##### Table of Contents



UNITED
STATESSECURITIES 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, 2005
 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
(State or other jurisdiction of
incorporation or organization)
    
    77-0396307
(I.R.S. Employer Identification No.)
 1060 East Arques Avenue
Sunnyvale, California 94085
 (408) 616-4000
 R £
 R £
 £ R




---



Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three and Nine Months Ended
September 30, 2005
 Table of Contents
 Part I Financial Information (Unaudited)Item 1 Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    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
    
    
    42Item 4 Controls and Procedures
    
    
    43Part II Other InformationItem 1 Legal Proceedings
    
    
    43Item 2 Change in Securities and Use of Proceeds
    
    
    45Item 3 Defaults Upon Senior Securities
    
    
    45Item 4 Submission of Matters to a Vote of Security Holders
    
    
    45Item 5 Other Information
    
    
    45Item 6 Exhibits
    
    
    46Signatures
    
    
    47CertificationsEXHIBIT 10.02EXHIBIT 10.03EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
  2




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Silicon Image, Inc.
 
 Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent Assets:Cash and cash equivalents
    
    $
    28,659
    
    
    $
    23,280Short-term investments
    
    
    105,459
    
    
    
    70,240Accounts receivable, net of allowances for
doubtful accounts of $939 at September 30 and
$745 at December 31
    
    
    27,653
    
    
    
    19,417Inventories
    
    
    13,436
    
    
    
    13,926Prepaid expenses and other current assets
    
    
    3,284
    
    
    
    3,073Total current assets
    
    
    178,491
    
    
    
    129,936Property and equipment, net
    
    
    9,494
    
    
    
    9,494Goodwill
    
    
    13,021
    
    
    
    13,021Intangible assets, net
    
    
    860
    
    
    
    1,683Other assets (Notes 6 and 9)
    
    
    7,588
    
    
    
    774Total assets
    
    $
    209,454
    
    
    $
    154,908Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    12,976
    
    
    $
    6,833Accrued liabilities
    
    
    11,575
    
    
    
    13,418Deferred license revenue
    
    
    4,704
    
    
    
    2,127Debt obligations and capital leases
    
    
    364
    
    
    
    489Deferred margin on sales to distributors
    
    
    11,230
    
    
    
    9,962Current liabilities
    
    
    40,849
    
    
    
    32,829Other long term liabilities (Note 9)
    
    
    6,811
    
    
    
    Total liabilities
    
    
    47,660
    
    
    
    32,829Commitments and contingencies (Note 9)Stockholders Equity:Common
stock, par value $0.001; shares authorized: 150,000,000;shares issued and outstanding: 80,310,859  September 30,
2005 and 78,131,604 
December 31, 2004

    
    
    80
    
    
    
    78Additional paid-in capital
    
    
    305,217
    
    
    
    299,744Unearned stock compensation
    
    
    (7,066
    )
    
    
    (7,632
    )Accumulated deficit
    
    
    (135,982
    )
    
    
    (172,978
    )Accumulated other comprehensive income (loss)
    
    
    (455
    )
    
    
    2,867Total stockholders equity
    
    
    161,794
    
    
    
    122,079Total liabilities and stockholders equity
    
    $
    209,454
    
    
    $
    154,908
  3




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##### Table of Contents



Silicon Image, Inc.
 
 Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Product
    
    $
    50,443
    
    
    $
    41,474
    
    
    $
    138,574
    
    
    $
    110,350Development, licensing and royalties
    
    
    5,559
    
    
    
    6,394
    
    
    
    12,469
    
    
    
    16,737Total revenue
    
    
    56,002
    
    
    
    47,868
    
    
    
    151,043
    
    
    
    127,087Cost and operating expenses:Cost of revenue (1)
    
    
    20,868
    
    
    
    18,204
    
    
    
    57,360
    
    
    
    50,414Research and development (2)
    
    
    12,309
    
    
    
    12,180
    
    
    
    32,334
    
    
    
    45,223Selling, general and administrative (3)
    
    
    7,754
    
    
    
    9,028
    
    
    
    20,580
    
    
    
    31,009Amortization of intangible assets
    
    
    274
    
    
    
    357
    
    
    
    822
    
    
    
    1,070Total cost and operating expenses
    
    
    41,205
    
    
    
    39,769
    
    
    
    111,096
    
    
    
