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UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
  ANNUAL
    REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
   For the fiscal year ended
    December 31, 2006
    Commission file number
    000-26887
      Silicon Image, Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

77-0396307(State of
    incorporation)

(IRS employer identification
    number)   1060 East
    Arques Avenue
    Sunnyvale, CA 94085 (Address
    of principal executive offices and zip code)
  Registrants
    telephone number, including area code(408) 616-4000
  Securities
    registered pursuant to section 12(g) of the Act:
    Common Stock, $0.001 par value per share
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K o
  Rule 12b-2
  þ o o
  Rule 12b-2 o þ
      Form 10-K.




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TABLE OF
    CONTENTS
  PagePART IItem 1


Business


3Item 1A


Risk
    Factors


20Item 1B


Unresolved Staff
    Comments


38Item 2


Properties


38Item 3


Legal
    Proceedings


38Item 4


Submission of
    Matters to a Vote of Securities Holders


40PART IIItem 5


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


41Item 6


Selected Financial
    Data


42Item 7


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


43Item 7A


Quantitative and
    Qualitative Disclosures About Market Risk


56Item 8


Financial
    Statements and Supplementary Data


57Item 9


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


57Item 9A


Controls and
    Procedures


57Item 9B


Other
    Information


61PART IIIItem 10


Directors,
    Executive Officers and Corporate Governance


61Item 11


Executive
    Compensation


61Item 12


Security Ownership
    of Certain Beneficial Owners and Management and
    Related Stockholder Matters


61Item 13


Certain
    Relationships and Related Transactions, and Director
    Independence


61Item 14


Principal
    Accountant Fees and Services


61PART IVItem 15


Exhibits and
    Financial Statement Schedules


62Signatures


94Index to
    Exhibits Filed Together with this Annual Report


95EXHIBIT 10.04EXHIBIT 10.19EXHIBIT 10.20EXHIBIT 10.23EXHIBIT 10.29EXHIBIT 10.30EXHIBIT 10.31EXHIBIT 10.32EXHIBIT 10.34EXHIBIT 10.35EXHIBIT 21.01EXHIBIT 23.01EXHIBIT 23.02EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01EXHIBIT 32.02   2




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This Annual Report on
    Form 10-K
    contains forward-looking statements within the meaning of
    Section 21E of the Securities 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
    Annual Report on
    Form 10-K
    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 Annual Report on
    Form 10-K
    are identified by words such as believes,
    anticipates, expects,
    intends, may, will,
    can, should, could,
    estimate, based on, intended,
    would, projected, forecasted
    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 updates or revisions to
    these forward-looking statements that may be made to reflect
    events or circumstances occurring subsequent to the filing of
    this
    Form 10-K
    with the Securities and Exchange Commission (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 us 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.
 PART I  Item 1.
    Business        tm
      tm
 3




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Standards
    Innovation
    New
    Initiatives
    system-on-a-chip
      Future
    Technology Directions
    Business
    Development Background
       4




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®
  (A/V) receivers,
      time-to-market
    first-to-market time-to-market
     5




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add-in-card
  tm
  tm HD-verified,
    Markets
    and Customers
     6




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Products
    Consumer
    Electronics
  point-to-point
  TM
  VastLane HDMI Transmitters. A/V
  VastLane HDMI Receivers.
 7




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HDMI


Maximum

Maximum

MaximumProduct

Type

Ports


Resolution

Color Depth

Bandwidth

Target ApplicationsSiI9011

VastLane HDMI Receiver


1


1080p

24 bits/pixel

5 Gbps

LCD TVs, plasma TVs, projection TVsSiI9023

VastLane HDMI Receiver


2


1080p

24 bits/pixel

5 Gbps

LCD TVs, plasma TVs, projection TVsSiI9133

VastLane HDMI Receiver


2


1080p

36 bits/pixel

6.75 Gbps

DVD players, STBsSiI9993

VastLane HDMI Receiver


1


720p/1080i

24 bits/pixel

2.58 Gbps

LCD TVs, plasma TVs, projection TVsSiI9030

VastLane HDMI Transmitter


1


1080p

24 bits/pixel

5 Gbps

DVD players/recorders, STBsSiI9132

VastLane HDMI Transmitter


1


1080p

36 bits/pixel

6.75 Gbps

game consolesSiI9134

VastLane HDMI Transmitter


1


1080p

36 bits/pixel

6.75 Gbps

DVD players/recorders, STBs   PCs and
    Displays
         8




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Product

Type

Target Applications

Other FeaturesSiI164

VastLane DVI Transmitter

Desktop PCs (motherboards, add-in
    boards) Notebook PCs

 I2C
    interface
     3.3V or 1.0-1.8V interface
     De-skewing optionSiI1162

VastLane DVI Transmitter

PC motherboards, graphic boards,
    notebook PCs

 I2C interface
     3.0-3.6V or 1.0-1.9V interface
     De-skewing option  BIOS and driver
    compatible with SiI 164SiI1169

VastLane DVI Receiver

LCD monitors, video and multimedia
    projectors, plasma displays

 3.3V interface
     HDCP
     Dual-link sync
     12C interface
     Programmable Equalization for long cable support
     Pin compatible with SiI161B, SiI1161, SiI169 and
    SiI163BSiI1362

VastLane DVI Transmitter

Desktop PC motherboards and
    add-inboards, notebook PCs

VGA-UXGA Transmitter, 48 PinSiI1362A

VastLane DVI Transmitter

PC motherboards, notebook PCs

 I2C interface
     Supports Intel SDVO technology  Cable
    distance support greater than 10 metersSiI1390/2

VastLane DVI Transmitter

Notebook and Desktop PCs
    (motherboards, add-in boards)

 SDVO
    interface HDMI 1.2 output HDCPSiI1930/2

VastLane DVI Transmitter

Notebook and Desktop PCs
    (motherboards, add-in boards)

 TMDS interface
     HDMI 1.2 output  HDCP   Storage
    (e-SATA)
      tm
 9




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SteelVine Storage Controllers
  SteelVine Bridges
  SteelVine Storage Processors
      Product

Categories

Key Features

Target ApplicationsSiI5723, 5733,
    5743, 5744, 3726
    4723, 4726

eSATA Storage Processors.

2-drive SteelVine IC with 3Gb/s
    Serial ATA and USB 2.0 host link and support for up to 2 SATA
    devices. Also supports drive cascading, RAID 0, 1 and drive
    spanning.

Consumer storage applications for
    PC and CE markets.SiI3124A

SATA Controllers

Single chip, quad-channel,
    PCI/PCI-X-to-3Gb/s
    SATA- Gen II host controller,
    SATARAIDtmsoftware, 1st Party DMA, hot plug, ATAPI support, port
    multiplier support with FIS-based switching, variable output
    strengths for backplane support, Supports up to 3Gb/s per
    channel.

Server motherboards, server
    add-in-cards,
    host bus adapters, RAID subsystems, embedded applicationsSiI3112,
    3512, 3114

SATA Controllers

Single-chip,
    PCI-to-1.5Gb/s
    SATA-Gen I host controller,
    SATARAIDtmsoftware, hot plug, ATAPI support, variable output strengths for
    backplane support

PC motherboards, PC
    add-in-cards,
    server motherboards, host bus adapters, RAID subsystems,
    embedded applications 10




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Product

Categories

Key Features

Target ApplicationsSiI3132,
    3531

SATA Controllers

Single-chip, PCI
    Express-to-3.0Gb/s
    SATA Gen-II host controller,
    SATARAIDtmsoftware, hot plug, ATAPI support, port multiplier with FIS
    based switching, variable output strengths for backplane support

PC motherboards, PC
    add-in-cards,
    server motherboards, host bus adapters, RAID subsystems,
    embedded applicationsSiI3811

SATA Device Bridge

1.5Gb/s
    SATA-to-PATA
    device bridge, ATAPI support

Notebook and PC motherboards,
    ATAPI devicesSiI0680

PATA Controller

Ultra ATA/133
    PCI-to-ATA
    host Controller

PC Motherboards, PC
    add-in-cards,
    server motherboards, host bus adapters, embedded applications   Promotion
    of Industry Standards
    High-Definition
    Multimedia Interface (HDMI)
    Revision

Date Issued

Key FeaturesHDMI 1.0

December 2002

Uncompressed digital audio/video
    interfaceHDMI 1.1

May 2004

DVD-Audio supportHDMI 1.2

August 2005

Super Audio CD support removed
    restrictions on use of PC video format timingsHDMI 1.2a

December 2005

Full definition of CEC
    functionality and compliance test. Additional cable and
    connector testing requirements.HDMI 1.3

June 2006

Single link bandwidth doubled to
    10.2 Gb/s (340 MHz) 
    Deep Color
    xvYCC color gamut
    Lossless High Bit Rate audio support Mini connector
    Lip Sync correctionHDMI 1.3a

November 2006

Compliance Testing requirements
    for HDMI 1.3 features, required testing    11




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DVD Copy Control Association.
  Federal Communications Commission.
              EICTA
  CASBAA Pay-TV Pay-TV
 12




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Digital
    Visual Interface (DVI)
    
    define, establish and support the DVI specification, an industry
    specification for sending video data between a computer and a
    digital display;
    encourage broad industry adoption of the DVI specification, in
    part by creating an implementers forum that others may
    join in order to receive information and by providing support
    for the DVI specification;
    invite third parties to enter into a Participants
    Agreement in order to consult on the content, feasibility and
    other aspects of the DVI specification.    High-bandwidth
    Digital Content Protection (HDCP)
    Serial
    ATA Working Group
     13




