute an adopters agreement.
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Our success depends in part on our relationships with Sunplus and other strategic partners.
   Our success depends on managing our relationship with Intel.
  
    
    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 and Silicon Image are two of the promoters of the Unified Display Interface Working Group;
    
    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;
 39




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
    
    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.
  We have granted Intel rights with respect to our intellectual property, which could allow Intel to
develop products that compete with ours or otherwise reduce the value of our intellectual
property.
  We may become engaged in additional intellectual property litigation that could be time-consuming,
may be expensive to prosecute or defend, and could adversely affect our ability to sell our
product.
   
    
    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.
  We have entered into, and may again be required to enter into, patent or other intellectual
property cross-licenses.
  40




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We indemnify certain of our licensing customers against infringement.
  We must attract and retain qualified personnel to be successful, and competition for qualified
personnel is increasing in our market.
  Share
Based Payment
 We have experienced transitions in our management team, our board of directors and our independent
registered public accounting firm in the past and may continue to do so in the future.
  
    
    In January 2005, Steve Laub (who replaced David Lee in November 2004) resigned from the
positions of chief executive officer and president and from the board of directors, Steve
Tirado was appointed as chief executive officer and president and to the board as well, and
Chris Paisley was appointed chairman of the board of directors.
    
    In February 2005, Jaime Garcia-Meza was appointed as vice president of our storage
business.
    
    In April 2005, Robert C. Gargus retired from the position of chief financial officer and
Darrel Slack was appointed as his successor.
    
    In April 2005, four of our then independent outside directors, David Courtney (chairman
of the audit committee), Keith McAuliffe, Chris Paisley (chairman of the board) and Richard
Sanquini, resigned from our board of directors and board committees.
 41




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
    
    In April 2005, Darrel Slack, our then chief financial officer, was elected to our board of directors.
    
    In May 2005, Masood Jabbar and Peter Hanelt were elected to our board of directors.
    
    In June 2005, David Lee did not stand for re-election as a director at our annual meeting
of stockholders, and accordingly, Dr. Lee resigned from our board of directors.
    
    In June 2005, PricewaterhouseCoopers LLP resigned as our independent registered public
accounting firm. In July 2005, we appointed Deloitte & Touche LLP as our new independent
registered public accounting firm.
    
    In August 2005, Darrel Slack began a personal leave of absence.
    
    In August 2005, Dale Brown resigned from the positions of chief accounting officer and corporate controller.
    
    In August 2005, Robert Freeman was appointed as interim chief financial officer and chief accounting officer.
    
    In September 2005, Darrel Slack resigned from the position of chief financial officer and
from our board of directors and the board of directors of HDMI Licensing, LLC, our
wholly-owned subsidiary.
    
    In October 2005, William George was elected to our board of directors.
    
    In October 2005, Robert Bagheri resigned from the position of executive vice president of operations.
    
    In October 2005, John LeMoncheck, then vice president, consumer electronics and PC/display, left Silicon Image.
    
    In October 2005, John Shin was appointed as interim vice president, consumer electronics
and PC/display businesses and served in that position until February 2006. Mr. Shin serves
as vice president of engineering, and has held that position since October 2003.
    
    In November 2005, Robert Freemans position changed from interim chief financial officer to chief financial officer.
    
    In December 2005, William Raduchel was elected to our board of directors.
    
    In January 2006, Dale Zimmerman was appointed as our vice president of worldwide marketing.
    
    In February 2006, John Hodge was elected to our board of directors.
    
    In September 2006, Patrick Reutens resigned from the position of chief legal officer.
    
    In January 2007, Edward Lopez was appointed as our chief legal officer.
    
    In February 2007, David Hodges advised our board of directors that he has decided to
retire and as such will not stand for reelection to our board of directors when his current
term expires at our 2007 Annual Meeting of Stockholders.
    
    In April 2007, Robert R. Freeman, announced his intention to retire from his position
as Chief Financial Officer.
    
    In April 2007, Rob Valiton resigned from his position as Vice President of Worldwide Sales.
    
    In April 2007, Sal Cobar was appointed as Vice President of Worldwide Sales.
  42




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We have completed a voluntarily-initiated internal review of our historical stock option
compensation practices and the SEC is conducting an informal inquiry into our past option-granting
practices. This inquiry may not be resolved favorably and may
require a significant amount of management time and attention and accounting and legal resources,
which could adversely affect our business, financial condition, results of operations and cash
flows.
   We have been and may continue to become the target of securities class action suits and derivative
suits which could result in substantial costs and divert management attention and resources.
  Our operations and the operations of our significant customers, third-party wafer foundries and
third-party assembly and test subcontractors are located in areas susceptible to natural
disasters.
   
    
    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.
 Continued terrorist attacks or war could lead to further economic instability and adversely affect
our operations, results of operations and stock price.
  43




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44




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##### Table of Contents



Changes in environmental rules and regulations could increase our costs and reduce our
revenue.
  Provisions of our charter documents and Delaware law could prevent or delay a change in control,
and may reduce the market price of our common stock.
  
    
    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.
  The price of our stock fluctuates substantially and may continue to do so.
  
    
    actual or anticipated changes in our operating results;
    
    changes in expectations of our future financial performance;
    
    changes in market valuations of same 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.
  45




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  46




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##### Table of Contents



Item 6. Exhibits
  10.01
    
    Sale and Purchase Agreement with Infineon Technologies AG and sci-worx GmbH (incorporated
by reference to Exhibit 10.01 to our Current Report on Form 8-K filed January 8, 2007)10.02*
    
    Video Processor Design License Agreement with Sunplus Technology Co., Ltd.10.03
    
    Silicon Image, Inc. Sales Incentive Plan for Vice President of Worldwide Sales for Fiscal
Year 2007 (incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K/A
filed February 27, 2007)10.04
    
    Employment Offer Letter between Noland Granberry and the Registrant dated February 14, 2006.31.01
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.02**
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 
    
    Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
Registrant hereby undertakes to
furnish supplementally copies of any of the omitted schedules and exhibits upon request by
the Securities and Exchange Commission.*
    
    Confidential treatment has been requested with respect to certain portions of this exhibit.
Omitted portions have been filed separately with the Securities and Exchange Commission.**
    
    This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by
reference into any filing of the registrant, in accordance with Item 601 of Regulation S-K. 47




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##### Table of Contents



Signatures
  Dated: May 7, 2007
    Silicon Image, Inc./s/ Robert R. FreemanRobert R. FreemanChief Financial Officer (Principal Financial Officer) 48




---



##### Table of Contents



Exhibit Index
 10.01
    
    Sale and Purchase Agreement with Infineon Technologies AG and sci-worx GmbH (incorporated
by reference to Exhibit 10.01 to our Current Report on Form 8-K filed January 8, 2007)10.02*
    
    Video Processor Design License Agreement with Sunplus Technology Co., Ltd.10.03
    
    Silicon Image, Inc. Sales Incentive Plan for Vice President of Worldwide Sales for Fiscal
Year 2007 (incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K/A
filed February 27, 2007)10.04
    
    Employment Offer Letter between Noland Granberry and the Registrant dated February 14, 2006.31.01
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification under Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.02**
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 
    
    Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
Registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by
the Securities and Exchange Commission.*
    
    Confidential treatment has been requested with respect to certain portions of this exhibit.
Omitted portions have been filed separately with the Securities and Exchange Commission.**
    
    This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by
reference into any filing of the Registrant, in accordance with Item 601 of Regulation S-K. 49