    127,716Income (loss) from operations
    
    
    14,797
    
    
    
    8,099
    
    
    
    39,947
    
    
    
    (629
    )Interest income and other, net
    
    
    908
    
    
    
    211
    
    
    
    2,167
    
    
    
    399Gain (loss) on investment security
    
    
    
    
    
    
    (64
    )
    
    
    1,263
    
    
    
    926Income before provision for income taxes
    
    
    15,705
    
    
    
    8,246
    
    
    
    43,377
    
    
    
    696Provision for taxes
    
    
    5,802
    
    
    
    369
    
    
    
    6,380
    
    
    
    941Net income (loss)
    
    $
    9,903
    
    
    $
    7,877
    
    
    $
    36,997
    
    
    $
    (245
    )Net income (loss) per share:Net income
(loss) per share  basic
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.47
    
    
    $
    0.00Net income (loss) per share  diluted
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.42
    
    
    $
    0.00Weighted average shares  basic
    
    
    79,736
    
    
    
    74,976
    
    
    
    79,077
    
    
    
    73,797Weighted average shares  diluted
    
    
    86,869
    
    
    
    85,890
    
    
    
    87,081
    
    
    
    73,797(1) Includes stock compensation expense (benefit)
    
    $
    (252
    )
    
    $
    (110
    )
    
    $
    (1,408
    )
    
    $
    1,890(2) Includes stock compensation expense (benefit)
    
    
    (655
    )
    
    
    595
    
    
    
    (4,346
    )
    
    
    11,584(3) Includes stock compensation expense (benefit)
    
    
    (540
    )
    
    
    1,042
    
    
    
    (3,719
    )
    
    
    9,253
  4




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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Nine Months Ended September 30,2005
    
    
    2004Cash
flows from operating activities:Net income (loss)
    
    $
    36,997
    
    
    $
    (245
    )Adjustments to reconcile net income (loss) to cash provided by operating activities:Depreciation
    
    
    4,611
    
    
    
    3,631Amortization of intangible assets
    
    
    823
    
    
    
    1,070Provision for doubtful accounts receivable
    
    
    194
    
    
    
    75Stock compensation expense (benefit)
    
    
    (9,473
    )
    
    
    22,727Increase in
additional paid in capital related to income tax provision
(Note 11)
    
    
    5,322
    
    
    
    Gain on investment security
    
    
    (1,263
    )
    
    
    (926
    )Realized loss on investments
    
    
    45
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (8,430
    )
    
    
    (9,623
    )Inventories
    
    
    490
    
    
    
    (3,726
    )Prepaid expenses and other assets
    
    
    (214
    )
    
    
    960Accounts payable
    
    
    6,143
    
    
    
    5,410Accrued liabilities and deferred license revenue
    
    
    734
    
    
    
    3,441Deferred margin on sales to distributors
    
    
    1,268
    
    
    
    5,154Cash provided by operating activities
    
    
    37,247
    
    
    
    27,948Cash
flows from investing activities:Proceeds from sales and maturities of short-term investments
    
    
    57,193
    
    
    
    21,807Purchases of short-term investments
    
    
    (94,560
    )
    
    
    (20,641
    )Net purchases of property and equipment
    
    
    (4,612
    )
    
    
    (4,782
    )Cash used in investing activities
    
    
    (41,979
    )
    
    
    (3,616
    )Cash
flows from financing activities:Proceeds from issuances of common stock, net
    
    
    10,236
    
    
    
    15,531Repayments of capital lease and debt obligations
    
    
    (125
    )
    
    
    (1,414
    )Cash provided by financing activities
    
    
    10,111
    
    
    
    14,117Net increase in cash and cash equivalents
    
    
    5,379
    
    
    
    38,449Cash and cash equivalents  beginning of period
    
    
    23,280
    
    
    
    24,059Cash and cash equivalents  end of period
    
    $
    28,659
    
    
    $
    62,508Supplemental cash flow information:Cash payment for income taxes
    
    $
    306
    
    
    $
    262Supplemental non-cash investing and financing activities:Unrealized gain on investment security, net of tax
    
    $
    
    
    
    $
    4,173

Increase in
restricted cash and related long-term liability associated with
ongoing litigation (Notes 6 and 9)

$
6,811


$

  5




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##### Table of Contents



Silicon Image, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 September 30, 2005
 (unaudited)
 1. Basis of Presentation
  2. Recent Accounting Pronouncements
      6