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Incits
    T-13 Committee
      Silicon
    Image Technology
  Multi-Layer
    Systems Approach to Solving High-Speed Interconnect
    Problems
        VastLane
    HDMI
     14




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Research
    and Development
         15




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Sales and
    Marketing
      Manufacturing
  Wafer
    Fabrication
    Assembly
    and Test
       16




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Quality
    Assurance
    Intellectual
    Property
     17




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Competition
   18




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time-to-market,
          Employees
  Note 11-
  Available
    Information
  www.siliconimage.com. Form 10-K. Form 10-K, Form 10-Q, Form 8-K,
 19




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Form 10-K,
 Item 1A.  Risk
    Factors  A description of the risk factors associated with our
    business is set forth below. You should carefully consider the
    following risk factors, together with all other information
    contained or incorporated by reference in this filing, before
    you decide to purchase shares of our common stock. These factors
    could cause our future results to differ materially from those
    expressed in or implied by forward-looking statements made by
    us. Additional risks and uncertainties not presently known to us
    or that we currently deem immaterial may also harm our business.
    The trading price of our common stock could decline due to any
    of these risks, and you may lose all or part of your
    investment.
  We
    operate in rapidly evolving markets, which makes it difficult to
    evaluate our future prospects.
  mid-to-late tm
  Our
    annual and quarterly operating results may fluctuate
    significantly and are difficult to predict.
    
    the growth, evolution and rate of adoption of industry standards
    for our key markets, including consumer electronics,
    digital-ready PCs and displays, and storage devices and systems;
    the fact that our licensing revenue is heavily dependent on a
    few key licensing transactions being completed for any given
    period, the timing of which is not always predictable and is
    especially susceptible to delay beyond the period in which
    completion is expected, and our concentrated dependence on a few
    licensees in any period for substantial portions of our expected
    licensing revenue and profits;
    the fact that our licensing revenue has been uneven and
    unpredictable over time, and is expected to continue to be
    uneven and unpredictable for the foreseeable future, resulting
    in considerable fluctuation in the amount of revenue recognized
    in a particular quarter;
    competitive pressures, such as the ability of competitors to
    successfully introduce products that are more cost-effective or
    that offer greater functionality than our products, including
    integration into their products of functionality offered by our
    products, the prices set by competitors for their products, and
    the potential for alliances, combinations, mergers and
    acquisitions among our competitors;
    average selling prices of our products, which are influenced by
    competition and technological advancements, among other factors;
    government regulations regarding the timing and extent to which
    digital content must be made available to consumers;
    the availability of other semiconductors or other key components
    that are required to produce a complete solution for the
    customer; usually, we supply one of many necessary components;
    and 20




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
    the cost of components for our products and prices charged by
    the third parties who manufacture, assemble and test our
    products.  and/or
  Our
    future annual and quarterly operating results are highly
    dependent upon how well we manage our business.
    
    our ability to manage product introductions and transitions,
    develop necessary sales and marketing channels, and manage other
    matters necessary to enter new market segments;
    our ability to successfully manage our business in multiple
    markets such as CE, PC, and storage, which may involve
    additional research and development, marketing or other costs
    and expenses;
    our ability to enter into licensing deals when expected and make
    timely deliverables and milestones on which recognition of
    revenue often depends;
    our ability to engineer customer solutions that adhere to
    industry standards in a timely and cost-effective manner;
    our ability to achieve acceptable manufacturing yields and
    develop automated test programs within a reasonable time frame
    for our new products;
    our ability to manage joint ventures and projects, design
    services, and our supply chain partners;
    our ability to monitor the activities of our licensees to ensure
    compliance with license restrictions and remittance of royalties;
    our ability to structure our organization to enable achievement
    of our operating objectives and to meet the needs of our
    customers and markets;
    the success of the distribution and partner channels through
    which we choose to sell our products and
    our ability to manage expenses and inventory levels; and
    our ability to successfully implement our plans to transfer
    certain of our technology, sales administration and procurement
    functions offshore to be closer to customers and suppliers,
    lower our tax liability, and reduce certain costs.    The
    licensing component of our business strategy increases business
    risk and volatility.
   21




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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
    products.
    Demand
    for our consumer electronics products is dependent on continued
    adoption and widespread implementation of the HDMI
    specification.
   22




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Pay-TV Pay-TV
     23




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We
    will have difficulty selling our products if customers do not
    design our products into their product offerings or if our
    customers product offerings are not commercially
    successful.
    Our
    products typically have lengthy sales cycles. A customer may
    decide to cancel or change its product plans, which could cause
    us to lose anticipated sales. In addition, our average product
    life cycles tend to be short and, as a result, we may hold
    excess or obsolete inventory that could adversely affect our
    operating results.
     24




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Our
    customer may not purchase anticipated levels of products, which
    can result in increased inventory levels
    We
    depend on a few key customers and the loss of any of them could
    significantly reduce our revenue.
  and/or
  
    one or more of our customers, including distributors, becomes
    insolvent or goes out of business;
    one or more of our key customers or distributors significantly
    reduces, delays or cancels orders; and/or
    one or more significant customers selects products manufactured
    by one of our competitors for inclusion in their future product
    generations.    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.  build-up
 25




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Our
    success depends on the development and introduction of new
    products, which we may not be able to do in a timely manner
    because the process of developing high-speed semiconductor
    products is complex and costly.
    
    accurate prediction of market requirements and evolving
    standards, including enhancements or modifications to existing
    standards such as HDMI, HDCP, DVI, SATA I and SATA II;
    identification of customer needs where we can apply our
    innovation and skills to create new standards or areas for
    product differentiation that improve our overall competitiveness
    either in an existing market or in a new market;
    development of advanced technologies and capabilities, and new
    products that satisfy customer requirements;
    competitors and customers integration of the
    functionality of our products into their products, which puts
    pressure on us to continue to develop and introduce new products
    with new functionality;
    timely completion and introduction of new product designs;
    management of product life cycles;
    use of leading-edge foundry processes and achievement of high
    manufacturing yields and low cost testing;
    market acceptance of new products; and
    market acceptance of new architectures like SteelVine.   26




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There
    are risks to our global strategy
    We
    have made acquisitions in the past and may make acquisitions in
    the future, if advisable, and these acquisitions involve
    numerous risks.
    
    difficulty and increased costs in assimilating employees,
    including our possible inability to keep and retain key
    employees of the acquired business;
    disruption of our ongoing business;
    discovery of undisclosed liabilities of the acquired companies
    and legal disputes with founders or shareholders of acquired
    companies;
    inability to successfully incorporate acquired technology and
    operations into our business and maintain uniform standards,
    controls, policies and procedures;
    inability to commercialize acquired technology; and
    the need to take impairment charges or write-downs with respect
    to acquired assets.    Our
    acquisition of sci-worx GmbH exposes us to a variety of
    risks.
   27




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Industry
    cycles may strain our management and resources.
    
    improve operational and financial systems;
    train and manage our employee base;
    successfully integrate operations and employees of businesses we
    acquire or have acquired;
    attract, develop, motivate and retain qualified personnel with
    relevant experience; and
    adjust spending levels according to prevailing market conditions.    The
    cyclical nature of the semiconductor industry may create
    constrictions in our foundry, test and assembly
    capacity.
    We
    depend on third-party
    sub-contractors
    to manufacture, assemble and test nearly all of our products,
    which reduce our control over the production
    process.
    
    reduced control over delivery schedules, quality assurance,
    manufacturing yields and production costs;
    lack of guaranteed production capacity or product supply,
    potentially resulting in higher inventory levels;
    lack of availability of, or delayed access to, next-generation
    or key process technologies; and
    limitations on our ability to transition to alternate sources if
    services are unavailable from primary suppliers.  sub-contractors sub-contractors and/or
 28




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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.
    
    political, social and economic instability;
    exposure to different business practices and legal standards,
    particularly with respect to intellectual property;
    natural disasters and public health emergencies;
    nationalization of business and blocking of cash flows;
    trade and travel restrictions
    the imposition of governmental controls and restrictions;
    burdens of complying with a variety of foreign laws;
    import and export license requirements and restrictions of the
    United States and each other country in which we operate; 29




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
    unexpected changes in regulatory requirements;
    foreign technical standards;
    changes in taxation and tariffs;
    difficulties in staffing and managing international operations;
    fluctuations in currency exchange rates;
    difficulties in collecting receivables from foreign entities or
    delayed revenue recognition;
    expense and difficulties in protecting our intellectual property
    in foreign jurisdictions;
    exposure to possible litigation or claims in foreign
    jurisdictions; and
    potentially adverse tax consequences.    The
    success of our business depends upon our ability to adequately
    protect our intellectual property.
  and/or
  Our
    participation in working groups for the development and
    promotion of industry standards in our target markets, including
    the Digital Visual Interface, HDMI, and UDI specifications,
    requires us to license some of our intellectual property for
    free or under specified terms and conditions, which may make it
    easier for others to compete with us in such
    markets.
   30




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
    we must license for free specific elements of our intellectual
    property to others for use in implementing the DVI
    specification; and we may license additional intellectual
    property for free as the DDWG promotes enhancements to the DVI
    specification.
    we must license specific elements of our intellectual property
    to others for use in implementing the HDMI specification and we
    may license additional intellectual property as the HDMI
    founders group promotes enhancements to the HDMI
    specification; and
    we have agreed to license specific elements of our intellectual
    property to other UDI promoters and third parties who execute an
    adopters agreement.  and/or
  and/or and/or
  Our
    success depends in part on our relationships with Sunplus and
    other strategic partners.
     31




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Our
    success depends on managing our relationship with
    Intel.
    
