##### 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 September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                     to                     .
 Commission file number: 000-26887
 Silicon Image, Inc.
  Delaware
    
    77-0396307(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1060 East Arques Avenue
Sunnyvale, California 94085
 (408) 616-4000
 þ o
  o þ o
 o þ




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##### Table of Contents



Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three and Nine Months Ended
September 30, 2006
 Table of Contents
 Part I. Financial Information
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other Information
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42Signatures
    
    
    43EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
 2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements (Unaudited)
 Silicon
Image, Inc.
 
 Condensed Consolidated Balance Sheets
 (in
thousands)  (unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    40,322
    
    
    $
    77,877Short-term investments
    
    
    195,468
    
    
    
    73,685Accounts receivable, net of allowances for
doubtful accounts of $214 in 2006 and $417 in
2005
    
    
    32,004
    
    
    
    30,141Inventories, net
    
    
    19,619
    
    
    
    17,072Prepaid expenses and other current assets
    
    
    4,365
    
    
    
    3,037Total current assets
    
    
    291,778
    
    
    
    201,812Property and equipment, net
    
    
    16,265
    
    
    
    9,613Goodwill
    
    
    13,021
    
    
    
    13,021Intangible assets, net
    
    
    171
    
    
    
    585Other assets
    
    
    1,216
    
    
    
    7,990Total assets
    
    $
    322,451
    
    
    $
    233,021Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    16,085
    
    
    $
    13,372Accrued liabilities
    
    
    19,351
    
    
    
    13,952Deferred license revenue
    
    
    5,026
    
    
    
    8,283Debt obligations and capital leases
    
    
    59
    
    
    
    230Deferred margin on sales to distributors
    
    
    18,944
    
    
    
    13,771Deferred
patent infringement proceeds (See Note 7)
    
    
    11,182
    
    
    
    Current liabilities
    
    
    70,647
    
    
    
    49,608Other long-term liabilities
    
    
    1,066
    
    
    
    6,867Total liabilities
    
    
    71,713
    
    
    
    56,475Commitments and contingencies (See Note 7)Stockholders Equity:Common stock
    
    
    86
    
    
    
    80Additional paid-in capital
    
    
    358,145
    
    
    
    307,149Unearned stock compensation
    
    
    
    
    
    
    (6,742
    )Accumulated deficit
    
    
    (107,237
    )
    
    
    (123,429
    )Accumulated other comprehensive loss
    
    
    (256
    )
    
    
    (512
    )Total stockholders equity
    
    
    250,738
    
    
    
    176,546Total liabilities and stockholders equity
    
    $
    322,451
    
    
    $
    233,021
  3




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##### Table of Contents



Silicon Image, Inc.
 
 Condensed Consolidated Statements of Income

(in thousands, except per share amounts)
 (unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Product
    
    $
    69,149
    
    
    $
    50,443
    
    
    $
    184,096
    
    
    $
    138,574Development, licensing and royalties
    
    
    9,178
    
    
    
    5,559
    
    
    
    23,909
    
    
    
    12,469Total revenue
    
    
    78,327
    
    
    
    56,002
    
    
    
    208,005
    
    
    
    151,043Cost of revenue and operating expenses:Cost of revenue (1)
    
    
    32,721
    
    
    
    20,868
    
    
    
    87,854
    
    
    
    57,360Research and development (2)
    
    
    16,866
    
    
    
    12,309
    
    
    
    47,611
    
    
    
    32,334Selling, general and administrative (3)
    
    
    17,472
    
    
    
    7,754
    
    
    
    49,496
    
    
    
    20,580Amortization of intangible assets
    
    
    78
    
    
    
    274
    
    
    
    430
    
    
    
    822Total cost of revenue and operating expenses
    
    
    67,137
    
    
    
    41,205
    
    
    
    185,391
    
    
    
    111,096Income from operations
    
    
    11,190
    
    
    
    14,797
    
    
    
    22,614
    
    
    
    39,947Interest income and other, net
    
    
    2,623
    
    
    
    908
    
    
    
    6,181
    
    
    
    2,167Gain on investment security
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,263Income before provision for income taxes
    
    
    13,813
    
    
    
    15,705
    
    
    