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##### Table of Contents



3. Stock-Based Compensation
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)  as reported
    
    $
    9,903
    
    
    $
    7,877
    
    
    $
    36,997
    
    
    $
    (245
    )Stock-based employee compensation expense
(benefit) included in the determination of net income
(loss) as reported, net of tax
    
    
    (1,767
    )
    
    
    (46
    )
    
    
    (9,998
    )
    
    
    16,133Stock-based employee compensation expense
determined using fair value method, net of tax
    
    
    (5,379
    )
    
    
    (5,639
    )
    
    
    (16,217
    )
    
    
    (16,009
    )Pro forma net income (loss)
    
    $
    2,757
    
    
    $
    2,192
    
    
    $
    10,781
    
    
    $
    (121
    )Net income (loss) per share  basic (as reported)
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.47
    
    
    $
    0.00Net income (loss) per share  diluted (as reported)
    
    $
    0.11
    
    
    
    0.09
    
    
    $
    0.42
    
    
    $
    0.00Pro forma net income (loss) per share  basic
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.14
    
    
    $
    0.00Pro forma net income (loss) per share  diluted
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.12
    
    
    $
    0.00
 7




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Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Expected life (years)
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Interest rate
    
    
    4.2
    %
    
    
    3.4
    %
    
    
    4.1
    %
    
    
    3.1
    %Volatility
    
    
    90
    %
    
    
    90
    %
    
    
    90
    %
    
    
    90
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted
average fair value
    
    $7.37
    
    $
    8.24
    
    
    $
    9.33
    
    
    $
    7.55
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Expected life (years)
    
    
    1.4
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.5Interest rate
    
    
    3.2
    %
    
    
    1.2
    %
    
    
    2.9
    %
    
    
    1.2
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Volatility
    
    
    66
    %
    
    
    65
    %
    
    
    71
    %
    
    
    70
    %Weighted average grant date fair value
    
    $
    4.55
    
    
    $
    2.88
    
    
    $
    4.30
    
    
    $
    2.69
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Options granted to employees
    
    $
    4
    
    
    $
    855
    
    
    $
    260
    
    
    $
    906Options granted to non-employees
    
    
    625
    
    
    
    1,454
    
    
    
    2,249
    
    
    
    4,220Option repricings
    
    
    (2,233
    )
    
    
    (1,047
    )
    
    
    (12,508
    )
    
    
    16,609Options assumed in connection with acquisitions
    
    
    157
    
    
    
    265
    
    
    
    526
    
    
    
    992Stock compensation expense (benefit)
    
    $
    (1,447
    )
    
    $
    1,527
    
    
    $
    (9,473
    )
    
    $
    22,727
  8




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##### Table of Contents



4. Comprehensive income (loss)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    9,903
    
    
    $
    7,877
    
    
    $
    36,997
    
    
    $
    (245
    )Change in unrealized value on investments, net of tax
    
    
    (198
    )
    
    
    (726
    )
    
    
    (3,322
    )
    
    
    3,217Total comprehensive income
    
    $
    9,705
    
    
    $
    7,151
    
    
    $
    33,675
    
    
    $
    2,972
 5. Net Income (Loss) Per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    9,903
    
    
    $
    7,877
    
    
    $
    36,997
    
    
    $
    (245
    )Weighted average shares
    
    
    79,938
    
    
    
    75,694
    
    
    
    79,299
    
    
    
    74,534Unvested common shares subject to repurchase
    
    
    (202
    )
    
    
    (718
    )
    
    
    (222
    )
    
    
    (737
    )Weighted average shares  basic
    
    
    79,736
    
    
    
    74,976
    
    
    
    79,077
    
    
    
    73,797Weighted average shares  diluted
    
    
    86,869
    
    
    
    85,890
    
    
    
    87,081
    
    
    
    73,797Net income (loss) per share  basic
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.47
    
    
    $
    (0.00
    )Net income (loss) per share  diluted
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.42
    
    
    $
    (0.00
    )
  Nine MonthsEndedSeptember 30,2004Unvested common stock subject to repurchase
    
    
    789Stock options
    
    
    10,113Total
    
    
    10,902
  9




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6. Balance Sheet Components
 September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Inventories:Raw materials
    
    $
    2,356
    
    
    $
    3,089Work in process
    
    
    3,906
    
    
    