    Intel and Silicon Image have been parties to business
    cooperation agreements;
    Intel and Silicon Image are parties to a patent cross-license;
    Intel and Silicon Image worked together to develop HDCP;
    an Intel subsidiary has the exclusive right to license HDCP, of
    which we are a licensee;
    Intel and Silicon Image were two of the promoters of the DDWG;
    Intel and Silicon Image are two of the promoters of the Unified
    Display Interface Working Group;
    Intel is a promoter of the SATA working group, of which we are a
    contributor;
    Intel is a supplier to us and a customer for our products;
    we believe that Intel has the market presence to drive adoption
    of SATA by making it widely available in its chipsets and
    motherboards, which could affect demand for our products;
    we believe that Intel has the market presence to affect adoption
    of HDMI by either endorsing complementary technology or
    promulgating a competing standard, which could affect demand for
    our products;
    Intel may potentially integrate the functionality of our
    products, including SATA, DVI, or HDMI into its own chips and
    chipsets, thereby displacing demand for some of our products;
    Intel may design new technologies that would require us to
    re-design our products for compatibility, thus increasing our
    R&D expense and reducing our revenue;
    Intels technology, including its 845G chipset, may lower
    barriers to entry for other parties who may enter the market and
    compete with us; and
    Intel may enter into or continue relationships with our
    competitors that can put us at a relative disadvantage.    We
    have granted Intel rights with respect to our intellectual
    property, which could allow Intel to develop products that
    compete with ours or otherwise reduce the value of our
    intellectual property.
    We may
    become engaged in additional intellectual property litigation
    that could be time-consuming, may be expensive to prosecute or
    defend, and could adversely affect our ability to sell our
    product.
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
    stop selling products or using technology that contains the
    allegedly infringing intellectual property;
    attempt to obtain a license to the relevant intellectual
    property, which license may not be available on reasonable terms
    or at all; and
    attempt to redesign products that contain the allegedly
    infringing intellectual property.    We
    have entered into, and may again be required to enter into,
    patent or other intellectual property
    cross-licenses.
  and/or
  We
    indemnify certain of our licensing customers against
    infringement.
   33




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We
    must attract and retain qualified personnel to be successful,
    and competition for qualified personnel is increasing in our
    market.
    Share Based Payment
  We
    have experienced transitions in our management team, our board
    of directors and our independent registered public accounting
    firm in the past and may continue to do so in the
    future.
    
    In January 2005, Steve Laub (who replaced David Lee in November
    2004) resigned from the positions of chief executive
    officer and president and from the board of directors, Steve
    Tirado was appointed as chief executive officer and president
    and to the board as well, and Chris Paisley was appointed
    chairman of the board of directors.
    In February 2005, Jaime Garcia-Meza was appointed as vice
    president of our storage business.
    In April 2005, Robert C. Gargus retired from the position of
    chief financial officer and Darrel Slack was appointed as his
    successor.
    In April 2005, four of our then independent outside directors,
    David Courtney (chairman of the audit committee), Keith
    McAuliffe, Chris Paisley (chairman of the board) and Richard
    Sanquini, resigned from our board of directors and board
    committees.
    In April 2005, Darrel Slack, our then chief financial officer,
    was elected to our board of directors.
    In May 2005, Masood Jabbar and Peter Hanelt were elected to our
    board of directors.
    In June 2005, David Lee did not stand for re-election as a
    director at our annual meeting of stockholders, and accordingly,
    Dr. Lee resigned from our board of directors. 34




---



##### Table of Contents




    In June 2005, PricewaterhouseCoopers LLP resigned as our
    independent registered public accounting firm. In July 2005, we
    appointed Deloitte & Touche LLP as our new independent
    registered public accounting firm.
    In August 2005, Darrel Slack began a personal leave of absence.
    In August 2005, Dale Brown resigned from the positions of chief
    accounting officer and corporate controller.
    In August 2005, Robert Freeman was appointed as interim chief
    financial officer and chief accounting officer.
    In September 2005, Darrel Slack resigned from the position of
    chief financial officer and from our board of directors and the
    board of directors of HDMI Licensing, LLC, our wholly-owned
    subsidiary.
    In October 2005, William George was elected to our board of
    directors.
    In October 2005, Robert Bagheri resigned from the position of
    executive vice president of operations.
    In October 2005, John LeMoncheck, then vice president, consumer
    electronics and PC/display, left Silicon Image.
    In October 2005, John Shin was appointed as interim vice
    president, consumer electronics and PC/display businesses and
    served in that position until February 2006. Mr. Shin
    serves as vice president of engineering, and has held that
    position since October 2003.
    In November 2005, Robert Freemans position changed from
    interim chief financial officer to chief financial officer.
    In December 2005, William Raduchel was elected to our board of
    directors.
    In January 2006, Dale Zimmerman was appointed as our vice
    president of worldwide marketing.
    In February 2006, John Hodge was elected to our board of
    directors.
    In September 2006, Patrick Reutens resigned from the position of
    chief legal officer.
    In January 2007, Edward Lopez was appointed as our chief legal
    officer.
    In February 2007, David Hodges advised our board of directors
    that he has decided to retire and as such will not stand for
    reelection to our board of directors when his current term
    expires at our 2007 Annual Meeting of Stockholders.    We
    have completed a voluntarily-initiated internal review of our
    historical stock option compensation practices and the SEC is
    conducting an informal inquiry into our past option-granting
    practices. This inquiry may not be resolved favorably and may
    require a significant amount of management time and attention
    and accounting and legal resources, which could adversely affect
    our business, financial condition, results of operations and
    cash flows.
   35




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##### Table of Contents



We
    have been and may continue to become the target of securities
    class action suits and derivative suits which could result in
    substantial costs and divert management attention and
    resources.
    Rule 10b-5
  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.
   36




---



##### Table of Contents




    an earthquake or other disaster in the San Francisco Bay
    Area or the Los Angeles area damaged our facilities or disrupted
    the supply of water or electricity to our headquarters or our
    Irvine facility;
    an earthquake, typhoon or other disaster in Taiwan or Japan
    resulted in shortages of water, electricity or transportation,
    limiting the production capacity of our outside foundries or the
    ability of ASE to provide assembly and test services;
    an earthquake, typhoon or other disaster in Taiwan or Japan
    damaged the facilities or equipment of our customers and
    distributors, resulting in reduced purchases of our
    products; or
    an earthquake, typhoon or other disaster in Taiwan or Japan
    disrupted the operations of suppliers to our Taiwanese or
    Japanese customers, outside foundries or ASE, which in turn
    disrupted the operations of these customers, foundries or ASE
    and resulted in reduced purchases of our products or shortages
    in our product supply.  Continued
    terrorist attacks or war could lead to further economic
    instability and adversely affect our operations, results of
    operations and stock price.
    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; 37




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##### Table of Contents




    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.    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings   38




---



##### Table of Contents



Rule 10b-5
 39




---



##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Securities Holders   40




---



##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    High


Low2006Fourth Quarter

$
14.52


$
10.96Third Quarter


12.99



8.64Second Quarter


12.17



8.21First Quarter


11.87



9.452005Fourth Quarter

$
10.27


$
7.06Third Quarter


12.25



8.89Second Quarter


12.40



9.50First Quarter


16.55



9.26          41




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##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except employees and per share data)Statements of Operations
    Data:Revenue

$
294,958


$
212,399


$
173,159


$
103,525


$
81,539Cost of revenue(1)


121,247



83,105



68,614



47,192



39,299Gross margin


173,711



129,294



104,545



56,333



42,240% of revenue


58.9
%


60.9
%


60.4
%


54.4
%


51.8
%Research and development(2)

$
63,598


$
44,860


$
61,459


$
43,386


$
40,205% of revenue


21.6
%


21.1
%


35.5
%


41.9
%


49.3
%Selling, general and
    administrative(3)

$
67,597


$
31,438


$
42,183


$
20,943


$
19,976% of revenue


22.9
%


14.8
%


24.4
%


20.2
%


24.5
%Income (loss) from operations

$
47,252


$
51,572


$
(961
)

$
(17,719
)

$
(40,850
)Net income (loss)

$
42,465


$
49,549


$
(324
)

$
(12,810
)

$
(40,092
)Net income (loss) per share:Basic

$
0.51


$
0.63


$
0.00


$
(0.18
)

$
(0.62
)Diluted

$
0.49


$
0.59


$
0.00


$
(0.18
)

$
(0.62
)Weighted average
    shares  basic


82,787



79,254



75,081



69,412



64,283Weighted average
    shares  diluted


86,791



83,957



75,081



69,412



64,283Consolidated Balance Sheet
    andOther Data as of Year
    End:Cash, cash equivalents and
    short-term investments

$
250,645


$
151,562


$
93,520


$
37,254


$
35,833Working capital


262,080



152,204



97,107



37,674



27,787Total assets


380,231



233,021



154,908



87,742



77,616Other long-term liabilities


538



6,867











Total stockholders equity


305,222



176,546



122,079



62,393



48,170Regular full-time employees


442



384



337



250



249(1) Includes stock-based
    compensation expense (benefit)

$
2,427


$
(1,383
)

$
2,777


$
583


$
1,189(2) Includes stock-based
    compensation expense (benefit)


11,108



(3,851
)


16,647



6,863



7,396(3) Includes stock-based
    compensation expense (benefit)


13,696



(3,297
)


13,359



2,542



2,522   Note Share-Based Payment Accounting for Stock Issued to Employees.
 42




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
            tm
  There are risks to our global
    strategy
     43




---



##### Table of Contents



Critical
    Accounting Policies
    Revenue
    recognition
      end-of-life
   44




