##### Table of Contents



UNITED
STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 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
    
    77-0396307(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1060 East Arques Avenue
Sunnyvale, California 94085
 (408) 616-4000
 þ o þ o
 þ o




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##### Table of Contents



Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three and Six Months Ended
June 30, 2005
 Table of Contents
 Part I
    
    Financial Information (Unaudited)Item 1
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    3Condensed Consolidated Statements of Operations for the   three and six months ended June 30, 2005 and 2004
    
    4Condensed Consolidated Statements of Cash Flows for the six months  ended June 30, 2005 and 2004
    
    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
    
    39Item 4
    
    Controls and Procedures
    
    40Part II
    
    Other Information
    
    41Item 1
    
    Legal Proceedings
    
    41Item 2
    
    Change in 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 and Reports on Form 8-K
    
    43Signatures
    
    
    
    44CertificationsEXHIBIT 10.01EXHIBIT 10.02EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02
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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Silicon Image, Inc.
 
 Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 June 30,
    
    December 31,2005
    
    2004AssetsCurrent Assets:Cash and cash equivalents
    
    $
    17,980
    
    
    $
    23,280Short-term investments
    
    
    98,858
    
    
    
    70,240Accounts receivable, net of allowances for doubtful
accounts of $806 at June 30 and $745 at December 31
    
    
    25,227
    
    
    
    19,417Inventories
    
    
    12,854
    
    
    
    13,926Prepaid expenses and other current assets
    
    
    3,531
    
    
    
    3,073Total current assets
    
    
    158,450
    
    
    
    129,936Property and equipment, net
    
    
    8,584
    
    
    
    9,494Goodwill
    
    
    13,021
    
    
    
    13,021Intangible assets, net
    
    
    1,135
    
    
    
    1,683Other assets
    
    
    779
    
    
    
    774Total assets
    
    $
    181,969
    
    
    $
    154,908Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    12,686
    
    
    $
    6,833Accrued liabilities
    
    
    11,807
    
    
    
    13,418Deferred license revenue
    
    
    3,413
    
    
    
    2,127Debt obligations and capital leases
    
    
    418
    
    
    
    489Deferred margin on sales to distributors
    
    
    9,985
    
    
    
    9,962Total current liabilities
    
    
    38,309
    
    
    
    32,829Commitments and contingencies (Note 9)Stockholders Equity:Common stock, par value $0.001; shares authorized:150,000,000  June 30 and December 31;
shares issued and outstanding: 79,498,572  June 30
and 78,131,604  December 31
    
    
    80
    
    
    
    78Additional paid-in capital
    
    
    296,949
    
    
    
    299,744Unearned stock compensation
    
    
    (7,228
    )
    
    
    (7,632
    )Accumulated deficit
    
    
    (145,884
    )
    
    
    (172,978
    )Accumulated other comprehensive income (loss)
    
    
    (257
    )
    
    
    2,867Total stockholders equity
    
    
    143,660
    
    
    
    122,079Total liabilities and stockholders equity
    
    $
    181,969
    
    
    $
    154,908
  3




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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Product
    
    $
    47,323
    
    
    $
    36,826
    
    
    $
    88,131
    
    
    $
    68,876Development, licensing and royalties
    
    
    3,398
    
    
    
    6,535
    
    
    
    6,910
    
    
    
    10,343Total revenue
    
    
    50,721
    
    
    
    43,361
    
    
    
    95,041
    
    
    
    79,219Cost and operating expenses:Cost of revenue (1)
    
    
    20,987
    
    
    
    17,695
    
    
    
    36,492
    
    
    
    32,210Research and development (2)
    
    
    11,903
    
    
    
    16,245
    
    
    
    20,025
    
    
    
    33,043Selling, general and administrative (3)
    
    
    8,801
    
    
    
    10,067
    
    
    
    12,705
    
    
    
    21,718Amortization of intangible assets
    
    
    274
    
    
    
    357
    
    
    
    548
    
    
    
    713Patent assertion costs
    
    
    72
    
    
    