    2,372Finished goods
    
    
    7,174
    
    
    
    8,465Total inventories
    
    $
    13,436
    
    
    $
    13,926Other assets:Restricted cash
    
    $
    6,811
    
    
    $
    Deposits
    
    
    305
    
    
    
    255Other
    
    
    472
    
    
    
    519Total other assets
    
    $
    7,588
    
    
    $
    774
  September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Accrued liabilities:Accrued payroll and related expenses
    
    $
    3,907
    
    
    $
    3,351Restructuring accrual
    
    
    254
    
    
    
    1,036Accrued legal fees
    
    
    616
    
    
    
    910Warranty accrual
    
    
    355
    
    
    
    351Bonus accrual
    
    
    1,606
    
    
    
    3,122Other accrued liabilities
    
    
    4,837
    
    
    
    4,648Total accrued liabilities
    
    $
    11,575
    
    
    $
    13,418
  2005
    
    
    2004Balance at January 1
    
    $
    351
    
    
    $
    271Provision for warranties issued during the period
    
    
    242
    
    
    
    200Cash and other settlements made during the period
    
    
    (238
    )
    
    
    (120
    )Balance at September 30
    
    $
    355
    
    
    $
    351
 7. Asset impairment and restructuring activities
  10




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2005
    
    
    2004Severance and
    
    
    Leased
    
    
    
    
    
    
    Severance and
    
    
    LeasedBenefits
    
    
    Facilities
    
    
    Total
    
    
    Benefits
    
    
    Facilities
    
    
    TotalBalance as of January 1
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036
    
    
    $
    37
    
    
    $
    1,838
    
    
    $
    1,875Cash payments
    
    
    
    
    
    
    (562
    )
    
    
    (562
    )
    
    
    (5
    )
    
    
    (569
    )
    
    
    (574
    )Adjustment related to
lease modification
    
    
    
    
    
    
    (220
    )
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    Balance as of September 30
    
    $
    32
    
    
    $
    222
    
    
    $
    254
    
    
    $
    32
    
    
    $
    1,269
    
    
    $
    1,301
  8. Debt Facilities
   9. Commitments and Contingencies
   11




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12




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##### Table of Contents



10. Customer and Geographic Information
  Three Months Ended September 30,



    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Taiwan
    
    $
    12,398
    
    
    $
    10,742
    
    
    $
    36,853
    
    
    $
    33,717Japan
    
    
    14,359
    
    
    
    10,096
    
    
    
    30,410
    
    
    
    25,468United States
    
    
    14,645
    
    
    
    14,278
    
    
    
    41,999
    
    
    
    35,577Hong Kong
    
    
    1,854
    
    
    
    1,633
    
    
    
    4,973
    
    
    
    4,413Korea
    
    
    5,942
    
    
    
    1,770
    
    
    
    14,159
    
    
    
    5,343Other
    
    
    6,804
    
    
    
    9,349
    
    
    
    22,649
    
    
    
    22,569Total revenue
    
    $
    56,002
    
    
    $
    47,868
    
    
    $
    151,043
    
    
    $
    127,087
  Three Months Ended September 30,


    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Consumer Electronics
    
    $
    34,127
    
    
    $
    26,987
    
    
    $
    82,162
    
    
    $
    60,519Storage
    
    
    9,707
    
    
    
    10,408
    
    
    
    32,744
    
    
    
    35,936Personal Computer
    
    
    12,168
    
    
    
    10,473
    
    
    
    36,137
    
    
    
    30,632Total revenue
    
    $
    56,002
    
    
    $
    47,868
    
    
    $
    151,043
    
    
    $
    127,087
 13




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##### Table of Contents



11. Provision for taxes
   14




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##### Table of Contents



12. Gain on investment security
    15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934 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, may, will 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.
 Overview
      16




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Commitments, Contingencies and Concentrations
   Critical Accounting Policies
  17




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Results of Operations
 REVENUE
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(dollars in thousands)Product revenue
    
    $
    50,443
    
    
    $
    41,474
    
    
    
    21.6
    %
    
    $
    138,574
    
    
    $
    110,350
    
    
    
    25.6
    %Development, licensing and
royalty revenue
    
    
    5,559
    
    
    
    6,394
    
    
    
    -13.1
    %
    
    
    12,469
    
    
    
    16,737
    
    
    