---



##### Table of Contents



agreed-upon agreed-upon period-to-period trued-up true-up percentage-of-completion percentage-of-completion progress-to-completion labor-hours
  Cash
    Equivalents and Short-Term Investments.
  corporate/municipal
  other-than-temporary, other-than-temporary,
  Allowance
    for Doubtful Accounts
   45




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##### Table of Contents



Inventories
  first-in
    Goodwill
    and intangible assets
  Goodwill and Other Intangible.
  Income
    Taxes
    Deferred
    Tax Assets
   46




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##### Table of Contents



Accrued
    Liabilities
      Stock-Based
    Compensation Expense
  Share-Based Payment
  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in
    Income Taxes  an Interpretation of FASB Statement
    No. 109
  Fair Value
    Measurement.
 47




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##### Table of Contents



Considering the
    Effects of Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  Reclassifications
      Annual
    Results of Operations
  REVENUE
  2006


Change


2005


Change


2004(Dollars in thousands)Consumer Electronics

$
167,877



54.4
%

$
108,712



52.3
%

$
71,377Personal Computer


49,399



0.4
%


49,212



19.4
%


41,223Storage Products


33,098



(8.1
)%


35,999



(9.4
)%


39,750Total product revenue

$
250,374



29.1
%

$
193,923



27.3
%

$
152,350Percentage of total revenue


84.9
%






91.3
%






88.0
%Development, licensing and
    royalties

$
44,584



141.3
%

$
18,476



(11.2
)%

$
20,809Percentage of total revenue


15.1
%






8.7
%






12.0
%Total revenue

$
294,958



38.9
%

$
212,399



22.7
%

$
173,159  48




---



##### Table of Contents



2006


Change


2005


Change


2004(Dollars in thousands)Consumer Electronics

$
194,721



64.2
%

$
118,578



40.2
%

$
84,604Personal Computer


58,761



16.4
%


50,484



21.4
%


41,585Storage Products


41,476



(4.3
)%


43,337



(7.7
)%


46,970Total revenue

$
294,958



38.9
%

$
212,399



22.7
%

$
173,159            49




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##### Table of Contents



Item 3-
  Commitments,
    Contingencies and Concentrations
      COST
    OF REVENUE AND GROSS MARGIN
  2006


Change


2005


Change


2004(Dollars in thousands)Cost of revenue(1)

$
121,247



45.9
%

$
83,105



21.1
%

$
68,614Total gross margin

$
173,711



34.4
%

$
129,294



23.7
%

$
104,545Gross margin as a percentage of
    total revenue


58.9
%






60.9
%






60.4
%(1) Includes stock-based
    compensation expense (benefit)

$
2,427






$
(1,383
)





$
2,777  50




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##### Table of Contents



Share-Based Payment Accounting for Stock Issued to
    Employees
    OPERATING
    EXPENSES
  Research and Development

2006


Change


2005


Change


2004(Dollars in thousands)Research and development(1)

$
63,598



41.8
%

$
44,860



(27.0
)%

$
61,459Percentage of total revenue


21.6
%






21.1
%






35.5
%(1) Includes stock-based
    compensation expense (benefit)


11,108







(3,851
)






16,647   Research and development
    (R&D). Share-Based
    Payment Accounting for Stock Issued to
    Employees
 51




---



##### Table of Contents



Selling, General and Administrative

2006


Change


2005


Change


2004(Dollars in thousands)Selling, general and
    administrative(2)

$
67,597



115.0
%

$
31,438



(25.5
)%

$
42,183Percentage of total revenue


22.9
%






14.8
%






24.4
%(2) Includes stock-based
    compensation expense (benefit)


13,696







(3,297
)






13,359   Selling, general and
    administrative(SG&A). Share-Based Payment Accounting for Stock Issued
    to Employees
  Amortization of Intangible assets

2006


Change


2005


Change


2004(Dollars in thousands)Amortization of intangible assets

$
508



(53.7
)%

$
1,098



(18.4
)%

$
1,345Percentage of total revenue


0.2
%






0.5
%






0.8
%   Amortization of intangible assets.
  Patent Assertion Costs (Reimbursement), Net

2006


Change


2005


Change


2004(Dollars in thousands)Patent assertion costs
    (reimbursement), net

$
(5,244
)


(1708.6
)%

$
326



(37.2
)%

$
519Percentage of total revenue


(1.8
)%






0.2
%






0.3
%   Patent assertion costs (reimbursement),
    net. Item 3-Legal
  Interest Income and other, Net

2006


Change


2005


Change


2004(Dollars in thousands)Interest income and other, net

$
9,205



169.9
%

$
3,410



374.9
%

$
718Percentage of total revenue


3.1
%






1.6
%






0.4
%   Interest income.
 52




---



##### Table of Contents



Other expenses, net.
  Gain on Investment Security

2006


Change


2005


Change


2004(Dollars in thousands)Gain on investment security

$




(100.0
)%

$
1,297



40.1
%

$
926Percentage of total revenue


0.0
%






0.6
%






0.5
%   Gain on investment security.
  Provision for Income Taxes

2006


Change


2005


Change


2004(Dollars in thousands)Provision for income taxes

$
13,992



107.9
%

$
6,730



568.3
%

$
1,007Percentage of total revenue


4.7
%






3.2
%






0.6
%   Provision for Income Taxes. There are risks to our global strategy
   53




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##### Table of Contents



Liquidity
    and Capital Resources
  2006


Change


2005


Change


2004(Dollars in thousands)Cash and cash equivalents

$
81,921


$
4,044


$
77,877


$
54,597


$
23,280Short-term investments


168,724



95,039



73,685



3,445



70,240Total cash, cash equivalents and
    short-term investment

$
250,645


$
99,083


$
151,562


$
58,042


$
93,520Percentage of total assets


65.9%







65.0%







60.4%Total current assets

$
336,551


$
134,739


$
201,812


$
71,876


$
129,936Total current liabilities


(74,471
)


(24,863
)


(49,608
)


(16,779
)


(32,829
)Working capital

$
262,080


$
109,876


$
152,204


$
55,097


$
97,107Cash provided by operating
    activities

$
46,003


$
(9,617
)

$
55,620


$
19,174


$
36,446Cash used in investing activities


(100,647
)


(88,458
)


(12,189
)


40,951



(53,140
)Cash provided by financing
    activities


58,669



47,503



11,166



(10,874
)


22,040Effect of exchange rate changes on
    cash & cash equivalents


19



19











Net increase in cash and cash
    equivalents

$
4,044


$
(50,553
)

$
54,597


$
49,251


$
5,346     Operating
    Activities
       54




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##### Table of Contents



Investing
    Activities
    Financing
    Activities
    Cash
    requirements and commitments
      
    Acquisition  In January 2007, we spent approximately
    $13.6 million for the acquisition of sci-worx. In addition,
    we also expect to pay $40.0 million under a licensing
    arrangement with Sunplus. Please refer to
    Note 11-
    Subsequent Events to the Consolidated Financial Statements for a
    detailed discussion.
    Commitments  We have approximately
    $18.1 million in commitments for 2007 as disclosed in the
    contractual obligations table below.
    On February 8, 2007, we announced that our Board of
    Directors authorized a stock repurchase program under which we
    intend, from time to time, as business conditions warrant, to
    purchase up to $100 million of common stock, on the open
    market, or in negotiated or block transactions. Purchases may be
    increased, decreased or discontinued at any time without prior
    notice. As of March 1, 2007, no shares had yet been
    repurchased under this stock repurchase program.  Debt and
    Lease Obligations
     55




---



##### Table of Contents



Payments Due InLess Than








More ThanTotal


1 Year


1-3 Years


3-5 Years


5 YearsContractual
    Obligations:Software license commitments

$
8,248


$
3,971


$
4,277


$



$
Operating lease obligations


10,529



2,851



4,643



3,035



Inventory purchase commitments


11,132



11,132











Minimum royalty obligation


100



100











Total

$
30,009


$
18,054


$
8,920


$
3,035


$
     Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest
    Rate Risk
   56




---



##### Table of Contents



0.5%

1.0%

1.5%$626,000

$1,253,000

$1,879,000     0.5%

1.0%

1.5%$388,000

$776,000

$1,163,000   Foreign
    Currency Exchange Risk
    sci-worx
  Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rule 13a-15(e) Form 10-K,
 57




---



##### Table of Contents



Rule 13a-15(b)
  Remediation
    of Prior Year Material Weakness
  Form 10-K Form 10-Q
                Managements
    Report on Internal Control over Financial Reporting
  Rule 13a-15(f)
  
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of our assets;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures are being made only in accordance
    with authorizations of our management and directors; and 58




---



##### Table of Contents




    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    assets that could have a material effect on the financial
    statements.    Internal Control  Integrated
    Framework. Form 10-K
    Changes
    in Internal Control Over Financial Reporting
  Form 10-K Form 10-Q
 59




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
    Internal Control 
    Integrated Framework
        Internal
    Control  Integrated Framework Internal Control  Integrated
    Framework
    DELOITTE &
    TOUCHE LLP
   60




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   61




---



##### Table of Contents



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules    Financial Statements:
  PageConsolidated
    Balance Sheets at December 31, 2006 and December 31,
    2005


63Consolidated
    Statements of Operations for the three years ended
    December 31, 2006


64Consolidated
    Statements of Stockholders Equity for the three years
    ended December 31, 2006


65Consolidated
    Statements of Cash Flows for the three years ended
    December 31, 2006


66Notes to
    Consolidated Financial Statements


67Unaudited Selected
    Quarterly Financial Data for the two years ended
    December 31, 2006


91Report of
    Deloitte & Touche LLP, Independent Registered Public
    Accounting Firm


92Report of
    PricewaterhouseCoopers LLP, Independent Registered Public
    Accounting Firm


