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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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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, 2002

Commission file number 000-26887

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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)

(408) 616-4000(Registrant's telephone number, including area code)

Securities
registered pursuant to section 12(g) of the Act: Common Stock, $0.001 par value

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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ý

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 under the Securities Exchange Act of
1934). Yes ý No o

The
aggregate market value of voting and non-voting common equity held by non-affiliates at June 28, 2002 was approximately $371,735,000, based on the last
reported sale price of our common shares on the NASDAQ Stock Market on that date of $6.12 per share. We had 65,673,000 common shares outstanding at June 28, 2002.

Part III
incorporates by reference information from our proxy statement for our annual meeting of stockholders' to be held on May 20, 2003.

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TABLE OF CONTENTS

|Part I                                                   |  |                                                                                                |  |   
|-------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --
|Item 1                                                   |  | Business                                                                                       |  | 1 
|Item 2                                                   |  | Properties                                                                                     |  | 13
|Item 3                                                   |  | Legal Proceedings                                                                              |  | 14
|Item 4                                                   |  | Submission of Matters to a Vote of Securities Holders                                          |  | 15
|Part II                                                  |  |                                                                                                |  |   
|Item 5                                                   |  | Market for the Registrant's Common Stock and Related Stockholder Matters                       |  | 16
|Item 6                                                   |  | Selected Financial Data                                                                        |  | 16
|Item 7                                                   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 17
|Item 7A                                                  |  | Quantitative and Qualitative Disclosure of Market Risk                                         |  | 53
|Item 8                                                   |  | Financial Statements and Supplementary Data                                                    |  | 54
|Item 9                                                   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 54
|Part III                                                 |  |                                                                                                |  |   
|Item 10                                                  |  | Directors and Executive Officers of the Registrant                                             |  | 55
|Item 11                                                  |  | Executive Compensation                                                                         |  | 55
|Item 12                                                  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 55
|Item 13                                                  |  | Certain Relationships and Related Transactions                                                 |  | 55
|Item 14                                                  |  | Controls and Procedures                                                                        |  | 55
|Part IV                                                  |  |                                                                                                |  |   
|Item 15                                                  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 56
|Signatures                                               |  | 90                                                                                            
|Certifications                                           |  | 91                                                                                            
|Index to Exhibits Filed Together with this Annual Report |  | 93                                                                                            

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This report contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-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
Form 10-K are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the only means
of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We
undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-K with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors,
including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image, Inc. in this report and in our other
reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

PART I

Item 1. Business

Silicon Image designs, develops and markets semiconductor products for applications that require high-bandwidth, cost-effective solutions
for high-speed digital data communications. The markets into which we sell our products are personal computer (PC), consumer electronics (CE) and storage.

Products
sold into the PC market generated 58% of our revenue in 2002, 70% of our revenue in 2001 and 96% of our revenue in 2000. Our products for the PC market include:



Our
products in the PC market are based on PanelLink® technology, which is our proprietary implementation of the digital visual interface (DVI) specification that defines a
high-speed serial data communication link between computers and digital displays. The majority of the displays in the PC market employ an analog receiver or a dual-interface
receiver capable of receiving either an analog or digital signal. We do not offer an analog or dual-interface solution, but do partner with other companies to sell
multiple-chip solutions into the dual-interface market. These multiple-chip solutions are typically limited to higher end, larger displays operating at resolutions
of SXGA (1280 pixels × 1024 pixels) and above. In addition, we have licensed certain of our technologies to companies for use in making products for the
dual-interface market.

Products
sold into the CE market generated 11% of our revenue in 2002, 8% of our revenue in 2001 and 4% of our revenue in 2000. Our products for the CE market include:



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Semiconductor
products sold into the storage market generated 15% of our revenue in 2002, 5% of our revenue in 2001 and none of our revenue in 2000. Our products for the storage market
include:



Sales
of storage systems products generated 8% of our revenue in 2002, 17% of our revenue in 2001 and none of our revenue in 2000. During 2002, we decided to phase out our storage
systems products and therefore do not expect significant revenue from these products in 2003.

Development,
licensing and royalties represented 8% of our revenue in 2002 and none of our revenue in 2001 and 2000. During 2002, we decided to license our technology to third parties
that address market segments in which we do not want to participate directly. Additionally, in conjunction with our decision to phase out our storage systems products and change primarily to a
licensing business model, we decided to design products for, and / or license our technology to, third parties in this market segment. We anticipate continuing this business model for our storage
systems technology as advancements and developments warrant.

From
our inception in 1995 through the first half of 1997, we were engaged primarily in developing our first generation PanelLink digital transmitter and receiver products, developing
our high-speed digital interconnect technology, establishing our digital interface technology as an open standard, and building strategic customer and foundry relationships.

In
the third quarter of 1997, we began volume shipments of our first generation PanelLink digital transmitter and receiver products. Since that time, we have introduced several new
generations of transmitter and receiver products providing higher speed and increased functionality. In 1999, we began shipping our first generation digital display controller product.