    -25.5
    %Total revenue
    
    $
    56,002
    
    
    $
    47,868
    
    
    
    17.0
    %
    
    $
    151,043
    
    
    $
    127,087
    
    
    
    18.9
    %
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(dollars in thousands)Consumer Electronics
    
    $
    34,127
    
    
    $
    26,987
    
    
    
    26.5
    %
    
    $
    82,162
    
    
    $
    60,519
    
    
    
    35.8
    %Storage
    
    
    9,706
    
    
    
    10,408
    
    
    
    -6.7
    %
    
    
    32,744
    
    
    
    35,936
    
    
    
    -8.9
    %Personal Computers
    
    
    12,169
    
    
    
    10,473
    
    
    
    16.2
    %
    
    
    36,137
    
    
    
    30,632
    
    
    
    18.0
    %Total revenue
    
    $
    56,002
    
    
    $
    47,868
    
    
    
    17.0
    %
    
    $
    151,043
    
    
    $
    127,087
    
    
    
    18.9
    %
  STOCK BASED COMPENSATION EXPENSE (BENEFIT)
  Three Months Ended September 30,


    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Options granted to employees
    
    $
    4
    
    
    $
    855
    
    
    $
    260
    
    
    $
    906Options granted to non-employees
    
    
    625
    
    
    
    1,454
    
    
    
    2,249
    
    
    
    4,220Option repricings
    
    
    (2,233
    )
    
    
    (1,047
    )
    
    
    (12,508
    )
    
    
    16,609Options assumed in connection with acquisitions
    
    
    157
    
    
    
    265
    
    
    
    526
    
    
    
    992Stock compensation expense (benefit)
    
    $
    (1,447
    )
    
    $
    1,527
    
    
    $
    (9,473
    )
    
    $
    22,727
  18




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COST OF REVENUE AND GROSS PROFIT
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(dollars in thousands)Cost of revenue (1)
    
    $
    20,868
    
    
    $
    18,204
    
    
    $
    2,664
    
    
    $
    57,360
    
    
    $
    50,414
    
    
    $
    6,946Product gross profit (excluding
licensing revenue)
    
    
    29,575
    
    
    
    23,270
    
    
    
    6,305
    
    
    
    81,214
    
    
    
    59,936
    
    
    
    21,278Product gross profit margin
    
    
    58.6
    %
    
    
    56.1
    %
    
    
    
    
    
    
    58.6
    %
    
    
    54.3
    %Total gross profit
    
    $
    35,134
    
    
    $
    29,664
    
    
    $
    5,470
    
    
    $
    93,683
    
    
    $
    76,673
    
    
    $
    17,010Total gross profit margin
    
    
    62.7
    %
    
    
    62.0
    %
    
    
    
    
    
    
    62.0
    %
    
    
    60.3
    %
  (1) Includes stock compensation
expense (benefit)
    
    $
    (252
    )
    
    $
    (110
    )
    
    
    
    
    
    $
    (1,408
    )
    
    $
    1,890
   OPERATING EXPENSES
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(dollars in thousands)Research and development (1)
    
    $
    12,309
    
    
    $
    12,180
    
    
    
    1.1
    %
    
    $
    32,334
    
    
    $
    45,223
    
    
    
    -28.5
    %Percentage of total revenue
    
    
    22.0
    %
    
    
    25.4
    %
    
    
    
    
    
    
    21.4
    %
    
    
    35.6
    %Selling, general and
administrative (2)
    
    $
    7,754
    
    
    $
    9,028
    
    
    
    -14.1
    %
    
    $
    20,580
    
    
    $
    31,009
    
    
    
    -33.6
    %Percentage of total revenue
    
    
    13.8
    %
    
    
    18.9
    %
    
    
    
    
    
    
    13.6
    %
    
    
    24.4
    %Amortization of intangible assets
    
    $
    274
    
    
    $
    357
    
    
    
    -23.2
    %
    
    $
    822
    
    
    $
    1,070
    
    
    
    -23.2
    %Interest income and other, net
    
    
    908
    
    
    
    211
    
    
    
    330.3
    %
    
    
    2,167
    
    
    
    399
    
    
    
    443.1
    %Gain (loss) on investment security
    
    
    
    
    
    
    (64
    )
    
    
    -100.0
    %
    
    
    1,263
    
    
    
    926
    
    
    
    36.4
    %
  (1) Includes stock compensation
expense (benefit)
    