    28,795
    
    
    
    43,377Provision for income taxes
    
    
    5,771
    
    
    
    5,802
    
    
    
    12,603
    
    
    
    6,380Net income
    
    $
    8,042
    
    
    $
    9,903
    
    
    $
    16,192
    
    
    $
    36,997Net income per share  basic
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.47Net income per share  diluted
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.44Weighted average shares  basic
    
    
    83,439
    
    
    
    79,736
    
    
    
    83,424
    
    
    
    79,211Weighted average shares  diluted
    
    
    87,433
    
    
    
    84,051
    
    
    
    87,577
    
    
    
    84,984(1) Includes stock compensation expense (benefit)
    
    $
    772
    
    
    $
    (252
    )
    
    $
    1,954
    
    
    $
    (1,408
    )(2) Includes stock compensation expense (benefit)
    
    
    3,781
    
    
    
    (655
    )
    
    
    9,393
    
    
    
    (4,346
    )(3) Includes stock compensation expense (benefit)
    
    
    4,073
    
    
    
    (540
    )
    
    
    11,113
    
    
    
    (3,719
    )
   4




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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Nine Months Ended September 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    16,192
    
    
    $
    36,997Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization
    
    
    5,045
    
    
    
    4,611Amortization of intangible assets
    
    
    429
    
    
    
    823Provision for doubtful accounts
    
    
    (2
    )
    
    
    194Stock compensation expense (benefit)
    
    
    22,460
    
    
    
    (9,473
    )Tax benefits
from equity-based compensation plans
    
    
    12,866
    
    
    
    5,322Excess tax
benefits from equity-based compensation plans
    
    
   (8,556
    )
    
    
    Amortization of investment premium
    
    
    (322
    )
    
    
    Gain on investment security
    
    
    
    
    
    
    (1,263
    )Realized loss on investments
    
    
    7
    
    
    
    45Loss on disposal of property and equipment
    
    
    10Changes in assets and liabilities:Accounts receivable
    
    
    (1,861
    )
    
    
    (8,430
    )Inventories
    
    
    (2,547
    )
    
    
    490Prepaid expenses and other assets
    
    
    13
    
    
    
    (214
    )Accounts payable
    
    
    786
    
    
    
    6,143Accrued liabilities and deferred license revenue
    
    
    (2,063
    )
    
    
    734Patent infringement proceeds (see Note 7)
    
    
    4,216
    
    
    
    Deferred margin on sales to distributors
    
    
    5,174
    
    
    
    1,268Cash provided by operating activities
    
    
    51,847
    
    
    
    37,247Cash flows from investing activities:Proceeds from sales and maturities of short-term investments
    
    
    65,280
    
    
    
    57,193Purchases of short-term investments
    
    
    (186,493
    )
    
    
    (94,560
    )Purchases of property and equipment
    
    
    (5,958
    )
    
    
    (4,612
    )Release of restriction on cash received in conjunction with resolution of
litigation (see Note 7)
    
    
    6,966
    
    
    
    Cash used in investing activities
    
    
    (120,205
    )
    
    
    (41,979
    )Cash flows from financing activities:Proceeds from issuances of common stock, net
    
    
    22,418
    
    
    
    10,236Excess tax
benefits from equity-based compensation plans
    
    
    8,556
    
    
    
    Repayments of debt and capital lease obligations
    
    
    (171
    )
    
    
    (125
    )Cash provided by financing activities
    
    
    30,803
    
    
    
    10,111Net increase (decrease) in cash and cash equivalents
    
    
    (37,555
    )
    
    
    5,379Cash and cash equivalents  beginning of period
    
    
    77,877
    
    
    
    23,280Cash and cash equivalents  end of period
    
    $
    40,322
    
    
    $
    28,659Supplemental cash flow information:Cash payment for interest
    
    $
    9
    
    
    $
    Cash payment for income taxes
    
    
    927
    
    
    
    306Unrealized gain/(loss) on investment security
    
    
    551
    
    
    
    Property and equipment purchased but not paid for
    
    
    3,213
    
    
    
    Intangibles purchased not paid for
    
    
    15
    
    
    
    Increase in restricted cash and related long-term liability associated with
ongoing litigation
    