    98
    
    
    
    121
    
    
    
    263Total cost and operating expenses
    
    
    42,037
    
    
    
    44,462
    
    
    
    69,891
    
    
    
    87,947Income (loss) from operations
    
    
    8,684
    
    
    
    (1,101
    )
    
    
    25,150
    
    
    
    (8,728
    )Interest income and other, net
    
    
    641
    
    
    
    104
    
    
    
    1,259
    
    
    
    188Gain on investment security
    
    
    1,382
    
    
    
    990
    
    
    
    1,263
    
    
    
    990Income (loss) before provision for income taxes
    
    
    10,707
    
    
    
    (7
    )
    
    
    27,672
    
    
    
    (7,550
    )Provision for taxes
    
    
    247
    
    
    
    255
    
    
    
    578
    
    
    
    572Net income (loss)
    
    $
    10,460
    
    
    $
    (262
    )
    
    $
    27,094
    
    
    $
    (8,122
    )Net income (loss) per share:Net income (loss) per share  basic
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.34
    
    
    $
    (0.11
    )Net income (loss) per share  diluted
    
    $
    0.12
    
    
    $
    (0.00
    )
    
    $
    0.31
    
    
    $
    (0.11
    )Weighted average shares  basic
    
    
    78,981
    
    
    
    73,352
    
    
    
    78,722
    
    
    
    72,934Weighted average shares  diluted
    
    
    86,817
    
    
    
    73,352
    
    
    
    87,157
    
    
    
    72,934(1) Includes stock compensation expense (benefit)
    
    $
    41
    
    
    $
    849
    
    
    $
    (1,156
    )
    
    $
    2,000(2) Includes stock compensation expense (benefit)
    
    
    747
    
    
    
    4,776
    
    
    
    (3,691
    )
    
    
    10,989(3) Includes stock compensation expense (benefit)
    
    
    514
    
    
    
    3,507
    
    
    
    (3,178
    )
    
    
    8,211
  4




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Silicon Image, Inc.
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Six Months Ended June 30,2005
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    27,094
    
    
    $
    (8,122
    )Adjustments to reconcile net loss to cash provided by operating activities:Depreciation
    
    
    3,153
    
    
    
    2,329Amortization of intangible assets
    
    
    548
    
    
    
    713Provision for doubtful accounts receivable
    
    
    61
    
    
    
    52Stock compensation expense (benefit)
    
    
    (8,025
    )
    
    
    21,200Gain on investment security
    
    
    (1,263
    )
    
    
    (990
    )Changes in assets and liabilities:Accounts receivable
    
    
    (5,871
    )
    
    
    (7,481
    )Inventories
    
    
    1,072
    
    
    
    375Prepaid expenses and other assets
    
    
    (463
    )
    
    
    649Accounts payable
    
    
    5,853
    
    
    
    2,832Accrued liabilities and deferred license revenue
    
    
    (325
    )
    
    
    3,265Deferred margin on sales to distributors
    
    
    23
    
    
    
    4,464Cash provided by operating activities
    
    
    21,857
    
    
    
    19,286Cash flows from investing activities:Proceeds from sales and maturities of short-term investments
    
    
    32,930
    
    
    
    13,281Purchases of short-term investments
    
    
    (63,454
    )
    
    
    (19,625
    )Net purchases of property and equipment
    
    
    (2,243
    )
    
    
    (2,975
    )Cash used in investing activities
    
    
    (32,767
    )
    
    
    (9,319
    )Cash flows from financing activities:Proceeds from issuances of common stock, net
    
    
    5,681
    
    
    
    8,461Repayments of capital lease and debt obligations
    
    
    (71
    )
    
    
    (869
    )Cash provided by financing activities
    
    
    5,610
    
    
    
    7,592Net increase (decrease) in cash and cash equivalents
    
    
    (5,300
    )
    
    
    17,559Cash and cash equivalents  beginning of period
    
    
    23,280
    
    
    