    $
    (655
    )
    
    $
    595
    
    
    
    
    
    
    $
    (4,346
    )
    
    $
    11,584(2) Includes stock compensation
expense (benefit)
    
    
    (540
    )
    
    
    1,042
    
    
    
    
    
    
    
    (3,719
    )
    
    
    9,253
 19




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Research and Development.
 Selling, General and Administrative
 Amortization of Intangible Assets.
 Restructuring.
   20




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2005






    
    
    
    2004Severance and
    
    
    Leased
    
    
    
    
    
    
    Severance and
    
    
    LeasedBenefits
    
    
    Facilities
    
    
    Total
    
    
    Benefits
    
    
    Facilities
    
    
    TotalBalance as of January 1
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036
    
    
    $
    37
    
    
    $
    1,838
    
    
    $
    1,875Cash payments
    
    
    
    
    
    
    (562
    )
    
    
    (562
    )
    
    
    (5
    )
    
    
    (569
    )
    
    
    (574
    )Adjustment related to
lease negotiation
    
    
    
    
    
    
    (220
    )
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    Balance as of September 30
    
    $
    32
    
    
    $
    222
    
    
    $
    254
    
    
    $
    32
    
    
    $
    1,269
    
    
    $
    1,301
  Interest Income and other, net.
 Gain on investment security.
 Provision
for taxes.
  21




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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    Change(dollars in thousands)Total cash, cash equivalents and short term investments
    
    $
    134,118
    
    
    $
    78,710
    
    
    $
    55,408Cash provided by operating activities
    
    $
    37,247
    
    
    $
    27,948
    
    
    $
    9,254Cash provided by (used in) investing activities
    
    
    (41,979
    )
    
    
    (3,616
    )
    
    
    (38,318
    )Cash provided by financing activities
    
    
    10,111
    
    
    
    14,117
    
    
    
    (4,006
    )Net increase (decrease) in cash and cash
equivalents
    
    $
    5,379
    
    
    $
    38,449
    
    
    $
    (33,070
    )
 Cash and Investments
  Operating Activities
  Investing and Financing Activities
  22




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Debt and Lease Obligations
    Contractual obligations
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsDebt and
capital lease obligations
    
    $
    364
    
    
    $
    305
    
    
    $
    59
    
    
    $
    
    
    
    $
    Operating lease obligations (1)
    
    
    8,834
    
    
    
    2,190
    
    
    
    3,848
    
    
    
    2,796
    
    
    
    Inventory purchase obligations
    
    
    9,771
    
    
    
    9,771
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    18,969
    
    
    $
    12,266
    
    
    $
    3,907
    
    
    $
    2,796
    
    
    $
    
 
 (1)
    
    Future minimum lease payments under operating leases have not been reduced by expected
sublease rental income or by the amount of our restructuring accrual that relates to leased
facilities.  23




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Factors Affecting Future Results
  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.
  Our 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 digital-ready PCs and displays, consumer electronics 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;
 24




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##### Table of Contents




    
    the cost of components for our products and prices charged by the third parties who
manufacture, assemble and test our products;
    
    fluctuations in the price of our common stock, which drive a substantial portion of our
stock compensation expense; and
    
    the nature and extent of litigation activities, particularly relating to our patent
infringement suit against Genesis Microchip, and
    
    any subsequent legal proceedings related to the matters raised in that suit; and class
action lawsuits against us that were initiated in early 2005;
  Our future 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 PC, storage
and CE; which may involve additional research and development, marketing or other costs and
expenses;
    
    our ability to close licensing deals when expected and make timely deliverables and
milestones on which recognition of revenue often depends;
    
    our ability to engineer customer solutions that adhere to industry standards in a timely,
and cost-effective manner;
    
    our ability to achieve acceptable manufacturing yields and develop automated test
programs within a reasonable time frame for our new products;
    
    our ability to manage joint ventures and projects, design services, and our supply chain
partners;
    
    our ability to monitor the activities of our licensees to ensure compliance with license
restrictions and remittance of royalties;
    
    our ability to structure our organization to enable achievement of our operating
objectives and to meet the needs of our customers and markets;
    
    the success of the distribution and partner channels through which we choose to sell our products; and
    
    our ability to manage expenses and inventory levels.
  The licensing component of our business strategy increases business risk and volatility.
  25




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We face intense competition in our markets, which may lead to reduced revenue from sales of our
products and increased losses.
   Our success depends in part on demand for our new SteelVine products.
  Our success depends in part on the success of our new integrated HDMI DTV products
  26




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Demand for our consumer electronics products is dependent on the adoption and widespread use of the
HDMI specification.
      Our success depends in part on strategic relationships.
   27




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##### Table of Contents



We do not have long-term commitments from our customers and we allocate resources based on our
estimates of customer demand.
  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.
  