    $
    
    
    
    $
    6,811
  5




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Silicon Image, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 September 30, 2006
 (unaudited)
 1. Basis of Presentation
  2. Recent Accounting Pronouncements
 Fair Value
Measurements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
 Accounting for Uncertainty in Income Taxes
 6




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3. Stock-Based Compensation
          Adoption of SFAS No. 123R
 Accounting for Stock Issued to Employees Accounting for Stock-based Compensation.
 Share-Based Payment
 7




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##### Table of Contents



Determining Fair Value
 Valuation and amortization method
 Expected Term
 Expected Volatility
 Risk-Free Interest Rate
 Expected Dividend
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Employee stock option plans:Expected life in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    84
    %
    
    
    90
    %
    
    
    88
    %
    
    
    90
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.2
    %
    
    
    4.7
    %
    
    
    4.1
    %Expected dividends
    
    none
    
    none
    
    none
    
    noneWeighted average fair value
    
    $
    7.65
    
    
    $
    7.37
    
    
    $
    7.31
    
    
    $
    9.33Employee Stock Purchase Plan:Expected life in years
    
    
    1.3
    
    
    
    1.4
    
    
    
    1.3
    
    
    
    1.4Expected volatility
    
    
    59
    %
    
    
    66
    %
    
    
    58
    %
    
    
    71
    %Risk-free interest rate
    
    
    5.1
    %
    
    
    3.2
    %
    
    
    4.9
    %
    
    
    2.9
    %Expected dividends
    
    none
    
    none
    
    none
    
    noneWeighted average fair value
    
    $
    4.18
    
    
    $
    4.55
    
    
    $
    4.41
    
    
    $
    4.30
 8




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Stock Compensation Expense
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of sales
    
    $
    772
    
    
    $
    1,954Research and development
    
    
    3,781
    
    
    
    9,393Selling, general and administrative
    
    
    4,073
    
    
    
    11,113Income tax effect
    
    
    (189
    )
    
    
    (235
    )$
    8,437
    
    
    $
    22,225
     Stock Options and Awards Activity
  Weighted AverageRemainingWeighted Average
    
    
    Contractual Term in
    
    
    Aggregate IntrinsicNumber of Shares
    
    
    Exercise Price
    
    
    Years
    
    
    ValueOutstanding at December 31, 2005
    
    
    20,684
    
    
    $
    7.98Granted
    
    
    2,193
    
    
    
    10.29Exercised
    
    
    (3,716
    )
    
    
    4.98Forfeitures and cancellations
    
    
    (1,056
    )
    
    
    11.32Outstanding at September 30, 2006
    
    
    18,105
    
    
    $
    8.68
    
    
    
    6.92
    
    
    $
    82,119Vested and
expected to vest at September 30, 2006
    
    
    17,398
    
    
    $
    8.60
    
    
    
    0.52
    
    
    $
    80,250Exercisable at September 30, 2006
    
    
    10,026
    
    
    $
    7.56
    
    
    
    5.87
    
    
    $
    56,880
  9




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Pro-forma Disclosures
 Accounting for Stock-Based
Compensation, Transition and Disclosure
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income  as reported
    
    $
    9,903
    
    
    $
    36,997Stock-based employee
compensation benefit included
in the determination of net
income as reported, net of
taxes
    
    
    (1,767
    )
    
    
    (9,998
    )Stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of taxes
    
    
    (5,379
    )
    
    
    (16,217
    )Pro forma net income
    
    $
    2,757
    
    
    $
    10,782Earnings per share:Basic  as reported
    
    $
    0.12
    
    
    $
    0.47Basic  pro forma
    
    $
    0.03
    
    
    
    0.14Diluted  as reported
    
    
    0.12
    
    
    
    0.44Diluted  pro forma
    
    
    0.03
    
    
    
    0.13
  4. Comprehensive income
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    8,042
    
    
    $
    9,903
    
    
    $
    16,192
    
    
    $
    36,997Change in
unrealized value on investments
    
    
    321
    
    
    
    (198
    )
    
    
    327
    
    
    
    (3,322
    )Total comprehensive income
    
    $
    8,363
    
    
    $
    9,705
    
    
    $
    16,519
    
    
    $
    33,675
 5. Net Income Per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    8,042
    