In
2000, we began focusing our resources on entering two new marketsCE and storage. We acquired two companies during 2000, one of which was a developer of
high-speed transmission technology for data storage applications and the other of which was a provider of digital video processing systems for the CE market.

In
2001, we focused on accelerating our entry into the CE and storage markets, leveraging our IP into licensing revenue and restructuring the company to improve profitability. We
acquired two companies during 2001, one of which was a provider of storage subsystems and semiconductors designed for storage area networks, and the other of which was a provider of mixed-signal and
high-speed circuit designs.

During
2002, we began to see the benefits of our diversification strategy, which resulted in establishing a key presence in the CE and storage markets, both of which we expect to
experience significant growth rates during the next several years. Additionally, we were able to successfully leverage our intellectual property to generate licensing revenue. Lastly, we completed the
final steps of the restructuring program we began in 2001. As part of this restructuring program, we decided in the second quarter of 2002 to phase out our existing storage subsystem products, to not
manufacture new subsystem products, and to license our technology to other companies in this market. Our restructuring

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program has resulted in a more focused market strategy and a more appropriate cost structure for us going forward.

Markets and Customers

We focus our sales and marketing efforts on achieving design wins with leading original equipment manufacturers (OEMs) of PC, CE and storage products. In most
cases, these OEMs outsource manufacturing functions to third parties. Therefore, once our product is designed into an OEMs product, we typically work with the OEMs third party
manufacturer to ready the design for production. Once the design is complete, we sell our products to these third party manufacturers either directly or indirectly through distributors.

Historically,
a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our top five customers, including distributors,
generated 41%, 51% and 57% of our revenue in 2002, 2001 and 2000, respectively. In 2002, shipments to World Peace International, an Asian distributor, generated 15% of our revenue, and shipments to
Weikeng, an Asian distributor, generated 11% of our revenue. In 2001, shipments to Samsung, a Korean customer, and Compaq, a global customer, each generated 12% of our revenue, and shipments to World
Peace International generated 11% of our revenue. In 2000, shipments to World Peace International generated 18% of our total revenue, and shipments to Kanematsu, a Japanese distributor, generated 16%
of our total revenue. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEM's rely upon third party manufacturers or distributors to provide
purchasing and inventory management functions. In 2002, 42% of our revenue was generated through distributors, versus 40% in 2001 and 66% in 2000.

Products

Our industry and the markets we serve are characterized by rapid technological advancement. We constantly strive for innovation in our product offerings. We
introduce products both to address markets or applications that we previously have not addressed, and to replace our existing products with products that are based on more advanced technology and that
incorporate new or enhanced features. We introduced 16 new products in 2002, and expect to introduce 12 to 16 new products in 2003. Although the number of new product introductions may decrease in
2003 from 2002 levels, we expect to continue integrating more functionality into our existing products in order to enhance their performance and capabilities.

When
we introduce replacement products, we notify our customers in advance, work with our customers to qualify and migrate to our newer products and accept final orders for replaced
products. This allows us to eventually discontinue production and support for our older, less advanced products. We may decide to phase out products for reasons other than new product introductions.
Such reasons could include failure of products to achieve market acceptance, changing market conditions and changes in business strategy.

In
1999, the Digital Display Working Group (DDWG), of which we are a promoter, published the digital visual interface (DVI) specification, which defines a high-speed serial
data communication link between computers and digital displays. Our key PC and CE products are based on our PanelLink technology and our highly-integrated PanelLink controller architecture. PanelLink
is our proprietary implementation of the DVI specification. PanelLink architecture is our platform for developing controllers that integrate PanelLink receiver technology with additional functionality
to enable intelligent displays. Key features of our solution include a high-speed interface, low cost of system implementation, system-level integration and scalability. Our solution
enables customers to introduce digital display products, thereby eliminating the need for analog technology in both the host system and display. We believe this provides a number of benefits to our
customers, including lower component

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costs, easy to use "plug and play" products for the end user, better image quality than analog systems, the ability to customize features to differentiate products and shorter design cycles.

PanelLink TransmittersOur PanelLink transmitter products reside on host systems, such as PC motherboards, graphics
add-in boards, notebook PCs, set-top boxes, A/V receivers, DVD and D-VHS players. Transmitters take a stream of digital data from a graphics source, convert it to
DVI-compliant digital output and transmit that output to a receiver in a display. Our PanelLink transmitter products are:

|PanelLink Transmitters      
|----------------------------
|
|SiI 160, SiI 164 and SiI 168
|SiI 170B                    
|SiI 178                     
|SiI 1162                    
|SiI 9190                    

Display ProductsWe have three families of display products: PanelLink receivers, PanelLink controllers and
Intelligent Panel Controllers. Our PanelLink receiver products reside in display systems, such as flat panel displays, projectors and digital TVs. Receivers receive DVI-compliant digital
input and restore the video data format. Our receivers also contain functionality that simplifies the design of digital displays. Our PanelLink receiver products are:

|PanelLink Receivers
|-------------------
|
|SiI 141B           
|SiI 143B           
|SiI 151B           
|SiI 153B           
|SiI 161B           
|SiI 163B           
|SiI 169            
|SiI 9993           