93   Financial Statement Schedules
    Exhibits.
  Form 10-K.
 62




---



##### Table of Contents



SILICON
    IMAGE, INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2005(In thousands, except share and per share amounts)ASSETSCurrent Assets:Cash and cash equivalents

$
81,921


$
77,877Short-term investments


168,724



73,685Accounts receivable, net of
    allowances for doubtful accounts of $235 on December 31,
    2006 and $417 on December 31, 2005


39,931



30,141Inventories


28,287



17,072Prepaid expenses and other current
    assets


4,895



3,037Deferred income taxes


12,793



Total current assets


336,551



201,812Property and equipment, net


18,431



9,613Goodwill


13,021



13,021Intangible assets, net


78



585Deferred income taxes, non-current


10,580



Other assets


1,570



7,990Total assets

$
380,231


$
233,021LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
14,187


$
13,372Accrued and other liabilities


37,308



13,952Debt obligations and capital leases






230Deferred license revenue


5,264



8,283Deferred margin on sales to
    distributors


17,712



13,771Total current liabilities


74,471



49,608Other long-term liabilities


538



6,867Total liabilities


75,009



56,475Commitments and contingencies
    (Notes 5 and 8)Stockholders equity:Convertible preferred stock, par
    value $0.001; 5,000,000 shares authorized; no shares issued
    or outstanding






Common stock, par value $0.001;
    150,000,000 shares authorized; shares issued and
    outstanding: 86,484,628  2006 and
    80,491,557  2005


87



80Additional paid-in capital


386,258



307,149Unearned compensation






(6,742
)Accumulated deficit


(80,964
)


(123,429
)Accumulated other comprehensive
    loss


(159
)


(512
)Total stockholders equity


305,222



176,546Total liabilities and
    stockholders equity

$
380,231


$
233,021    63




---



##### Table of Contents



SILICON
    IMAGE, INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended December 31,2006


2005


2004(In thousands, except per share amounts)Revenue:Product

$
250,374


$
193,923


$
152,350Development, licensing and
    royalties


44,584



18,476



20,809Total revenue


294,958



212,399



173,159Cost of revenue and operating
    expenses:Cost of revenue(1)


121,247



83,105



68,614Research and development(2)


63,598



44,860



61,459Selling, general and
    administrative(3)


67,597



31,438



42,183Amortization of intangible assets


508



1,098



1,345Patent assertion costs
    (reimbursement), net


(5,244
)


326



519Total cost of revenue and
    operating expenses


247,706



160,827



174,120Income (loss) from operations


47,252



51,572



(961
)Interest income


9,438



3,605



945Other expenses, net


(233
)


(195
)


(227
)Gain on investment security






1,297



926Income before provision for income
    taxes


56,457



56,279



683Provision for income taxes


13,992



6,730



1,007Net income (loss)

$
42,465


$
49,549


$
(324
)Net income (loss) per
    share  basic

$
0.51


$
0.63


$
(0.00
)Net income (loss) per
    share  diluted

$
0.49


$
0.59


$
(0.00
)Weighted average
    shares  basic


82,787



79,254



75,081Weighted average
    shares  diluted


86,791



83,957



75,081(1) Includes stock-based
    compensation expense (benefit)

$
2,427


$
(1,383
)

$
2,777(2) Includes stock-based
    compensation expense (benefit)


11,108



(3,851
)


16,647(3) Includes stock-based
    compensation expense (benefit)


13,696



(3,297
)


13,359    64




---



##### Table of Contents



SILICON
    IMAGE, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  AccumulatedAdditional








OtherCommon Stock


Paid-In


Unearned


Accumulated


ComprehensiveShares


Amount


Capital


Compensation


Deficit


Income (Loss)


TotalBalance at December 31,
    2003


72,367


$
72


$
243,171


$
(8,196
)

$
(172,654
)

$



$
62,393Net loss


















(324
)






(324
)Unrealized net gain on
    available-for-sale
    investments, net of tax






















2,867



2,867Total comprehensive income


























2,543Net issuances of common stock


5,140



5



20,998















21,003Common stock issued for ESPP


616



1



2,720















2,721Common stock issued for acquisitions


9























Compensation expense for option
    modification










1,527















1,527Tax benefit from equity based
    compensation plans










636















636Stock-based compensation expense










30,692



564











31,256Balance at December 31,
    2004


78,132



78



299,744



(7,632
)


(172,978
)


2,867



122,079Net income


















49,549







49,549Foreign currency translation
    adjustments






















(22
)


(22
)Unrealized net loss on
    available-for-sale
    investments, net of tax






















(3,357
)


(3,357
)Total comprehensive income


























46,170Net issuances of common stock


1,787



2



7,584















7,586Common stock issued for ESPP


716







3,840















3,840Restricted common stock repurchased


(143
)






(1
)














(1
)Tax benefit from equity based
    compensation plans










5,403















5,403Stock-based compensation benefit










(9,421
)


890











(8,531
)Balance at December 31,
    2005


80,492



80



307,149



(6,742
)


(123,429
)


(512
)


176,546Net income


















42,465







42,465Unrealized net gain on
    available-for-sale
    investments, net of tax






















334



334Foreign currency translation
    adjustments






















19



19Total comprehensive income


























42,818Net issuances of common stock


5,571



6



31,120















31,126Common stock issued for ESPP


421



1



3,916















3,917Elimination of unearned
    compensation in connection with FAS 123(R) adoption










(6,742
)


6,742











Tax benefit from equity based
    compensation plans










23,584















23,584Stock-based compensation expense










27,231















27,231Balance at December 31,
    2006


86,484


$
87


$
386,258


$



$
(80,964
)

$
(159
)

$
305,222    65




---



##### Table of Contents



SILICON
    IMAGE, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net income (loss)

$
42,465


$
49,549


$
(324
)Adjustments to reconcile net income
    (loss) to cash provided by operating activities:Depreciation and amortization


7,108



6,108



4,903Provision for doubtful accounts


215



194



75Stock-based compensation expense
    (benefit)


27,231



(8,531
)


32,783Amortization of intangible assets


508



1,098



1,345Amortization/(Accretion) of
    investment premium/discount


(869
)


469



Gain on investment security






(1,297
)


(926
)Tax benefit from employee stock
    transactions


23,584



5,403



636Excess tax benefits from equity
    based compensation plans


(23,856
)






Realized loss on sale of investments


82



45



Unrealized loss on derivative
    transactions


41







Loss on disposal of property and
    equipment


15



148



Changes in assets and liabilities,
    net of amounts acquired:Accounts receivable


(10,005
)


(10,918
)


(6,738
)Inventories


(11,215
)


(3,146
)


(3,614
)Prepaid expenses and other assets


(1,824
)


(313
)


115Deferred income taxes


(23,279
)






Accounts payable


(453
)


6,539



391Accrued liabilities and deferred
    license revenue


19,181



6,463



5,112Deferred patent infringement
    proceeds


(6,867
)






Deferred margin on sales to
    distributors


3,941



3,809



2,688Cash provided by operating
    activities


46,003



55,620



36,446Cash flows from investing
    activities:Purchases of short-term investments


(240,308
)


(94,561
)


(75,109
)Proceeds from sales of short-term
    investments


146,273



86,349



27,932Proceeds from sale of investment
    security






2,171



Purchases of property and equipment


(13,479
)


(6,169
)


(5,963
)Proceeds from sale of property and
    equipment






21



Release of restriction on cash
    received in conjunction with resolution of litigation


6,867







Cash used in investing activities


(100,647
)


(12,189
)


(53,140
)Cash flows from financing
    activities:Proceeds from issuances of common
    stock


35,043



11,426



23,724Repayments of debt and capital
    lease obligations


(230
)


(259
)


(1,684
)Repurchase of restricted stock






(1
)


Excess tax benefits from employee
    stock transactions


23,856







Cash provided by financing
    activities


58,669



11,166



22,040Effect of exchange rate changes on
    cash and cash equivalents


19







Net increase in cash and cash
    equivalents


4,044



54,597



5,346Cash and cash
    equivalents  beginning of period


77,877



23,280



17,934Cash and cash
    equivalents  end of period

$
81,921


$
77,877


$
23,280Supplemental cash flow
    information:Acquisitions of property and
    equipment under capital lease arrangements

$



$



$
441Cash payments for interest

$
10


$
34


$
54Cash payments for taxes

$
1,316


$
946


$
310Unrealized net gain (loss) on
    available-for-sale
    securities

$
334


$
(3,357
)

$
3,743Reimbursable tenant improvements

$



$



$
582Property and equipment received and
    accrued

$
2,462


$
227


$
Software support purchased not paid
    for

$
420







Increase in restricted cash and
    related long-term liability associated with Genesis litigation

$



$
6,867


$
    66




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1 
    THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
  The
    Company
  tm
  Basis
    of presentation
    Reclassifications
      Revenue
    recognition
     67




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   end-of-life
    agreed-upon agreed-upon period-to-period trued-up true-up percentage-of-completion percentage-of-completion progress-to-completion labor-hours
 68




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Cash
    Equivalents and Short-Term Investments.
    other-than-temporary, other-than-temporary,
  Concentration
    of credit risk
      Allowance
    for Doubtful Accounts
    2006


2005


2004In thousandsBalance at January 1

$
417


$
745


$
670Provision for doubtful accounts


215



194



75Write offs/recoveries


(397
)


(522
)


Balance at December 31

$
235


$
417


$
745   Inventories
  first-in
 69




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
      Long-lived
    assets
    Accounting for the Impairment or Disposal of Long-Lived
    Assets.
    Goodwill
    and intangible assets
  Goodwill and Other Intangible Assets
     70