    
    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; or
    
    one or more significant customers selects 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;
 28




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
    
    monitor and manage the level of inventory of our products at each distributor;
    
    estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
    
    monitor the financial condition and credit-worthiness of our distributors, many of which
are located outside of the United States, and the majority of which are not publicly traded;
    
    Since we have limited ability to forecast inventory levels at our end customers, it is
possible that there may be significant build-up of inventories in the retail channel, with
the OEM or the OEMs contract manufacturer. Such a buildup could result in a slowdown in
orders, requests for returns from customers, or requests to move out planned shipments. This
could adversely impact our revenue and profits.
  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 DVI, HDCP, SATA I and SATA II, and HDMI;
    
    identification of customer needs where we can apply our innovation and skills to create
new standards or areas for product differentiation that improve our overall competitiveness
either in an existing market or in a new market;
    
    development of advanced technologies and capabilities, and new products that satisfy
customer requirements;
    
    competitors and customers integration of the functionality of our products into their
products, which puts pressure on us to continue to develop and introduce new products with
new functionality;
    
    timely completion and introduction of new product designs;
    
    management of product life cycles;
    
    use of leading-edge foundry processes and achievement of high manufacturing yields and low cost testing; and
    
    market acceptance of new products; and
    
    market acceptance of new architectures like SteelVine.
  29




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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;
    
    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.
  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;
    
    lack of guaranteed production capacity or product supply;
    
    lack of availability of, or delayed access to, next-generation or key process technologies; and
 30




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
    
    limitations on our ability to transition to alternate sources if services are unavailable from primary suppliers.
  31




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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.
  
    
    difficulties in managing from afar;
    
    political and economic instability, including international tension in Iraq, Korea and
the China Strait and lack of normal diplomatic relationships between the United States and
Taiwan;
    
    less developed infrastructures in newly industrializing
countries;
    
    susceptibility of foreign areas to terrorist attacks;
    
    susceptibility to interruptions of travel, including those due to international tensions
(including the war in and occupation of Iraq), medical issues such as the SARS and Avian Flu
epidemics (particularly affecting the Asian markets we serve), and the financial instability
and bankruptcy of major air carriers;
    
    bias against foreign, especially American, companies;
    
    difficulties in collecting accounts receivable;
    
    expense and difficulties in protecting our intellectual property in foreign jurisdictions;
    
    difficulties in complying with multiple, conflicting and changing laws and regulations,
including export requirements, tariffs, import duties, visa restrictions, environmental laws
and other barriers;
    
    exposure to possible litigation or claims in foreign jurisdictions; and
    
    competition from foreign-based suppliers and the existence of protectionist laws and
business practices that favor these suppliers, such as withholding taxes on payments made to
us.
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The success of our business depends upon our ability to adequately protect our intellectual
property.
  Our participation in the Digital Display Working Group requires us to license some of our
intellectual property for free, which may make it easier for others to compete with us in the DVI
PC market.
  
    
    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.
  Our participation as a founder in the working group developing HDMI requires us to license some of
our intellectual property, which may make it easier for others to compete with us in the market.
   
    
    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.
 33




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Our success depends on managing our relationship with Intel.
  
    
    Intel has been an investor of ours;
    
    Intel and we have been parties to business cooperation agreements;
    
    Intel and we are parties to a patent cross-license;
    
    Intel and we worked together to develop HDCP;
    
    an Intel subsidiary has the exclusive right to license HDCP, of which we are a licensee;
    
    Intel and we were two of the promoters of the Digital Display Working Group (DDWG);
    
    Intel is a promoter of the serial ATA 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 serial ATA by making
them 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 Fibre
Channel, Serial ATA, DVI, or HDMI into its own chips and chipsets, thereby displacing demand
for some of our products;
    
    Intel may design new technologies that would require us to re-design our products for
compatibility, thus increasing our R&D expense and reducing our revenue;
    