    24,059Cash and cash equivalents  end of period
    
    $
    17,980
    
    
    $
    41,618Supplemental cash flow information:Cash payment for income taxes
    
    $
    296
    
    
    $
    262Supplemental non-cash investing and financing activities:Unrealized gain on investment security, net of tax
    
    $
    
    
    
    $
    3,943
  5




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




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3. Stock-Based Compensation
   Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss)  as reported
    
    $
    10,460
    
    
    $
    (262
    )
    
    $
    27,094
    
    
    $
    (8,122
    )Stock-based employee compensation expense (benefit)
included in the determination of net income (loss)
as reported
    
    
    560
    
    
    
    6,893
    
    
    
    (9,705
    )
    
    
    16,179Stock-based employee compensation expense
determined using fair value method
    
    
    (6,175
    )
    
    
    (5,233
    )
    
    
    (12,765
    )
    
    
    (10,370
    )Pro forma net income (loss)
    
    $
    4,845
    
    
    $
    1,398
    
    
    $
    4,624
    
    
    $
    (2,313
    )Net income (loss) per share  basic (as reported)
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.34
    
    
    $
    (0.11
    )Net income (loss) per share  diluted (as reported)
    
    
    0.12
    
    
    
    (0.00
    )
    
    
    0.31
    
    
    
    (0.11
    )Pro forma net income (loss) per share  basic
    
    
    0.06
    
    
    
    0.02
    
    
    
    0.06
    
    
    
    (0.03
    )Pro forma net income (loss) per share  diluted
    
    
    0.06
    
    
    
    0.02
    
    
    
    0.05
    
    
    
    (0.03
    )
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Expected life (years)
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    5Interest rate
    
    
    3.7
    %
    
    
    3.0
    %
    
    
    4.1
    %
    
    
    3.0
    %Volatility
    
    
    90
    %
    
    
    90
    %
    
    
    90
    %
    
    
    90
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value
    
    $
    7.51
    
    
    $
    8.37
    
    
    $
    9.36
    
    
    $
    7.39
 7




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Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Expected life (years)
    
    
    1.9
    
    
    
    1.5
    
    
    
    1.7
    
    
    
    1.5Interest rate
    
    
    3.8
    %
    
    
    1.2
    %
    
    
    3.8
    %
    
    
    1.2
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Volatility
    
    
    77
    %
    
    
    73
    %
    
    
    77
    %
    
    
    73
    %Weighted average grant date fair value
    
    $
    5.26
    
    
    $
    2.88
    
    
    $
    4.47
    
    
    $
    2.69
   Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Options granted to employees
    
    $
    12
    
    
    $
    20
    
    
    $
    31
    
    
    $
    51Options granted to non-employees
    
    
    685
    
    
    
    1,263
    
    
    
    1,624
    
    
    
    2,766Option repricings
    
    
    415
    
    
    
    7,535
    
    
    
    (10,220
    )
    
    
    17,656Options assumed in connection with
acquisitions
    
    
    190
    
    
    
    314
    
    
    
    540
    
    
    
    727Stock compensation expense (benefit)
    
    $
    1,302
    
    
    $
    9,132
    
    
    $
    (8,025
    )
    
    $
    21,200
  4. Comprehensive income (loss)
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss)
    
    $
    10,460
    
    
    $
    (262
    )
    
    $
    27,094
    
    
    $
    (8,122
    )Change in unrealized value on investments, net
    
    
    (1,317
    )
    
    
    3,943
    
    
    
    (3,124
    )
    
    
    3,943Total comprehensive income
    
    $
    9,143
    
    
    $
    3,681
    
    
    $
    23,970
    
    
    $
    (4,179
    )
  8




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5. Net Income (Loss) Per Share
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss)
    
    $
    10,460
    
    
    $
    (262
    )
    
    $
    27,094
    
    
    $
    (8,122
    )Weighted average shares
    
    
    79,214
    
    
    
    74,101
    
    
    
    78,955
    
    
    
    73,683Unvested common shares subject to repurchase
    
    
    (233
    )
    