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
     December 31, 2006


December 31, 2005Gross





GrossEstimated


Carrying


Accumulated


Carrying


AccumulatedUseful Lives


Amount


Amortization


Amount


Amortization(Dollar in thousands)Intangible assets subject to
    amortization:Acquired technology(1)


36-48 months


$
1,780


$
(1,703
)

$
1,780


$
(1,348
)Non-compete agreement


36 months



1,849



(1,849
)


1,849



(1,696
)$
3,629


$
(3,552
)

$
3,629


$
(3,044
)Intangible assets not subject to
    amortization:Goodwill





$
13,021






$
13,021    (1)
    
    Remaining balance of $77,000 to be fully amortized in 2007.  Deferred
    tax assets
    Accrued
    liabilities
    Guarantees,
    Indemnifications and Warranty Liabilities
      71




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  2006


2005


2004(In thousands)Balance at January 1

$
382


$
351


$
271Provision for warranties issued
    during the period


30



273



300Reduction to pre-existing
    warranties


(314
)






Cash and other settlements made
    during the period


(38
)


(242
)


(220
)Balance at December 31

$
60


$
382


$
351   Stock-based
    compensation
  Accounting for Stock Issued to Employees
  Share-Based Payment Transition Election to Accounting
    for the Tax Effects of Share-Based Payment Awards.
  Advertising
    and Research and Development
    Accumulated
    other comprehensive loss
  available-for-sale available-for-sale
 72




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   Net
    income (loss) per share
    Year Ended December 31,2006


2005


2004Numerator:Net income (loss)

$
42,465


$
49,549


$
(324
)Denominator:Weighted average shares of common
    stock outstanding


82,787



79,466



75,733Less: unvested shares of common
    stock subject to repurchase






(212
)


(652
)Weighted average
    shares  basic


82,787



79,254



75,081Dilutive common stock options


4,004



4,491



Unvested shares of common stock
    subject to repurchase






212



Weighted average
    shares  diluted


86,791



83,957



75,081Net income (loss) per
    share  basic

$
0.51


$
0.63


$
(0.00
)Net income (loss) per
    share  diluted

$
0.49


$
0.59


$
(0.00
)     Recent
    accounting pronouncements
  Accounting for Uncertainty in
    Income Taxes  an Interpretation of FASB Statement
    No. 109
  Fair Value
    Measurements
 73




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Considering the
    Effects of Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  NOTE 2 
    CONSOLIDATED BALANCE SHEET COMPONENTS
    Gross


GrossCarrying


Unrealized


Unrealized


EstimatedValue


Gain


Loss


Fair ValueClassified as current
    assets:Cash

$
30,895


$



$



$
30,895Cash equivalents:














Money market funds


51,026











51,026Commercial paper














Total cash equivalents


51,026











51,026Total cash and cash equivalents


81,921











81,921Short-term investments:Corporate notes and bonds

$
60,837



16



(199
)

$
60,654Asset-backed securities


87,764



8



(60
)


87,712United States government agencies


2,494



1







2,495Mortgage backed securities


17,879







(16
)


17,863Total short-term investments


168,974



25



(275
)


168,724Total cash and cash equivalents
    and short-term investments

$
250,895


$
25


$
(275
)

$
250,645  74




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Gross


GrossCarrying


Unrealized


Unrealized


EstimatedValue


Gain


Loss


Fair ValueClassified as current
    assets:Cash

$
7,929


$



$



$
7,929Cash equivalents:Money market funds


11,399











11,399Commercial paper


58,529



20







58,549Total cash equivalents


69,928



20







69,948Total cash and cash equivalents


77,857



20







77,877Short-term investments:Corporate notes and bonds

$
32,095


$
2


$
(295
)

$
31,802Asset-backed securities


26,154







(107
)


26,047United States government agencies


15,946







(110
)


15,836Total short-term investments


74,195



2



(512
)


73,685Total cash and cash equivalents
    and short-term investments

$
152,052


$
22


$
(512
)

$
151,562   December 31,2006


2005(In thousands)Inventories:Raw materials

$
7,908


$
3,123Work in process


2,712



4,511Finished goods


17,667



9,438$
28,287


$
17,072Property and
    equipment:Computers and software

$
22,432


$
16,669Equipment


25,836



16,601Furniture and fixtures


3,068



2,25951,336



35,529Less: accumulated depreciation


(32,905
)


(25,916
)$
18,431


$
9,613     75




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  December 31,2006


2005(In thousands)Accrued liabilities:Accrued payroll and related
    expenses

$
4,921


$
4,738Restructuring accrual (see
    Note 3)






25Accrued legal fees


1,022



490Warranty accrual (see Note 1)


60



382Bonus accrual


8,718



2,615Accrued income taxes


12,683



381Accrued and other liabilities


9,904



5,321$
37,308


$
13,952   NOTE 3 
    ASSET IMPAIRMENT AND RESTRUCTURING ACTIVITIES
      Severance


Leasedand Benefits


Facilities


TotalBalance as of December 31,
    2004

$
32


$
1,004


$
1,036Cash payments






(759
)


(759
)Adjustment related to lease
    modification






(220
)


(220
)Non-cash activity


(32
)






(32
)Balance as of December 31,
    2005






25



25Cash payments






(25
)


(25
)Balance as of December 31,
    2006

$



$



$
     NOTE 4 
    INCOME TAXES
    Year Ended December 31,2006


2005


2004Income (loss) before provision for
    income taxes:U.S.

$
121,577


$
55,977


$
683Non U.S.


(65,120
)


302



Total income before provision for
    income taxes

$
56,457


$
56,279


$
683  76




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Year Ended December 31,Provision for Taxes

2006


2005


2004Current:Federal

$
12,130


$
701


$
636State


205



13



Foreign


1,352



613



37113,687



1,327



1,007Deferred:Federal


(14,573
)






State


(8,706
)






(23,279
)






Charge in lieu of taxes
    attributable to employee stock plans


23,584



5,403



Total provision for income taxes

$
13,992


$
6,730


$
1,007       Year Ended December 31,2006


2005


2004Tax provision at federal statutory
    rate

$
19,760


$
19,751


$
239State income taxes


644



13



Foreign income and withholding
    taxes


1,361



613



371U.S. federal losses utilized


(18,471
)


(19,821
)


(710
)Changes in valuation allowance
    related to employee stock transactions


14,333



5,403



Foreign unbenefited losses


22,811







Impact of valuation allowance
    release


(24,779
)






Tax credits


(3,277
)






Stock-based compensation


1,526







Alternative minimum taxes






701



636Non-deductible expenses


84



70



471Tax provision

$
13,992


$
6,730


$
1,007  77




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    December 31,2006


2005Net operating loss carryforwards

$
200


$
23,666Stock-based compensation


8,930



4,888Tax credits


6,103



16,898Inventory valuation


2,171



1,285Capitalized research and
    development


1,245



2,873Other items not currently
    deductible


4,724



2,66323,373



52,273Less: valuation allowance






(52,273
)Net deferred tax assets

$
23,373


$
Reported as:Deferred income taxes

$
12,793Deferred income taxes, non-current


10,580Net deferred taxes

$
23,373         NOTE 5 
    DEBT, LEASE AND OTHER OBLIGATIONS
     78




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
            Payments Due InLess Than








More ThanTotal


1 Year


1-3 Years


3-5 Years


5 YearsContractual
    Obligations:Software license commitments

$
8,248


$
3,971


$
4,277


$



$
Operating lease obligations


10,529



2,851



4,643



3,035



Inventory purchase commitments


9,340



9,340











Minimum royalty obligation


100



100











Total

$
28,217


$
16,262


$
8,920


$
3,035


$
    79




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  NOTE 6 
    STOCKHOLDERS EQUITY
  1995
    Equity Incentive Plan (the 1995 Plan)
    1999
    Equity Incentive Plan (the 1999 Plan)
          Non-plan
    options
    Adoption
    of SFAS No. 123R
   80




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   Determining
    Fair Value
  Valuation and amortization method Black-Scholes
  Expected Term
  Expected Volatility
  Risk-Free Interest Rate
  Expected Dividend
    Years Ended December 31,2006


2005


2004Employee stock option plans:Expected life in years


5.0



5.0



5.0Expected volatility


86.4
%


90.0
%


90.0
%Risk-free interest rate


4.7
%


4.2
%


3.4
%Expected dividends


none



none



noneWeighted average grant datefair value

$
7.47


$
8.14


$
9.29Employee Stock Purchase Plan:Expected life in years


1.25



1.22



1.32Expected volatility


58.0
%


59.0
%


85.0
%Risk-free interest rate


4.9
%


3.7
%


1.2
%Expected dividends


none



none



noneWeighted average grant datefair value

$
4.41


$
4.73


$
2.69  81




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Stock-based
    compensation expense
    Year Ended December 31,2006


2005


2004Cost of sales

$
2,427


$
(1,383
)

$
2,777Research and development


11,108



(3,851
)


16,647Selling, general and administrative


13,696



(3,297
)


13,359Income tax effect


(8,757
)


3,473



$
18,474


$
(5,058
)

$
32,783          82




---



##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   Stock
    Options and Awards Activity
    Options Available for Future Issuance





Number of Option Shares Outstanding





Weighted


WeightedNon-Stockholder








Non-Stockholder





Average


Average1995 and


Approved Plans From Acquisitions





Stockholder


Approved





Exercise


Remaining


Aggregate1999


CMD


SCL


TWN





Approved


Plans From


Non-





Price per


Contractual


IntrinsicPlans


Plan


Plan


Plan


Total


Plan


Acquisitions


Plan*


Total


Share


Terms in Years


ValueAt December 31, 2003


1,980



151



149



98



2,378



13,223



4,983



1,955



20,161


$
4.63Authorized


3,618















3,618



















Granted


(5,264
)