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PanelLink ControllersOur PanelLink controller products are suitable for display systems such as flat panel
displays, CRT monitors and digital TVs. Our PanelLink controller products are:

|PanelLink Controllers
|---------------------
|
|SiI 861              
|SiI 859              
|SiI 863              
|SiI 907B             

Intelligent Panel ControllersOur Intelligent Panel controller products are programmable controllers with
integrated timing controllers that reside on the LCD display module. These products receive digital input, restore the video data format and directly interface with the LCD module electronics. Our
Intelligent Panel controller products are:

|Intelligent Panel Controllers
|-----------------------------
|
|SiI 215A                     
|SiI 223A                     
|SiI 243A                     
|SiI 253                      

Digital Video ProcessorsOur digital video processor products are high-quality digital video
format converters that convert any standard-definition interlaced video signal to a non-interlaced signal, resulting in higher-definition images. These products are suitable for display on
LCD, digital light processing DTVs or progressive scan. Our digital video processors and processing system products are (* denotes product is being phased out):

|Digital Video Processors and Processing Systems
|-----------------------------------------------
|
|SiI 504                                        
|iScan Pro*                                     
|iScan Ultra                                    

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Fibre Channel SerDesOur fibre channel serializer / deserializer (SerDes) products are a
low-power, high-quality (low-jitter), cost-effective solution for applications such as HBAs and switches that connect PCs and servers to large storage
banks. Our Fibre Channel products are:

|Fibre Channel SerDes
|--------------------
|
|SiI 2020A           
|SiI 2022            
|SiI 2024            

Serial ATA Controllers, PHYs and BridgesThe products in our SATALink family include two host controllers, a
dual-channel PHY and two bridge ICs that are intended to enable customers to begin to incorporate serial ATA while they transition from parallel ATA. Our serial ATA controller, PHY and
bridge devices are based on the SATA 1.0 specification, which is used to transmit and receive data at a rate of 1.5 Gbps, and are:

|Serial ATA Controllers and Bridges
|----------------------------------
|
|SiI 3112                          
|SiI 3611                          
|SiI 3012                          

Parallel ATA and USB ControllersOur parallel ATA and USB Controllers serve products incorporating parallel
ATA and USB interfaces such as motherboards, add-in cards and embedded systems. Our parallel ATA and USB controller products are (* denotes product is being phased out):

|Parallel ATA and USB Controllers
|--------------------------------
|
|PCI-643*                        
|PCI 646 U2*                     
|SiI 0648                        
|SiI 0649                        
|SiI 0680                        
|SiI 0670*                       
|SiI 0673*                       

Promotion of Industry Standards

As technology innovators, a key element of our business strategy is the development and promotion of industry standards in our target markets. Current standards
efforts include:



We, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu, announced the formation of the Digital Display Working Group (DDWG) in 1998. Subsequently,
these parties entered into a Promoter's Agreement in which they agreed to:



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In
1999, the DDWG published the DVI 1.0 specification, which defines a high-speed serial data communication link between computers and digital displays. Today, over 100
companies, including systems manufacturers, graphics semiconductor companies and monitor manufacturers have participated in DDWG activities, and many are developing hardware and software products
designed to be compliant with the DVI specification.



In 2000, the High-bandwidth Digital Content Protection (HDCP) specification HDCP 1.0 was released by Intel, with our contributions acknowledged in the
specification. The specification was developed to provide a content protected link from host devices, such as set-top boxes and DVD and D-VHS players, to displays such as HDTVs
and digital TVs. This technology has support from some members of the Motion Picture Industry Association and aims to prevent high-definition movie content from being copied when
transmitted over a digital link.



In December 2002, the final specification for High Definition Multimedia Interface (HDMI) was released. The HDMI 1.0 specification is a
next-generation digital interface for consumer electronics that enables the secure distribution of uncompressed high-definition video and multi-channel audio in a single cable,
providing consumers with a broader array of high-quality digital content while increasing ease of use. This standard was created by Silicon Image, together with Sony, Matsushita Electric
(Panasonic), Phillips, Thomson (RCA), Hitachi and Toshiba, and with strong support from Fox and Universal studios, DirecTV and Echostar. The HDMI specification is based on our transition minimized
differential signaling (TMDS) technology, the underlying technology for DVI 1.0. We expect HDMI to become a standard digital interface for consumer electronics products that carry digital
audio and video signals.



During 2000, we acquired Zillion Technologies, a developer of high-speed transmission technology for data storage applications. Zillion contributed in
drafting the preliminary serial ATA specification (SATA 1.0), which was published in 2001 and is being promoted as a successor to parallel bus technology. We are a contributor to the SATA working
group, which includes APT, Dell, Intel, Maxtor and Seagate among its promoters. In February 2002, we joined the SATA II Working Group as a contributor. The SATA II working group released
"Extensions to Serial ATA 1.0 Specifications" in October 2002 to enhance the existing SATA 1.0 specification for the server and network storage markets, and is developing a specification for
the next-generation SATA speed of 3Gbps. The SATA II working group includes many of the same members as the SATA working group.