    
    (749
    )
    
    
    (233
    )
    
    
    (749
    )Weighted average shares  basic
    
    
    78,981
    
    
    
    73,352
    
    
    
    78,722
    
    
    
    72,934Weighted average shares  diluted
    
    
    86,817
    
    
    
    73,352
    
    
    
    87,157
    
    
    
    72,934Net income (loss) per share  basic
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.34
    
    
    $
    (0.11
    )Net income (loss) per share  diluted
    
    $
    0.12
    
    
    $
    (0.00
    )
    
    $
    0.31
    
    
    $
    (0.11
    )
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2004
    
    June 30, 2004Unvested common stock subject to repurchase
    
    
    749
    
    
    
    749Stock options
    
    
    10,773
    
    
    
    10,284Total
    
    
    11,522
    
    
    
    11,033
  9




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6. Balance Sheet Components
 June 30,
    
    December 31,2005
    
    2004(in thousands)Inventories:Raw materials
    
    $
    2,559
    
    
    $
    3,089Work in process
    
    
    2,864
    
    
    
    2,372Finished goods
    
    
    7,431
    
    
    
    8,465Total inventories
    
    $
    12,854
    
    
    $
    13,926Accrued liabilities:Accrued payroll and
related
expenses
    
    $
    5,595
    
    
    $
    3,351Restructuring
accrual
    
    
    655
    
    
    
    1,036Accrued legal
fees
    
    
    1,033
    
    
    
    910Warranty accrual
    
    
    353
    
    
    
    351Bonus accrual
    
    
    915
    
    
    
    3,122Other accrued liabilities
    
    
    3,256
    
    
    
    4,648Total accrued
liabilities
    
    $
    11,807
    
    
    $
    13,418
  2005
    
    2004Balance at January 1
    
    $
    351
    
    
    $
    271Provision for warranties issued during the period
    
    
    115
    
    
    
    200Cash and other settlements made during the period
    
    
    (113
    )
    
    
    (120
    )Balance at June 30
    
    $
    353
    
    
    $
    351
 7. Asset impairment and restructuring activities
    2005
    
    2004Severance
    
    
    
    
    
    
    
    
    
    Severanceand
    
    Leased
    
    
    
    
    
    and
    
    LeasedBenefits
    
    Facilities
    
    Total
    
    Benefits
    
    Facilities
    
    TotalBalance as of January 1
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036
    
    
    $
    37
    
    
    $
    1,838
    
    
    $
    1,875Cash payments
    
    
    
    
    
    
    (381
    )
    
    
    (381
    )
    
    
    (5
    )
    
    
    (453
    )
    
    
    (458
    )Balance as of June 30
    
    $
    32
    
    
    $
    623
    
    
    $
    655
    
    
    $
    32
    
    
    $
    1,385
    
    
    $
    1,417
 10




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8. Debt Facilities
    11




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9. Commitments and Contingencies
     12




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10. Customer and Geographic Information
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Taiwan
    
    $
    13,087
    
    
    $
    13,518
    
    
    $
    24,455
    
    
    $
    22,975Japan
    
    
    8,510
    
    
    
    7,832
    
    
    
    16,051
    
    
    
    15,372United States
    
    
    15,197
    
    
    
    11,730
    
    
    
    27,355
    
    
    
    21,299Hong Kong
    
    
    1,901
    
    
    
    1,291
    
    
    
    3,119
    
    
    
    2,780Korea
    
    
    3,521
    
    
    
    1,843
    
    
    
    8,215
    
    
    
    3,573Other
    
    
    8,505
    
    
    
    7,147
    
    
    
    15,846
    
    
    
    13,220Total revenue
    
    $
    50,721
    
    
    $
    43,361
    
    
    $
    95,041
    
    
    $
    79,219
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Consumer Electronics
    
    $
    26,802
    
    
    $
    21,272
    
    
    $
    48,034
    
    
    $
    33,554Storage
    
    
    11,055
    
    
    
    11,609
    
    
    