(189
)


(264
)


(43
)


(5,760
)


5,264



496



1,700



7,460



12.85Canceled


1,145



124



169







1,438



(1,145
)


(293
)






(1,438
)


5.67Exercised






















(3,255
)


(1,162
)


(719
)


(5,136
)


4.09At December 31, 2004


1,479



86



54



55



1,674



14,087



4,024



2,936



21,047



7.61Authorized


3,907















3,907



















Granted


(4,587
)


(152
)


(68
)


(36
)


(4,843
)


4,587



256







4,843



11.31Canceled


1,576



93



30



18



1,717



(1,576
)


(141
)


(1,702
)


(3,419
)


12.40Exercised






















(962
)


(501
)


(324
)


(1,787
)


4.24At December 31, 2005


2,375



27



16



37



2,455



16,136



3,638



910



20,684



7.98Authorized


4,025















4,025















Granted


(2,539
)














(2,539
)


2,539











2,539



10.67Canceled


1,253



69



32



44



1,398



(1,253
)


(145
)






(1,398
)


10.97Exercised






















(3,979
)


(1,213
)


(379
)


(5,571
)


5.59At December 31, 2006


5,114



96



48



81



5,339



13,443



2,280



531



16,254


$
8.95



6.80


$
69,956Vested and expected to vest at
    December 31, 2006


































15,651


$
8.88



0.49


$
68,551Exercisable at December 31,
    2006


































9,143


$
7.79



5.73


$
50,441     *
    
    primarily used as inducements for new officers    in-the-money.
 83




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   Pro-forma
    Disclosures
  Accounting for Stock-Based
    Compensation, Transition and Disclosure
  Year EndedDecember 31,2005


December 31, 2004Net income (loss)  as
    reported

$
49,549


$
(324
)Stock-based employee compensation
    expense (benefit) included in net income (loss) as reported, net
    of taxes for 2005


(6,578
)


27,218Stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of taxes for 2005


(15,117
)


(22,769
)Pro forma net income

$
27,854


$
4,125Basic net income (loss) per share-
    pro forma

$
0.35


$
0.05Diluted net income (loss) per
    share- pro forma

$
0.33


$
0.05Basic net income (loss) per share-
    as reported

$
0.63


$
0.00Diluted net income (loss) per
    share- as reported

$
0.59


$
0.00       Options Outstanding


Options ExercisableWeighted


Weighted





WeightedAverage


Average





AverageNumber of


Exercise


Remaining


Number of


ExerciseRanges of Exercise Prices

Shares


Price


Contractual Life


Shares


Price(In thousands)





(In Years)


(In thousands)$ 0.06 - $ 2.74


1,655


$
1.37



4.48



1,578


$
1.34$ 2.88 - $ 4.44


1,828



3.92



4.99



1,559



3.83$ 4.45 - $ 6.16


1,675



5.82



4.65



1,278



5.79$ 6.21 - $ 7.94


2,085



7.09



7.35



1,009



6.77$ 7.99 - $ 9.89


2,013



9.51



8.23



656



9.39$ 9.90 - $10.88


1,642



10.36



8.49



449



10.30$10.91 - $12.68


1,746



11.86



8.25



591



11.83$12.70 - $14.14


1,643



13.67



7.95



828



13.62$14.21 - $17.01


1,964



16.39



6.53



1,193



16.60$17.86 - $17.86


3



17.86



7.93



2



17.8616,254


$
8.95



6.80



9,143


$
7.79   Stock
    Option Exchange (Repricing)
   84




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
    Employee
    Stock Purchase Plan
    Option
    Grants to Non-employees
     85




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   NOTE 7 
    SEGMENT AND GEOGRAPHIC INFORMATION
  Disclosures about Segments of an
    Enterprise and Related Information
    Year Ended December 31,2006


2005


2004Taiwan

$
59,865


$
53,579


$
42,715Japan


103,140



46,170



34,620United States


63,253



54,593



48,391Hong Kong


11,293



6,819



5,243Korea


20,867



20,663



8,015Other


36,540



30,575



34,175$
294,958


$
212,399


$
173,159     Year Ended December 31,2006


2005


2004Consumer Electronics

$
167,877


$
108,712


$
71,377Personal Computers


49,399



49,212



41,223Storage products


33,098



35,999



39,750Development, licensing and
    royalties


44,584



18,476



20,809$
294,958


$
212,399


$
173,159     Year Ended December 31,2005


2005


2004Consumer Electronics

$
194,721


$
118,578


$
84,604Personal Computers


58,761



50,484



41,585Storage products


41,476



43,337



46,970$
294,958


$
212,399


$
173,159        86




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   NOTE 8 
    LEGAL PROCEEDINGS
         87




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
  Rule 10b-5
           88




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
   NOTE 9 
    GAIN ON EQUITY INVESTMENT
  lock-up lock-up
    NOTE 10 
    RELATED PARTY TRANSACTIONS
           89




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
     NOTE 11 
    SUBSEQUENT EVENTS
       90




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##### Table of Contents



SILICON
    IMAGE, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    Continued
 UNAUDITED
    SELECTED QUARTERLY FINANCIAL DATA



The following table sets forth the Companys consolidated
    statements of operations data for the eight quarters ended
    December 31, 2006. This unaudited quarterly information has
    been prepared on the same basis as the Companys audited
    consolidated financial statements and, in the opinion of
    management, includes all adjustments, consisting only of normal
    recurring adjustments, necessary for the fair presentation of
    this data. Three Months EndedMar 31


Jun 30


Sep 30


Dec 31(In thousands, except per share amounts)2006Total revenue

$
59,099


$
70,579


$
78,327


$
86,953Gross margin(1)


33,751



40,794



45,606



53,560Income from operations(2)


2,450



8,974



11,190



24,638Net income


2,352



5,798



8,042



26,273Net income per share 
    basic

$
0.03


$
0.07


$
0.10


$
0.31Net income per share 
    diluted

$
0.03


$
0.07


$
0.09


$
0.29Weighted average
    shares  basic


80,986



81,562



83,439



85,618Weighted average
    shares  diluted


85,398



85,628



87,433



89,1132005Total revenue

$
44,320


$
50,721


$
56,002


$
61,356Gross margin(3)


28,815



29,734



35,134



35,611Income from operations(4)


16,466



8,684



14,797



11,625Net income


16,633



10,460



9,903



12,553Net income per share 
    basic

$
0.21


$
0.13


$
0.12


$
0.16Net income per share 
    diluted

$
0.19


$
0.12


$
0.11


$
0.15Weighted average
    shares  basic


78,307



78,981



79,736



80,315Weighted average
    shares  diluted


83,963



83,928



84,051



84,042(1) Includes stock-based
    compensation expense

$
628


$
554


$
772


$
473(2) Includes stock-based
    compensation expense

$
7,283


$
6,551


$
8,626


$
4,771(3) Includes stock-based
    compensation expense (benefit)

$
(1,196
)

$
41


$
(252
)

$
24(4) Includes stock-based
    compensation expense (benefit)

$
(9,327
)

$
1,302


$
(1,447
)

$
941   Share-Based Payment Accounting for Stock Issued to
    Employees
   91




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Silicon Image, Inc.



We have audited the accompanying consolidated balance sheets of
    Silicon Image, Inc. and subsidiaries (the Company)
    as of December 31, 2006 and 2005, and the related
    consolidated statements of operations, stockholders
    equity, and cash flows for the years then ended. These financial
    statements are the responsibility of the Companys
    management. Our responsibility is to express an opinion on these
    financial statements based on our audits.



We conducted our audits in accordance with the standards of the
    Public Company Accounting Oversight Board (United States). Those
    standards require that we plan and perform the audit to obtain
    reasonable assurance about whether the financial statements are
    free of material misstatement. An audit includes examining, on a
    test basis, evidence supporting the amounts and disclosures in
    the financial statements. An audit also includes assessing the
    accounting principles used and significant estimates made by
    management, as well as evaluating the overall financial
    statement presentation. We believe that our audits provide a
    reasonable basis for our opinion.



In our opinion, such 2006 and 2005 consolidated financial
    statements present fairly, in all material respects, the
    financial position of the Company as of December 31, 2006
    and 2005, and the results of its operations and its cash flows
    for the years then ended, in conformity with accounting
    principles generally accepted in the United States of America.



As discussed in Note 6 to the consolidated financial
    statements, effective January 1, 2006, the Company changed
    its method of accounting for stock-based compensation in
    accordance with guidance provided in Statement of Financial
    Accounting Standards No. 123(R), Share-Based Payment.



We have also audited, in accordance with the standards of the
    Public Company Accounting Oversight Board (United States), the
    effectiveness of the Companys internal control over
    financial reporting as of December 31, 2006, based on the
    criteria established in Internal Control 
    Integrated Framework issued by the Committee of Sponsoring
    Organizations of the Treadway Commission and our report dated
    March 1, 2007, expressed an unqualified opinion on
    managements assessment of the effectiveness of the
    Companys internal control over financial reporting and an
    unqualified opinion on the effectiveness of the Companys
    internal control over financial reporting.