In January 2002, we joined the Serial-Attached SCSI (SAS) working group as a contributor. The SAS working group is working to develop a specification that
will propose serial-attached SCSI as a successor to existing parallel bus SCSI technology. Members of the SAS working group include Adaptec, Agilent, Compaq, Dell, Eurologic, Fujitsu, Hitachi, IBM,
LSI Logic, Maxtor, QLogic, Seagate and others.

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Silicon Image Technology



We invented technology upon which the DVI and HDMI specifications are based and have substantial experience in the design, manufacture and deployment of
semiconductor products incorporating this high-speed data communications technology. The advanced nature of our high-speed digital design allows us to integrate significant
functionality with multiple high-speed communication channels using industry-standard, low-cost complementary metal oxide semiconductor (CMOS) manufacturing processes. At the
core of our innovation is a multi-layered approach to providing multigigabit semiconductor solutions.

The
three layers of our multi-layer serial link (MSL) architecture include the physical, coding and protocol layers. Serial link technology is the basis for the physical layer, which
performs electrical signaling in several data communication protocols, including DVI 1.0, HDMI 1.0, Serial ATA and Fibre Channel. This technology converts parallel data into a serial stream that is
transmitted sequentially at a constant rate and then reconstituted into its original form. Our high-speed serial link technology includes a number of proprietary elements designed to
address the significant challenge of ensuring that data sent to a display or a storage device can be accurately recovered after it has been separated and transmitted in serial streams over multiple
channels. In order to enable a display or a storage device to recognize data at the proper time and rate, our digital serial link technology uses a digital phase-locked loop combined with a unique
phase detecting and tracking method to monitor the timing of the data.

At
the coding layer, we have developed substantial intellectual property in data coding technology for high-speed serial communication. Our coding technology simplifies the
protocol for high-speed serial communication and allows tradeoffs to be made in physical implementation of the link, which in turn reduces the cost of bandwidth and simplifies the overall
system design. In addition, we have ensured direct current (DC) balanced transmission and the ability to use TMDS to keep electromagnetic emissions low and to enable connection to fiber optic
interconnects without use of additional components.



Our PanelLink Cinema technology sends high-fidelity digital audio and protected video across the HDMI link for use in the consumer electronics market.
Combining digital video and digital audio transmissions in a single interconnect system simplifies and reduces the cost of the connection between consumer electronics devices, while maintaining
high-quality and protection. PanelLink Cinema technology is fully compliant with the HDMI 1.0 specification.

Research and Development

We have assembled a team of engineers and technologists with extensive experience in the areas of high-speed interconnect architecture, circuit
design, digital imaging processor architecture, LCD panels and storage interconnect, software and systems. Our engineering team includes a group of consultants in Asia that focuses primarily on
advanced technology development. The majority of these consultants are students at a university that we utilize for research and design services.

From
our inception until 1998, our internal research and development efforts focused primarily on the development of our core PanelLink technology, our initial transmitter and receiver
products, and our first intelligent panel controller product. In 1999, we improved our PanelLink technology and developed new transmitter and receiver products, focusing on providing both higher
speeds and improved ease of use. We also began development of our PanelLink architecture for digital displays. In 2000, we focused our internal research and development efforts on integrating our
PanelLink receiver

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technology with additional functionality, such as PanelLink A/V and HDCP, for flat panel displays, digital CRTs and the consumer electronics industry. In 2001, we diversified our research and
development efforts by increasing our investment in storage semiconductor development and by adding storage system architecture and software development expertise through our acquisition of CMD
Technology. In 2002, our research and development efforts focused primarily on technology and applications for the consumer electronics and storage markets, including the development of HDMI
technology.

Our
research and development efforts continue to focus on developing higher bandwidth links with different clocking methodologies for use in various PC, CE and storage applications. By
utilizing our patented data coding technology and different clocking methodologies, we believe our high-speed link can scale with advances in semiconductor manufacturing process technology
and simplify system design.

We
have invested, and expect that we will continue to invest, significant funds for research and development activities. Excluding non-cash stock compensation expense, our
research and development expenses were approximately $32.8 million in 2002, $25.5 million in 2001, and $12.8 million in 2000.

Sales and Marketing

We sell our products to distributors and OEMs throughout the world using a direct sales force with field offices located in North America, Taiwan and
Europe, and indirectly through a network of distributors and manufacturer's representatives located throughout North America, Asia and Europe.