    
    $
    9,903
    
    
    $
    16,192
    
    
    $
    36,997Weighted average shares
    
    
    83,439
    
    
    
    79,938
    
    
    
    83,424
    
    
    
    79,433Unvested common shares subject to repurchase
    
    
    
    
    
    
    (202
    )
    
    
    
    
    
    
    (222
    )Weighted average shares  basic
    
    
    83,439
    
    
    
    79,736
    
    
    
    83,424
    
    
    
    79,211Weighted average shares  diluted
    
    
    87,433
    
    
    
    84,051
    
    
    
    87,577
    
    
    
    84,984Net income per share  basic
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.19
    
    
    $
    0.47Net income per share  diluted
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.44
 10




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted-average common shares for basic
net income per share
    
    
    83,439
    
    
    
    79,736
    
    
    
    83,424
    
    
    
    79,211Weighted-average dilutive stock options
outstanding under the treasury stock method
    
    
    3,994
    
    
    
    4,113
    
    
    
    4,153
    
    
    
    5,551Unvested common shares subject to repurchase
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    222Total
    
    
    87,433
    
    
    
    84,051
    
    
    
    87,577
    
    
    
    84,984
 6. Balance Sheet Components
 September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Inventories:Raw materials
    
    $
    1,970
    
    
    $
    3,123Work in process
    
    
    3,458
    
    
    
    4,511Finished goods
    
    
    14,191
    
    
    
    9,438Total inventories
    
    $
    19,619
    
    
    $
    17,072Property and equipmentComputers and software
    
    $
    21,029
    
    
    $
    16,669Equipment
    
    
    23,185
    
    
    
    16,601Furniture and fixtures
    
    
    2,893
    
    
    
    2,25947,107
    
    
    
    35,529Less: accumulated depreciation
    
    
    (30,842
    )
    
    
    (25,916
    )Total property and equipment, net
    
    $
    16,265
    
    
    $
    9,613Accrued liabilities:Accrued payroll and related expenses
    
    $
    4,701
    
    
    $
    4,738Restructuring accrual
    
    
    
    
    
    
    25Accrued legal fees
    
    
    744
    
    
    
    490Warranty accrual
    
    
    366
    
    
    
    382Bonus accrual
    
    
    5,099
    
    
    
    2,615Other accrued liabilities
    
    
    8,441
    
    
    
    5,702Total accrued liabilities
    
    $
    19,351
    
    
    $
    13,952
  2006Balance at January 1
    
    $
    382Provision for warranties issued during the period
    
    
    17Cash and other settlements made during the period
    
    
    (33
    )Balance at September 30
    
    $
    366
 11




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7. Commitments and Contingencies
       12




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##### Table of Contents



Contractual obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsDebt obligations
    
    $
    40
    
    
    $
    40
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    14,429
    
    
    
    4,720
    
    
    
    6,022
    
    
    
    3,687
    
    
    
    Inventory purchase obligations
    
    
    10,964
    
    
    
    10,964
    
    
    
    
    
    
    
    
    
    
    
    Minimum royalty obligation
    
    
    125
    
    
    
    100
    
    
    
    25
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    25,558
    
    
    $
    15,824
    
    
    $
    6,047
    
    
    $
    3,687
    
    
    $
    
 8. Customer and Geographic Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Taiwan
    
    $
    14,895
    
    
    $
    12,398
    
    
    $
    44,187
    
    
    $
    36,853Japan
    
    
    30,294
    
    
    
    14,359
    
    
    
    69,727
    
    
    
    30,410United States
    
    
    14,371
    
    
    
    14,645
    
    
    
    40,450
    
    
    
    41,999Korea
    
    
    6,744
    
    
    
    5,942
    
    
    
    18,110
    
    
    
    14,159Hong Kong
    
    
    3,042
    
    
    
    1,854
    
    
    
    7,516
    
    
    
    4,973Other
    
    
    8,981
    
    
    
    6,804
    
    
    
    28,015
    
    
    