    Intels technology, including its 845G chipset, may lower barriers to entry for other
parties who may enter the market and compete with us; and
    
    Intel may enter into or continue relationships with our competitors that can put us at a
relative disadvantage.
  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.
  34




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We are 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.
   We are currently engaged in intellectual property litigation that is time-consuming and expensive
to prosecute. 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.
  35




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##### Table of Contents




    
    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.
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We have entered into, and may again be required to enter into, patent or other intellectual
property cross-licenses.
  We must attract and retain qualified personnel to be successful, and competition for qualified
personnel is increasing in our market.
    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 April 2004, Steve Tirado moved from the position of president and Chief Operating
Officer to division president of storage group, Jaime Garcia-Meza moved from the position of
vice president of worldwide sales to vice president of sales and marketing for storage
platforms, Rob Valiton was appointed as vice president of worldwide sales, and Chris Paisley
was appointed to the board of directors
    
    In August 2004, we announced that Robert C. Gargus planned to retire from the position of
chief financial officer and Dale Brown, the controller, was appointed as chief accounting
officer.
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
    
    In September 2004, Parviz Khodi, the vice president, PC/display products, passed away
unexpectedly and his duties were subsequently assumed by John LeMoncheck, the vice
president, CE products and Patrick Reutens was appointed as chief legal officer.
    
    In November 2004, David Lee resigned from the positions of chief executive officer and
president, Steve Laub was appointed as chief executive officer and president and to the
board of directors as well, and Andrew Rappaport and Douglas Spreng resigned from the board
of directors.
    
    In January 2005, Steve Laub 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 independent outside directors, David Courtney (Chairman of the
Audit Committee), Keith McAuliffe, Chris Paisley (Chairman of the Board) and Richard
Sanquini, resigned from our Board of Directors and Board committees.
    
    In April 2005, Darrel Slack, our 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 at our annual meeting of
stockholders, and accordingly, Dr. Lee resigned from our Board of Directors.
    
    In June 2005, Pricewaterhouse Coopers LLP, our independent accountant, resigned as our
auditor. In July 2005, we appointed Deloitte & Touche LLP as our new independent auditor.
    
    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, Ahmad Ghaemmaghami was appointed as interim executive vice president of operations.
    
    In October 2005, John LeMoncheck, vice president, consumer electronics and PC/display, left the company.
    
    In October 2005, John Shin was appointed as interim vice president, consumer electronics and PC/display.
    
    In November 2005, Robert Freemans position changed from interim chief financial officer to chief financial officer.
  Industry cycles may strain our management and resources.
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
    
    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.
  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.
 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;
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
    
    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 comparable companies in our markets;
    
    changes in market valuations or expectations of future financial performance of our vendors or customers;
    
    changes in our key executives and technical personnel; and
    
    announcements by us or our competitors of significant technical innovations, design wins,
contracts, standards or acquisitions.
  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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
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Foreign Currency Exchange Risk
  
 Item 4. Controls and Procedures
 Evaluation of Controls and Procedures.
 Changes in Internal Controls
         
 Part II. Other Information
 
 Item 1. Legal Proceedings
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Item 2. Changes in 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
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Item 6. Exhibits
 (a) Exhibits10.01
    
    Silicon Image, Inc. Bonus Plan for Fiscal Year 2005 (as amended) (incorporated by
reference to Exhibit 10.01 to our Current Report on Form 8-K (File No. 000-26887) filed
July 25, 2005)10.02
    
    Employment Offer Letter between Robert Freeman and the Registrant dated August 18, 2005.10.03
    
    1999 Equity Incentive Plan, as amended through April 5, 2005.31.01
    
    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 2002.32.02
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
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Signatures
  Dated: November 9, 2005
    
    Silicon Image, Inc./s/ Robert R FreemanRobert R FreemanChief Financial Officer (Principal Financial Officer)
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Exhibit Index
 10.01
    
    Silicon Image, Inc. Bonus Plan for Fiscal Year 2005 (as amended) (incorporated by
reference to Exhibit 10.01 to our Current Report on Form 8-K (File No. 000-26887) filed
July 25, 2005)10.02
    
    Employment Offer Letter between Robert Freeman and the Registrant dated August 18, 2005.10.03
    
    1999 Equity Incentive Plan, as amended through April 5, 2005.31.01
    
    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 2002.32.02
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
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