Our
sales strategy for all products is to achieve design wins with key industry leaders in order to grow the markets in which we participate and to promote and accelerate the adoption
rate for industry standards we support or are developing, such as DVI, HDMI and serial ATA. Our sales personnel and applications engineers provide a high-level of technical support to our
customers. Our marketing efforts focus primarily on promoting adoption of the DVI, HDMI and serial ATA specifications, participating in industry trade shows and forums, entering into branding
relationships such as PanelLink for DVI, PanelLink Cinema for HDMI, and SATALink for serial ATA to build awareness of our brands, and on bringing new solutions to markets.

Manufacturing



Our semiconductor products are fabricated using standard CMOS processes, which permit us to engage independent wafer foundries to fabricate our semiconductors. By
outsourcing our manufacturing requirements, we are able to avoid the high cost of owning and operating a semiconductor wafer fabrication facility. This allows us to focus our resources on the design
and quality of our products. Our devices are currently fabricated using 0.5 micron, 0.35 micron, 0.25 micron and 0.18 micron processes. We continuously evaluate the benefits, primarily improved
performance, and feasibility of migrating our products to smaller geometry process technologies. We rely almost entirely on Taiwan Semiconductor Manufacturing Company (TSMC), an outside foundry, to
produce all of our PC, CE and fibre channel and serial ATA storage products. We also rely on other outside foundries, such as Kawasaki and Atmel, to produce our parallel ATA and USB storage
semiconductor products. We do not have long-term supply agreements with any of these foundries and therefore cannot be assured of sufficient capacity availability or future prices. Because
of the cyclical nature of the semiconductor industry, capacity availability can change quickly and significantly. We attempt to optimize wafer availability by continuing to use less advanced wafer
geometries, such as 0.5 micron, 0.35 micron and 0.25 micron, which generally have more available capacity.

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After wafer fabrication, die (semiconductor devices) are assembled into packages and the finished products are tested. Our products are designed to use
low-cost standard packages and to be tested with widely-available semiconductor test equipment. We outsource all of our packaging and the majority of our test requirements to Amkor
Technology in Korea, Advanced Semiconductor Engineering in Taiwan, Malaysia and the United States, and Fujitsu and Kawasaki in Japan. We test a small portion of our products in-house.

The
high-speed nature of our products makes it difficult to test our products in a cost-effective manner prior to assembly. Since the fabrication yields of our
products have historically been high and the costs of our packaging have historically been low, we test our products after they are assembled. Our operations personnel closely review the process
control monitor information provided to us by our foundries. To ensure quality, we have established firm guidelines for rejecting wafers that we consider unacceptable. To date, not testing our
products prior to assembly has not caused us to experience higher final test failures or lower yields. However, lack of testing prior to assembly could have adverse effects if there are significant
problems with wafer processing. Additionally, for newer products and products for which yield rates have not stabilized, we may conduct bench testing using our personnel and equipment, which is more
expensive than fully automated testing.



We focus on product quality through all stages of the design and manufacturing process. Our designs are subjected to in-depth circuit simulation at
temperature, voltage and processing extremes before being fabricated. We pre-qualify each of our subcontractors through a series of industry-standard environmental product stress tests, as
well as an audit and analysis of the subcontractor's quality system and manufacturing capability. We also participate in quality and reliability monitoring through each stage of the production cycle
by reviewing data from our wafer foundries and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yields. Our independent
foundries and assembly and test subcontractors have achieved ISO 9000 certification.

Intellectual Property

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. As of December 31, 2002, we have been issued 31 United States
patents and have in excess of 130 United States patent applications pending. Our issued patents expire in 2016 or later, subject to our payment of periodic maintenance fees. We cannot assure you that
any valid patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our technology, or that any patent will be upheld in the
event of a dispute. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. We also generally control access to and
distribution of our documentation and other proprietary information. Despite our precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology
without authorization, develop similar technology independently or design around our patents. It is also possible that some of our existing or new licensing relationships will enable other parties to
use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive, and the outcome often is not predictable, and the relief
available may not compensate for the harm caused.

Our
participation in the DDWG requires that we grant others the right to use specific elements of our intellectual property in implementing the DVI specification in their products, at no
cost, in exchange for an identical right to use specific elements of their intellectual property for this purpose.

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We agreed to grant rights to the DDWG members and other adopters of the DVI specification in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to
rely on intellectual property law to prevent the adopters of the DVI specification from using certain specific elements of our intellectual property for free. This reciprocal free license covers the
connection between a computer and digital display. It does not, however, extend to the internal methods by which such performance is created. Although the DVI specification is an open industry
standard, we have developed proprietary methods of implementing the DVI specification. The intellectual property that we have agreed to license defines the logical structure of the interface, such as
the number of signal wires, the signaling types, and the data encoding method for serial communication. Our implementation of this logical structure in integrated circuits remains proprietary, and
includes our techniques to convert data to and from a serial stream, our signal recovery algorithms and our circuits to reduce electromagnetic interference (EMI). Third parties may develop proprietary
intellectual property relating to DVI implementations that would prevent us from developing or enhancing our DVI implementation in conflict with those rights. Third parties may also develop equivalent
or superior implementations of the DVI specification and we cannot guarantee that we will succeed in protecting our intellectual property rights in our proprietary implementation. Third parties may
have infringed or be infringing our intellectual property rights, or may do so in the future, and we may not discover that fact in a timely or cost-effective manner. Moreover, the cost of
pursuing an intellectual property infringement may be greater than any benefit we would realize.