    22,649Total revenue
    
    $
    78,327
    
    
    $
    56,002
    
    
    $
    208,005
    
    
    $
    151,043
 13




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Consumer Electronics
    
    $
    54,265
    
    
    $
    34,127
    
    
    $
    137,874
    
    
    $
    82,162Personal Computer
    
    
    14,462
    
    
    
    12,168
    
    
    
    37,968
    
    
    
    36,137Storage
    
    
    9,600
    
    
    
    9,707
    
    
    
    32,163
    
    
    
    32,744Total revenue
    
    $
    78,327
    
    
    $
    56,002
    
    
    $
    208,005
    
    
    $
    151,043
     9. Provision for income taxes
   10.
Gain on investment security
    11. Related Party Transaction
  14




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##### Table of Contents



12. Subsequent Events
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933. These forward-looking statements
involve a number of risks and uncertainties, including those identified in the section of this Form
10-Q entitled Factors Affecting Future Results, that may cause actual results to differ
materially from those discussed in, or implied by, such forward-looking statements. Forward-looking
statements within this Form 10-Q are identified by words such as believes, anticipates,
expects, intends, estimates, may, will and variations of such words and other similar
expressions. However, these words are not the only means of identifying such statements. In
addition, any statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. We undertake no obligation to
publicly release the results of any revisions to these forward-looking statements that may be made
to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the
SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Our
actual results could differ materially from those anticipated in, or implied by, forward-looking
statements as a result of various factors, including the risks outlined elsewhere in this report.
Readers are urged to carefully review and consider the various disclosures made by Silicon Image,
Inc. in this report and in our other reports filed with the SEC that attempt to advise interested
parties of the risks and factors that may affect our business.
 Overview
    15




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16




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Concentrations, Commitments and Contingencies
    Critical Accounting Policies
  17




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Results of Operations
 REVENUE
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(dollars in thousands)
    
    
    (dollars in thousands)Product revenue
    
    $
    69,149
    
    
    $
    50,443
    
    
    
    37.1
    %
    
    $
    184,096
    
    
    $
    138,574
    
    
    
    32.9
    %Development, licensing and royalty revenue
    
    
    9,178
    
    
    
    5,559
    
    
    
    65.1
    %
    
    
    23,909
    
    
    
    12,469
    
    
    
    91.7
    %Total revenue
    
    $
    78,327
    
    
    $
    56,002
    
    
    
    39.9
    %
    
    $
    208,005
    
    
    $
    151,043
    
    
    
    37.7
    %
 Three months ended September 30,
    
    
    Nine months ended September 30,2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(dollars in thousands)
    
    
    (dollars in thousands)Consumer Electronics (1)
    
    $
    54,265
    
    
    $
    34,127
    
    
    
    59.0
    %
    
    $
    137,874
    
    
    $
    82,162
    
    
    
    67.8
    %Personal Computers (1)
    
    $
    14,462
    
    
    
    12,169
    
    
    
    18.8
    %
    
    $
    37,968
    
    
    
    36,137
    
    
    
    5.1
    %Storage (1)
    
    $
    9,600
    
    
    
    9,706
    
    
    
    -1.1
    %
    
    $
    32,163
    
    
    
    32,744
    
    
    
    -1.8
    %Total revenue
    
    $
    78,327
    
    
    $
    56,002
    
    
    
    39.9
    %
    
    $
    208,005
    
    
    $
    151,043
    
    
    
    37.7
    %
 
 (1)   Includes development, licensing and royalty revenue   18




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##### Table of Contents



COST OF REVENUE AND GROSS PROFIT
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(dollars in thousands)
    
    (dollars in thousands)Cost of revenue (1)
    
    $
    32,721
    
    
    $
    20,868
    
    
    $
    11,853
    
    
    $
    87,854
    
    
    $
    57,360
    
    
    $
    30,494Total gross profit
    
    $
    45,606
    
    
    $
    35,134
    
    
    $
    10,472
    
    
    $
    120,151
    
    
    $
    93,683
    
    
    $
    26,468Gross profit margin
    
    
    58.2
    %
    
    
    62.7
    %
    
    
    
    
    
    
    57.8
    %
    
    
    62.0
    %(1) Includes stock
compensation expense
(benefit)
    
    $
    772
    
    
    $
    (252
    )
    
    
    
    
    