/s/  DELOITTE & TOUCHE LLP



San Jose, California
    March 1, 2007

92




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM         93




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##### Table of Contents



SIGNATURES      By:
    /s/  STEVE
    TIRADO   Chief Executive Officer
 (Principal Executive Officer)
       Signature

Title

Date/s/  Steve
    TiradoSteve
    Tirado

Director, President and Chief
    Executive Officer (Principal Executive Officer)

March 1, 2007/s/  Robert
    R. FreemanRobert
    R. Freeman

Chief Financial Officer (Principal
    Financial Officer)

March 1, 2007/s/  William
    GeorgeWilliam
    George

Director

March 1, 2007/s/  Peter
    HaneltPeter
    Hanelt

Director

March 1, 2007/s/  John
    HodgeJohn
    Hodge

Director

March 1, 2007/s/  David
    A. HodgesDavid
    A. Hodges

Director

March 1, 2007/s/  Masood
    JabbarMasood
    Jabbar

Director

March 1, 2007/s/  William
    RaduchelWilliam
    Raduchel

Director

March 1, 2007  94




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##### Table of Contents



INDEX TO
    EXHIBITS 3.01

Second Amended and Restated
    Certificate of Incorporation of the Registrant (Incorporated by
    reference from Exhibit 3.03 of the Registrants
    Registration Statement on
    Form S-1
    (File
    No. 333-83665),
    as amended, declared effective by the Securities and Exchange
    Commission on October 5, 1999 (the
    Form S-1)).3.02

Restated Bylaws of the Registrant
    (Incorporated by reference from Exhibit 3.01 of the
    Form 8-K
    filed by the Registrant on February 4, 2005).3.03

Certificate of Amendment of Second
    Amended and Restated Certificate of Incorporation of the
    Registrant (Incorporated by reference from Exhibit 3.04 of
    the
    Form 10-Q
    filed by Registrant on August 14, 2001).4.01

Form of Specimen Certificate for
    Registrants common stock (Incorporated by reference from
    Exhibit 4.01 of the
    Form S-1).10.01*

Form of Indemnity Agreement
    entered into between the Registrant and certain of its directors
    and officers. (Incorporated by reference from Exhibit 10.01
    of the
    Form 10-K
    filed by the Registrant on March 15, 2004).10.02*

1995 Equity Incentive Plan, as
    amended through July 20, 1999, and related forms of stock
    option agreements and stock option exercise agreements
    (Incorporated by reference from Exhibit 10.02 of the
    Form S-1).10.03*

1999 Equity Incentive Plan, as
    amended (including
    Sub-Plan for
    UK employees), and related forms of notice of grant of stock
    options, stock option agreement, stock option exercise notice
    and joint election (for UK employees) (Incorporated by
    reference from Exhibit 10.03 of the
    Form 10-K
    filed by the Registrant on March 16, 2006).10.04*

1999 Employee Stock Purchase Plan
    (including
    Sub-Plan for
    UK employees) and related enrollment forms, subscription
    agreements, notice of suspension, notice of withdrawal and joint
    election (for UK employees).10.05

Business Cooperation Agreement
    dated September 16, 1998 between Intel Corporation and the
    Registrant, as amended October 30, 1998 (Incorporated by
    reference from Exhibit 10.12 of the
    Form S-1).10.06

Patent License Agreement dated
    September 16, 1998 between Intel Corporation and the
    Registrant (Incorporated by reference from Exhibit 10.13 of
    the
    Form S-1).10.07

Digital Visual Interface
    Specification Revision 1.0 Promoters Agreement dated
    January 8, 1999 (Incorporated by reference from
    Exhibit 10.14 of the
    Form S-1).10.08*

Form of Nonqualified Stock Option
    Agreement entered into between Registrant and its officers
    (Incorporated by reference from Exhibit 10.21 of the
    Form S-1).10.09*

CMD Technology Inc. 1991 Stock
    Option Plan and related form of Incentive Stock Option Agreement
    (Incorporated by reference from Exhibit 4.05 of the
    Form S-8
    filed by the Registrant on June 26, 2001).10.10*

CMD Technology Inc. 1999 Stock
    Incentive Plan, as amended, and related form of Stock Option
    Agreement (Incorporated by reference from Exhibit 10.35 of
    the
    Form 10-Q
    filed by the Registrant on November 14, 2001).10.11*

Silicon Communication Lab, Inc.
    1999 Stock Option Plan, as amended, and related form of Stock
    Option Agreement (Incorporated by reference from
    Exhibit 10.35 of the
    Form 10-Q
    filed by the Registrant on November 14, 2001).10.12*

Non-Plan Stock Option Agreement
    between Hyun Jong Shin (John Shin) and the Registrant dated
    November 6, 2001. (Incorporated by reference from
    Exhibit 10.42 of the
    Form 10-K
    filed by the Registrant on March 29, 2002). 95




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##### Table of Contents



10.13

Lease Agreement dated
    December 12, 2002 between iSTAR Sunnyvale Partners, L.P.
    and the Registrant. (Incorporated by reference from
    Exhibit 10.44 of the
    Form 10-K
    filed by the Registrant on March 27, 2003)10.14*

TransWarp Networks, Inc. 2002
    Stock Option/Stock Issuance Plan (Incorporated by reference from
    Exhibit 4.06 of the
    Form S-8
    filed by the Registrant on May 23, 2003).10.15*

Employment Offer Letter between J.
    Duane Northcutt and the Registrant dated February 19, 2002.
    (Incorporated by reference from Exhibit 10.27 of the
    Form 10-K
    filed by the Registrant on March 15, 2005).10.16*

Employment Offer Letter between
    Robert Valiton and the Registrant dated April 17, 2004
    (Incorporated by reference from Exhibit 10.01 of the
    Form 10-Q
    filed by the Registrant on August 9, 2004).10.17*

Employment Offer Letter between
    Patrick Reutens and the Registrant dated September 20, 2004
    (Incorporated by reference from Exhibit 10.2 of the
    Form 10-Q
    filed by the Registrant on November 8, 2004).10.18*

Employment Offer Letter between
    Steve Tirado and the Registrant dated January 24, 2005
    (Incorporated by reference from Exhibit 10.36 of the
    Form 10-K
    filed by the Registrant on March 15, 2005).10.19*

Employment Offer Letter between
    Shin Hyun Jong (John Shin) and the Registrant dated
    August 20, 2001.10.20*

Employment Offer Letter between
    Dale Zimmerman and the Registrant dated January 10, 2005.10.21*

Director Compensation Plan
    (Incorporated by reference from Exhibit 10.01 of the
    Form 10-Q
    filed by the Registrant on May 10, 2005).10.22

Business Cooperation Agreement
    dated April 26, 2005 between Intel Corporation and the
    Registrant (Incorporated by reference from Exhibit 10.01 of
    the
    Form 10-Q
    filed by the Registrant on August 9, 2005).10.23

Lease dated September 22,
    2005 between Jeronimo Technology Partners, LLC and the
    Registrant.10.24

Unified Display Interface
    Specification Promoters Agreement dated April 26, 2005
    among Intel Corporation, National Semiconductor Company and the
    Registrant (Incorporated by reference from Exhibit 10.02 of
    the
    Form 10-Q
    filed by the Registrant on August 9, 2005).10.25*

Employment Offer Letter between
    Robert Freeman and the Registrant dated November 8, 2005
    (Incorporated by reference from Exhibit 10.01 of the
    Form 8-K
    filed by the Registrant on November 14, 2005).10.26*

Silicon Image, Inc. Bonus Plan for
    Fiscal Year 2006 (Incorporated by reference from
    Exhibit 10.01 of the
    Form 8-K
    filed by the Registrant on February 17, 2006).10.27*

Silicon Image, Inc. Sales
    Incentive Plan for Vice President of Worldwide Sales for Fiscal
    Year 2006 (Incorporated by reference from Exhibit 10.02 of
    the
    Form 8-K
    filed by the Registrant on February 17, 2006).10.28/*

Consulting Agreement between David
    Lee and the Registrant dated March 15, 2006. (Incorporated
    by reference to Exhibit 10.03 to our current report on
    Form 8-K
    filed March 16, 2006.10.29

First Amendment to Lease dated
    July 23, 2003 between iStar Sunnyvale Partners, L.P. and
    the Registrant.10.30

Second Amendment to Lease dated
    February 17, 2004 between iStar Sunnyvale Partners, L.P.
    and the Registrant.10.31

Third Amendment to Lease dated
    June 1, 2004 between iStar Sunnyvale Partners, L.P. and the
    Registrant.10.32

Fourth Amendment to Lease dated
    May 10, 2006 between iStar Sunnyvale Partners, L.P. and the
    Registrant. 96




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##### Table of Contents



10.33*

Consulting Agreement between
    Patrick Reutens and the Registrant dated September 18, 2006
    (Incorporated by reference from Exhibit 10.01 of the
    Form 8-K
    filed by the Registrant on September 20, 2006)10.34*

Employment Offer Letter between
    Edward Lopez and the Registrant dated December 23, 2006.10.35

Settlement and License Agreement
    between the Registrant and Genesis Microchip Inc. dated
    December 21, 200610.36*

Silicon Image, Inc. Sales
    Compensation Plan for Vice President of Worldwide Sales for
    Fiscal Year 2007 (Incorporated by reference from
    Exhibit 10.01 to the
    Form 8K/A,
    Amendment No. 1 filed by the Registrant on
    February 27, 2007)21.01

Subsidiaries of the Registrant.23.01

Consent of Deloitte &
    Touche LLP.23.02

Consent of PricewaterhouseCoopers
    LLP24.01

Power of Attorney (included on
    signature page).31.01

Certification of Principal
    Executive Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31.02

Certification of Principal
    Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.32.01**

Certification of Principal
    Executive Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.32.02**

Certification of Principal
    Financial Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.     
    
    Confidential treatment has been requested with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.*
    
    This exhibit is a management contract or compensatory plan or
    arrangement.**
    
    This exhibit is being furnished, rather than filed, and shall
    not be deemed incorporated by reference into any filing of the
    Registrant, in accordance with Item 601 of
    Regulation S-K. 97