Our
participation as a founder of the HDMI specification requires that we grant others the right to use specific elements of our intellectual property in implementing the HDMI
specification in their products, in exchange for a license. This license bears an annual fee and royalties that are payable to HDMI
Licensing, L.L.C., a wholly-owned subsidiary of ours. There can be no assurance that such license fees and royalties will adequately compensate us for having to license our intellectual property. The
license, with restrictions, generally covers the patent claims necessary to implement the specification of an interface for CE devices, and does not extend to the internal methods by which such
performance is created. Although the HDMI specification is a proposed industry standard, we have developed proprietary methods of implementing the HDMI specification. The intellectual property that we
have agreed to license defines the logical structure of the interface, such as the number of signal wires, the signaling types, and the data encoding method for serial communication. Our
implementation of this logical structure in integrated circuits remains proprietary, and includes our techniques to convert data to and from a serial stream, our signal recovery algorithms, our
implementation of audio and visual data processing, and our circuits to reduce EMI. Third parties may also develop intellectual property relating to HDMI implementations that would prevent us from
developing or enhancing our HDMI specification in conflict with those rights. Third parties may also develop equivalent or superior implementations of the HDMI specification and we cannot guarantee
that we will succeed in protecting our intellectual property rights in our proprietary implementation. Third parties may have infringed or be infringing our intellectual property rights, or may do so
in the future, and we may not discover that fact in a timely or cost-effective manner. Moreover, the cost of pursuing an intellectual property infringement may be greater than any benefit
we would realize. In addition, third parties may not pay the prescribed license fees and royalties, in which case we may become involved in infringement or collection actions, or we may determine that
the cost of pursuing such matters may be greater than any benefit we would realize. We agreed to grant rights to the founders and adopters of the HDMI specification in order to promote the adoption of
our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the founders and adopters of the HDMI specification from using certain specific
elements of our intellectual property for the specified royalties.

We
entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the grantor's patents, including certain future patents, with specific
exclusions related to the grantor's current and anticipated future products and network devices. Products excluded include

11

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our digital receivers, discrete digital transmitters and discrete display controllers, and Intel's processors, chipsets, graphics controllers and flash memory products. This cross-license does not
require delivery of any masks, designs, software or any other item evidencing or embodying such patent rights, thus making "cloned" products no easier to create. The cross-license agreement expires
when the last licensed patent expires, anticipated to be no earlier than 2016, subject to the right of either party to terminate the agreement earlier upon material breach by the other party, or a
bankruptcy, insolvency or change of control of the other party. We have forfeited, however, our ability to rely on intellectual property law to prevent Intel from using our patents within the scope of
this license. To date, we are not aware of any use by Intel of our patent rights that negatively impacts our business.

The
semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which can result in significant, protracted litigation. We
have brought a patent infringement suit against Genesis Microchip, which is described in further detail below in the section entitled "Legal Proceedings."

Competition

The markets in which we compete are intensely competitive and are characterized by rapid technological change, evolving standards, short product life cycles and
decreasing prices. We believe that some of the key factors affecting competition in our markets are levels of product integration, compliance with industry standards,
time-to-market, cost, product capabilities, system design costs, intellectual property, customer support, quality and reputation.

In
the PC market, our products face competition from a number of sources including analog solutions, DVI-compliant solutions, dual-interface solutions and other
digital interface solutions.



The
market for our intelligent panel controller products is also very competitive. Some of our intelligent panel controller products are designed to be functionally interchangeable with
similar products sold by National Semiconductor, Texas Instruments and Thine.

In
the consumer electronics market, our digital interface products are used to connect new cable set-top boxes, satellite set-top boxes and DVD players to digital
televisions. These products incorporate

12

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DVI and HDCP, or HDMI with or without HDCP support. Companies that have announced or are shipping competing DVI-HDCP solutions include TI, Thine, Broadcom, and Genesis. In addition, our
video processor products face competition from products sold by AV Science, Broadcom, Focus Enhancements, Genesis Microchip, Mediamatics, Micronas Semiconductor, Oplus, Philips Semiconductor,
Pixelworks, and Trident. We also compete in some instances against in-house processing solutions designed by large consumer electronics OEMs. We expect competition for HDMI products from
the other HDMI founders and adopters, including Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba.

In
the storage market, our fibre channel products face competition from companies selling similar discrete products, including Agilent, Mindspeed, PMC-Sierra, Serverworks and
Vitesse, from other Fibre Channel SerDes providers who license their core technology, such as LSI Logic, and from companies that sell HBA controllers with integrated SerDes, such as QLogic and
Agilent.