    $
    1,954
    
    
    $
    (1,408
    )
   OPERATING EXPENSES
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(dollars in thousands)
    
    (dollars in thousands)Research and development (1)
    
    $
    16,866
    
    
    $
    12,309
    
    
    
    37.0
    %
    
    $
    47,611
    
    
    $
    32,334
    
    
    
    47.2
    %Percentage of total revenue
    
    
    21.5
    %
    
    
    22.0
    %
    
    
    
    
    
    
    22.9
    %
    
    
    21.4
    %Selling, general and administrative (2)
    
    $
    17,472
    
    
    $
    7,754
    
    
    
    125.3
    %
    
    $
    49,496
    
    
    $
    20,580
    
    
    
    140.5
    %Percentage of total revenue
    
    
    22.3
    %
    
    
    13.8
    %
    
    
    
    
    
    
    23.8
    %
    
    
    13.6
    %Amortization of intangible assets
    
    $
    78
    
    
    $
    274
    
    
    
    -71.5
    %
    
    $
    430
    
    
    $
    822
    
    
    
    -47.7
    %Interest income and other, net
    
    $
    2,623
    
    
    $
    908
    
    
    
    188.9
    %
    
    $
    6,181
    
    
    $
    2,167
    
    
    
    185.2
    %Gain from investment security
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,263
    
    
    
    -100.0
    %(1) Includes
stock compensation
expense (benefit)
    
    $
    3,781
    
    
    $
    (655
    )
    
    
    
    
    
    $
    9,393
    
    
    $
    (4,346
    )(2) Includes
stock compensation
expense (benefit)
    
    $
    4,073
    
    
    $
    (540
    )
    
    
    
    
    
    $
    11,113
    
    
    $
    (3,719
    )
 Research and Development (R&D).
 19




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Selling, General and Administrative (SG&A)
 Amortization of Intangible Assets.
 Restructuring.
 2006
    
    
    2005Severance and
    
    
    Leased
    
    
    
    
    
    
    Severance and
    
    
    LeasedBenefits
    
    
    Facilities
    
    
    Total
    
    
    Benefits
    
    
    Facilities
    
    
    TotalBalance as of January 1
    
    $
    
    
    
    $
    25
    
    
    $
    25
    
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036Cash payments
    
    
    
    
    
    
    (25
    )
    
    
    (25
    )
    
    
    
    
    
    
    (562
    )
    
    
    (562
    )Adjustment related to lease negotiation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (220
    )
    
    
    (220
    )Balance as of September 30
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    32
    
    
    $
    222
    
    
    $
    254
 Interest Income and other, net.
 Gain from investment security.
 Provision for income taxes.
  20




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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    Change(dollars in thousands)Total cash, cash equivalents and short-term
investments
    
    $
    235,790
    
    
    $
    134,118
    
    
    $
    101,672Cash provided by operating activities
    
    $
    51,847
    
    
    $
    37,247
    
    
    $
    14,600Cash used in investing activities
    
    
    (120,205
    )
    
    
    (41,979
    )
    
    
    (78,226
    )Cash provided by financing activities
    
    
    30,803
    
    
    
    10,111
    
    
    
    20,692Net increase (decrease) in cash and cash equivalents
    
    $
    (37,555
    )
    
    $
    5,379
    
    
    $
    (42,934
    )
 Cash, Cash Equivalents and Short-Term Investments
  Operating Activities
  Investing and Financing Activities
  Contractual Obligations and Off Balance Sheet Arrangements
  Long
term liquidity
  21




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
   22




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Part II. Other Information
 
 Item 1. Legal Proceedings
    23




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Item 1A. Risk Factors
  We operate in rapidly evolving markets, which makes it difficult to evaluate our future
prospects.
  We have a history of losses and may not sustain profitability.
  24




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Our annual and quarterly operating results may fluctuate significantly and are difficult to
predict.
  
 
 
 
 
 
 
 
 
  Our future annual and quarterly operating results are highly dependent upon how well we manage
our business.
  