    23,037
    
    
    
    25,505Personal Computer
    
    
    12,864
    
    
    
    10,480
    
    
    
    23,970
    
    
    
    20,160Total revenue
    
    $
    50,721
    
    
    $
    43,361
    
    
    $
    95,041
    
    
    $
    79,219
    13




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11. Provision for taxes
  12. Gain on investment security
    14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This report contains forward-looking statements within the meaning of Section 21E of the
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
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##### Table of Contents



Commitments, Contingencies and Concentrations
    Critical Accounting Policies
  17




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Results of Operations for the Three and Six Months Ended June 30, 2005 Compared to Results of
Operations for the Three and Six Months Ended June 30, 2004
 REVENUE
 Three months ended June 30,
    
    
    
    
    
    Six months ended June 30,2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(dollars in thousands)Product revenue
    
    $
    47,323
    
    
    $
    36,826
    
    
    
    28.5
    %
    
    $
    88,131
    
    
    $
    68,876
    
    
    
    28.0
    %Development,
licensing and
royalty revenue
    
    
    3,398
    
    
    
    6,535
    
    
    
    (48.0
    %)
    
    
    6,910
    
    
    
    10,343
    
    
    
    (33.2
    %)Total revenue
    
    $
    50,721
    
    
    $
    43,361
    
    
    
    17.0
    %
    
    $
    95,041
    
    
    $
    79,219
    
    
    
    20.0
    %
 Three months ended June 30,
    
    
    
    
    
    Six months ended June 30,2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(dollars in thousands)Consumer Electronics
    
    $
    26,802
    
    
    $
    21,272
    
    
    
    26.0
    %
    
    $
    48,034
    
    
    $
    33,554
    
    
    
    43.2
    %Storage
    
    
    11,055
    
    
    
    11,609
    
    
    
    (4.8
    %)
    
    
    23,037
    
    
    
    25,505
    
    
    
    (9.7
    %)Personal Computers
    
    
    12,864
    
    
    
    10,480
    
    
    
    22.7
    %
    
    
    23,970
    
    
    
    20,160
    
    
    
    18.9
    %Total revenue
    
    $
    50,721
    
    
    $
    43,361
    
    
    
    17.0
    %
    
    $
    95,041
    
    
    $
    79,219
    
    
    
    20.0
    %
  18




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COST OF REVENUE AND GROSS PROFIT
 Three months ended
    
    
    
    
    
    Six months endedJune 30,
    
    
    
    
    
    June 30,2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(dollars in thousands)Cost of revenue (1)
    
    $
    20,987
    
    
    $
    17,695
    
    
    $
    3,292
    
    
    $
    36,492
    
    
    $
    32,210
    
    
    $
    4,282Product gross profit (excluding licensing revenue)
    
    
    26,336
    
    
    
    19,131
    
    
    
    7,205
    
    
    
    51,639
    
    
    
    36,666
    
    
    
    14,973Product gross profit margin
    
    
    55.7
    %
    
    
    51.9
    %
    
    3.8 pts
    
    
    58.6
    %
    
    
    53.2
    %
    
    5.4 ptsTotal gross profit
    
    
    29,734
    
    
    
    25,666
    
    
    
    4,068
    
    
    
    58,549
    
    
    
    47,009
    
    
    
    11,540Total gross profit margin
    
    
    58.6
    %
    
    
    59.2
    %
    
    (0.6) pts
    
    
    61.6
    %
    
    
    59.3
    %
    
    2.3 pts(1) Includes stock compensation expense (benefit)
    
    $
    41
    
    
    $
    849
    
    
    
    
    
    
    $
    (1,156
    )
    
    $
    2,000
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OPERATING EXPENSES
 Six months ended JuneThree months ended June 30,
    
    
    
    
    
    30,2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(dollars in thousands)Research and development (1)
    
    $
    11,903
    
    
    $
    16,245
    
    
    
    (26.7
    %)
    
    $
    20,025
    
    
    $
    33,043
    
    
    