Our
serial ATA products compete with similar products from Marvell, VIA, SIS and Promise. In addition, other companies, such as APT, Intel, LSI Logic, ServerWorks and Vitesse, have
developed or announced intentions to develop serial ATA products. We also are likely to compete against Intel and other motherboard chip-set makers that have announced intentions to
integrate serial ATA functionality into their chipsets.

Many
of our competitors have longer operating histories and greater presence in key markets, greater name recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and customer
requirements, or devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, Intel, National
Semiconductor and Texas Instruments, and consumer electronics manufacturers, such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba, may compete against us in the future. We cannot assure you
that we can compete successfully against current or potential competitors, or that competition will not seriously harm our business.

Employees

As of December 31, 2002, we had a total of 249 employees, including 8 located outside of the United States. None of our employees are represented by a
collective bargaining agreement, nor have we experienced any work stoppages. We consider our relations with our employees to be good. We depend on the continued service of our key technical, sales and
senior management personnel, and our ability to attract and retain additional qualified personnel. If we are unable to hire and retain qualified personnel, our business will be seriously harmed.

Available Information

Our Internet website address ishttp://www.siliconimage.com. We make available free of charge through our Internet
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.

Item 2. Properties

Our principal operating facility, consisting of approximately 80,000 square feet of space in Sunnyvale, California, is leased through August 1, 2010 and
should be adequate to meet our requirements through at least 2003. We also have approximately 91,000 square feet of space in Irvine, California, which is leased through November 2005, and
approximately 8,000 square feet of space in

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Milpitas, California, which we currently do not occupy and which is leased through April 2006. We currently sublease to third parties, under two separate arrangements, approximately 24,000
square feet of our space in Irvine, California on conventional terms, and are attempting to sublease additional space at this facility and at our Milpitas facility. Each of our subleases, one of which
is on a month-to-month basis and the other of which is through July 2003, is for approximately 12,000 square feet of space.

Item 3. Legal Proceedings

On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis
Microchip, Inc. (collectively, Genesis) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the Federal
Suit). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the
importation of articles infringing our patent (the ITC investigation). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our
patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on
February 7, 2002. We filed an amended complaint for the Federal Suit as of February 28, 2002. In April 2002, Genesis answered and made counterclaims against us for
non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis'
counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain
of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims. In
August 2002, the Court granted our motion and dismissed Genesis' counterclaims without leave to amend. In September 2002, we filed a
motion for summary judgment, upon which the Court has yet to rule. In October 2002, both parties filed several more motions for summary judgment, upon which the Court has yet to rule. Several
dispositive motions have subsequently been filed under seal and were heard by the Court in March 2003; the Court has yet to rule on these motions. Depending on the outcome of such motions, a
trial date may be set, the case may be dismissed, or other orders may be entered. Management intends to prosecute our position vigorously until this matter is resolved. Through December 31,
2002, we have spent approximately $8.3 million on this matter and expect to continue to incur significant costs through at least the first half of 2003.

Silicon
Image, certain officers and directors, and Silicon Image's underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et
al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all defendants were part of a scheme to
manipulate the price of Silicon Image's stock in the aftermarket following Silicon Image's initial public offering in October 1999. Response to the complaint and discovery in this action on
behalf of Silicon Image and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the
Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for the time being. In February 2003, the Court denied underwriters' motion
to dismiss and ordered that the case may proceed against issuers including against Silicon Image. At this time, we cannot predict the outcome of this lawsuit; however, we intend to defend this matter
vigorously.

Silicon
Image, certain officers and directors, and Silicon Image's underwriters have been named as defendants in a securities class action lawsuit captioned Liu v. Credit Suisse First
Boston Corp., et al., No. 03-20459 (S.D. Fla. 2003) pending in Federal District Court for the Southern District of Florida. Plaintiff filed an action on behalf of a putative class
of shareholders who purchased stock from some or

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all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The lawsuit alleges that Silicon Image and certain officers were part of a scheme by Credit
Suisse First Boston to artificially inflate the price of Silicon Image's stock through the dissemination of allegedly false analysts' reports. Silicon Image has not been served with a copy of the
complaint. At this time, we cannot predict the outcome of this lawsuit; however, we intend to defend this matter vigorously.

On
August 7, 2002, we filed a demand for arbitration with the American Arbitration Association, file #74 Y 117 01399 02 GAP, against the principal shareholders of CMD Technology
(CMD) relating to shares held in escrow in connection with our acquisition of CMD. Pursuant to agreements by which we acquired CMD, a portion of the Silicon Image common stock issued to the principal
shareholders of CMD was held in two separate escrow pools as collateral for the indemnification obligations of these shareholders. We previously made indemnification claims against these escrow pools
for the release of escrow shares with a value of approximately $5.4 million, which claims were contested by the principal shareholders of CMD. On February 28, 2003, we and the principal
shareholders of CMD entered into a settlement agreement and mutual release, pursuant to which our indemnification claims were resolved. As a result of the settlement, we expect to receive 949,780 of
the escrowed shares, valued at approximately $4.8 million.