 
 
 
 
 25




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
 
 
 
 
  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.
   26




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##### Table of Contents



Our success depends in part on demand for our new SteelVine storage products.
  Our success depends in part on the success of our new integrated HDMI DTV products.
  Demand for our CE products is dependent on the adoption and widespread use of the HDMI
specification.
 ®
    27




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Our success depends in part on strategic relationships.
   We do not have long-term commitments from our customers and we allocate resources based on our
estimates of customer demand.
  28




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##### Table of Contents



Our lengthy sales cycle can result in a delay between incurring expenses and generating
revenue, which could harm our operating results.
  We depend on a few key customers and the loss of any of them could significantly reduce our
revenue.
  
 
 
 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.
  
 
 
 29




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##### Table of Contents




   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.
  
 
 
 
 
 
 
 
 
  30




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##### Table of Contents



We have made acquisitions in the past and may make acquisitions in the future, if advisable,
and these acquisitions involve numerous risks.
  
 
 
 
 
 
  The cyclical nature of the semiconductor industry may create constrictions in our foundry,
test and assembly capacity.
  31




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##### Table of Contents



We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our
products, which reduce our control over the production process.
  
 
 
 
  The complex nature of our production process, which can reduce yields and prevent
identification of problems until well into the production cycle or, in some cases, after the
product has been shipped.
    32




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##### Table of Contents



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




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##### Table of Contents



Our participation in working groups for the development and promotion of industry standards in
our target markets, including the Digital Visual Interface, HDMI, and UDI specifications, requires
us to license some of our intellectual property, which may make it easier for others to compete
with us in such markets.
   
 
 
   Our success depends on managing our relationship with Intel.
  
 
 
 
 34




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##### Table of Contents




 
 
 
 
 
 
 
 
 
  We have granted Intel rights with respect to our intellectual property, which could allow
Intel to develop products that compete with ours or otherwise reduce the value of our intellectual
property.
  We have been and may continue to become the target of securities class action suits and
derivative suits which could result in substantial costs and divert management attention and
resources.
   35




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##### Table of Contents



We may become engaged in intellectual property litigation that could be time-consuming, may be
expensive to prosecute or defend, and could adversely affect our ability to sell our product.
    
 
 
 36




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##### Table of Contents



We have entered into, and may again be required to enter into patent or other intellectual
property cross-licenses.
  We have commenced a voluntarily-initiated internal review of our historical stock option
compensation practices and the SEC is conducting an informal inquiry into our option-granting
practices. These reviews 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 must attract and retain qualified personnel to be successful, and competition for qualified
personnel is increasing in our market.
   37




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##### Table of Contents



We have experienced a number of transitions with respect to our board of directors, executive
officers, and our independent registered public accounting firm in recent quarters, including the
following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 38




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##### Table of Contents




 
 
 
 
 
  Industry cycles may strain our management and resources.
  
 
 
 
 
  Our operations and the operations of our significant customers, third-party wafer foundries
and third-party assembly and test subcontractors are located in areas susceptible to natural
disasters.
   
 
 
 39




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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.
  
 
 
 
 
 
 
 
  The price of our stock fluctuates substantially and may continue to do so.
  
 
 
 
 40




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##### Table of Contents




 
  Continued terrorist attacks or war could lead to further economic instability and adversely
affect our operations, results of operations and stock price.
  We indemnify certain of our licensing customers against infringement.
  If we are unable to successfully address the material weakness in our internal controls as
described in Item 9A of our Annual Report on Form 10-K , our ability to report our financial results
on a timely and accurate basis may be adversely affected.
   41




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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
  
 Item 6. Exhibits
  10.01
    
    Consulting Agreement between Patrick Reutens and the Registrant dated September 18, 2006
(incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K filed September 20,
2006)31.01
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.02**
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by
reference into any filing of the registrant, in accordance with Item 601 of Regulation S-K. 42




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##### Table of Contents



Signatures
  Dated: November 14, 2006
    Silicon Image, Inc./s/ Robert R FreemanRobert R FreemanChief Financial Officer (Principal Financial Officer) 43




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##### Table of Contents



Exhibit Index
 10.01
    
    Consulting Agreement between Patrick Reutens and the Registrant dated September 18, 2006
(incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K filed September 20,
2006)31.01
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.02
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.01**
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.02**
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by
reference into any filing of the Registrant, in accordance with Item 601 of Regulation S-K.