    (39.4
    %)Percentage of total revenue
    
    
    23.5
    %
    
    
    37.5
    %
    
    (14.0)pts
    
    
    21.1
    %
    
    
    41.7
    %
    
    (20.6) ptsSelling, general and administrative (2)
    
    $
    8,801
    
    
    $
    10,067
    
    
    
    (12.6
    %)
    
    $
    12,705
    
    
    $
    21,718
    
    
    
    (41.5
    %)Percentage of total revenue
    
    
    17.4
    %
    
    
    23.2
    %
    
    (5.8) pts
    
    
    13.4
    %
    
    
    27.4
    %
    
    (14.0) ptsAmortization of intangible assets
    
    $
    274
    
    
    $
    357
    
    
    
    (23.2
    %)
    
    $
    548
    
    
    $
    713
    
    
    
    (23.1
    %)Patent
assertion costs
    
    
    72
    
    
    
    98
    
    
    
    (26.5
    %)
    
    
    121
    
    
    
    263
    
    
    
    (54.0
    %)Interest income and other, net
    
    
    641
    
    
    
    104
    
    
    
    516.3
    %

    
    
    1,259
    
    
    
    188
    
    
    
    569.7
    %Gain on
investment security
    
    
    1,382
    
    
    
    990
    
    
    
    39.6
    %
    
    
    1,263
    
    
    
    990
    
    
    
    27.6
    %
 (1) Includes stock compensation expense
(benefit)
    
    $
    747
    
    
    $
    4,776
    
    
    
    
    
    
    $
    (3,691
    )
    
    $
    10,989(2) Includes stock compensation expense
(benefit)
    
    
    514
    
    
    
    3,507
    
    
    
    
    
    
    
    (3,178
    )
    
    
    8,211
 Research and Development.
 Selling, General and Administrative
 Amortization of Intangible Assets.
 Restructuring.
  20




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2005
    
    2004Severance
    
    
    
    
    
    
    
    
    
    Severanceand
    
    Leased
    
    
    
    
    
    and
    
    LeasedBenefits
    
    Facilities
    
    Total
    
    Benefits
    
    Facilities
    
    TotalBalance as of January 1
    
    $
    32
    
    
    $
    1,004
    
    
    $
    1,036
    
    
    $
    37
    
    
    $
    1,838
    
    
    $
    1,875Cash payments
    
    
    
    
    
    
    (381
    )
    
    
    (381
    )
    
    
    (5
    )
    
    
    (453
    )
    
    
    (458
    )Balance as of June 30
    
    $
    32
    
    
    $
    623
    
    
    $
    655
    
    
    $
    32
    
    
    $
    1,385
    
    
    $
    1,417
 Patent assertion costs.
 Interest Income and other, net.
 Gain on investment security.
 Provision for Taxes.
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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 June 30,
    
    December 31,2005
    
    2004
    
    Change(dollars in thousands)Cash and cash equivalents
    
    $
    17,980
    
    
    $
    23,280
    
    
    $
    (5,300
    )Short term investments
    
    
    98,858
    
    
    
    70,240
    
    
    
    28,618Total cash, cash equivalents and short term investments.
    
    $
    116,838
    
    
    $
    93,520
    
    
    $
    23,318Total current assets
    
    $
    158,450
    
    
    $
    129,936
    
    
    $
    28,514Total current liabilities
    
    
    38,309
    
    
    
    32,829
    
    
    
    5,480Working capital
    
    $
    120,141
    
    
    $
    97,107
    
    
    $
    23,034
 Six months ended June 30,2005
    
    2004
    
    Change(dollars in thousands)Cash provided by (used in) operating activities
    
    $
    21,857
    
    
    $
    19,286
    
    
    $
    2,571Cash provided by (used in) investing activities
    
    
    (32,767
    )
    
    
    (9,319
    )
    
    
    (23,448
    )Cash provided by financing activities
    
    
    5,610
    
    
    
    7,592
    
    
    
    (1,982
    )Net increase (decrease) in cash and cash equivalents
    
    $
    (5,300
    )
    
    $
    17,559
    
    
    $
    (22,859
    )
  Working Capital
     Operating Activities
  Investing and Financing Activities
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Debt and Lease Obligations
     Payments due inContractual obligations
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsDebt obligations
    
    $
    337
    
    
    $
    220
    
    
    $
    117
    
    
    $
    
    
    
    $
    Operating lease obligations (1)
    
    
    8,179
    
    
    
    2,305
    
    
    
    2,807
    
    
    
    2,942
    
    
    
    125Inventory purchase obligations
    
    
    8,808
    
    
    
    8,808
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    17,324
    
    
    $
    11,333
    
    
    $
    2,924
    
    
    $
    2,942
    
    
    $
    125
 
 (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 become profitable.
  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 lumpy over time, and is expected to continue
to be lumpy 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;
    
    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
non-cash stock compensation expense; and
    
    the nature and extent of litigation activities, particularly relating to our patent
infringement suit against Genesis Microchip, and
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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.
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We face intense competition in our markets, which may lead to reduce 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.
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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;
    
    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;
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
    
    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.
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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
    
    our ability to transition to alternate sources if services are unavailable from primary suppliers.
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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.
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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.
  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.
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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.
   34




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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.
  35




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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.
    
    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.
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
    
    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, PricewaterhouseCoopers LLP, our independent accountant, resigned as our
auditor. In July 2005, we appointed Deloitte & Touche LLP as our new independent auditor.
  We face potential delisting from Nasdaq, as a result of the resignation of independent outside
directors.
  Industry cycles may strain our management and resources.
  
    
    improve operational and financial systems;
    
    train and manage our employee base;
    
    successfully integrate operations and employees of businesses we acquire or have acquired;
    
    attract, develop, motivate and retain qualified personnel with relevant experience; and
    
    adjust spending levels according to prevailing market conditions.
  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.
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
    
    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;
    
    providing for a classified board of directors with staggered, three-year terms;
    
    requiring advance notice of stockholder nominations for the board of directors;
    
    providing the board of directors the opportunity to expand the number of directors without notice to stockholders;
    
    prohibiting cumulative voting in the election of directors;
    
    requiring super-majority voting to amend some provisions of our certificate of incorporation and bylaws;
    
    limiting the persons who may call special meetings of stockholders; and
    
    prohibiting stockholder actions by written consent.
 Provisions of Delaware law also may discourage, delay or prevent someone from acquiring or
merging with us.
 The price of our stock fluctuates substantially and may continue to do so.
  38




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##### Table of Contents




    
    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.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Foreign Currency Exchange Risk
  39




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Controls and Procedures.
 Changes in Internal Controls
    40




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
    41




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##### Table of Contents



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
    Shares
    
    Shares
    
    Shares
    
    Shares
    
    BrokerName
    
    For
    
    Against
    
    Abstaining
    
    Withheld
    
    Non-VotesSteve Tirado
    
    
    50,796,627
    
    
    
    
    
    
    
    
    
    
    
    20,359,357
    
    
    
    
 
 Item 5. Other Information
  42




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##### Table of Contents



Item 6. Exhibits
  10.01*
    
    Business Cooperation Agreement dated April 26, 2005 between Intel Corporation and the Registrant.10.02*
    
    Unified Display Interface Specification Promoters Agreement
dated April 26, 2005 among Intel Corporation, National Semiconductor Corporation and the Registrant.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.
 
  43




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##### Table of Contents



Signatures
  Dated:  August 9, 2005
    Silicon Image, Inc./s/ Darrel SlackDarrel SlackChief Financial Officer
(Principal Financial Officer) 44




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##### Table of Contents



Exhibit Index
 10.01*
    
    Business Cooperation Agreement dated April 26, 2005 between Intel Corporation and the Registrant.10.02*
    
    Unified Display Interface Specification Promoters Agreement
dated April 26, 2005 among Intel Corporation, National Semiconductor Corporation and the Registrant.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.