In
addition, we are involved in a number of judicial and administrative proceedings incidental to our business. We intend to prosecute or defend, as appropriate, such matters vigorously,
and although adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material
adverse effect on our results of operations or financial position.

The
amount of legal fees we incur with respect to the litigation matters described above will depend on the duration of our litigation matters, as well as the nature and extent of the
litigation activities. We are not able to accurately estimate the amount of legal fees we will incur in 2003 with respect to the litigation matters described above, however, we do expect to incur
substantial amounts through at least the first half of 2003.

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

None.

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PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

Our common shares have been traded on the NASDAQ Stock Market under the symbol "SIMG" since our initial public offering on October 6, 1999. Our shares are
not listed on any other markets or exchanges. The following table shows the high and low closing prices for our common shares as reported by the NASDAQ Stock Market:

High

Low2002Fourth Quarter

$
7.42

$
2.34Third Quarter


6.87


3.34Second Quarter


10.67


4.41First Quarter


9.14


4.062001Fourth Quarter


4.60


1.12Third Quarter


4.85


2.08Second Quarter


5.39


2.97First Quarter


9.25


2.53


As
of January 31, 2003, we had approximately 227 holders of record of our common shares and a substantially greater number of beneficial owners.

We
filed a Registration Statement on Form S-1 (File No. 333-83665) that was declared effective by the SEC on October 5, 1999. On
October 6, 1999, Silicon Image shares commenced trading, and on October 12, 1999, we completed the sale of all 8,970,000 registered shares at a price of $6.00 per share.

We
received net proceeds of $48 million, after deducting underwriting discounts and commissions of approximately $3.8 million and estimated offering expenses of
approximately $1.7 million. None of these offering expenses were paid directly or indirectly to any of our directors or officers, any person owning 10% or more of any class of our equity
securities, or any of our affiliates. We intend to use the proceeds from this offering for general corporate purposes, including working capital and capital expenditures.

We
have never declared or paid cash dividends on shares of our capital stock. We intend to retain any future earnings to finance growth and do not anticipate paying cash dividends in the
future.

In
connection with our acquisition of Zillion Technologies, LLC, we are obligated under an exchange agreement to periodically issue to the two founders of Zillion shares of our common
stock as consideration for their membership interests in Zillion which we acquired and services provided pursuant to their employment agreements with us. The Zillion founders were granted registration
rights with respect to the shares to be issued under this exchange agreement. These issuances of shares were made in reliance on an exemption from registration under Section 4(2) of the
Securities Act. On December 31, 2002, we issued 18,750 shares of our common stock to the Zillion founders pursuant to the exchange agreement. The issuances of shares were made without general
solicitation or advertising and were only made to two individuals.

Item 6. Selected Financial Data

The following selected financial data should be read in connection with our consolidated financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and

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Results of Operations" included elsewhere in this Form 10-K. Historical results of operations are not necessarily indicative of future results.

|                                                  |                         | Year Ended December 31, |        
|------------------------------------------------- | ----------------------- | ----------------------- | -------
|
|
|Statements of Operations Data:                    |                         |                         |        
|Total revenue                                     |                         | $                       | 81,539 
|Cost of revenue:                                  |                         |                         |        
|                                                  | Absolute dollars(1)     |                         | $      
|                                                  | % of revenue            |                         |        
|Research and development:                         |                         |                         |        
|                                                  | Absolute dollars(2)     |                         | $      
|                                                  | % of revenue            |                         |        
|Selling, general and administrative:              |                         |                         |        
|                                                  | Absolute dollars(3)     |                         | $      
|                                                  | % of revenue            |                         |        
|Net loss from operations                          |                         | $                       | (40,850
|Net loss                                          |                         | $                       | (40,092
|Net loss per share:                               |                         |                         |        
|                                                  | Basic and diluted       |                         | $      
|                                                  | Weighted average shares |                         |        
|Balance Sheet and Other Data as of Year End:      |                         |                         |        
|Cash, cash equivalents and short-term investments |                         | $                       | 35,833 
|Working capital                                   |                         | $                       | 27,787 
|Total assets                                      |                         | $                       | 77,616 
|Tangible assets                                   |                         | $                       | 64,595 
|Long-term debt obligations                        |                         | $                       |       
|Total stockholders' equity                        |                         | $                       | 48,170 
|Tangible net book value                           |                         | $                       | 35,149 
|Regular full-time employees                       |                         |                         | 249    

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Silicon Image designs, develops and markets semiconductor products for applications that require high-bandwidth, cost-effective solutions
for high-speed digital data communications. The markets into which we sell our products are personal computer (PC), consumer electronics (CE) and storage.

Products
sold into the PC market generated 58% of our revenue in 2002, 70% of our revenue in 2001 and 96% of our revenue in 2000.

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Our
products in the PC market are based on PanelLink technology, which is our proprietary implementation of the digital visual interface (DVI) specification that defines a
high-speed serial data communication link between computers and digital displays. Despite sluggish growth in the host portion of the PC market and a movement among graphic card
manufacturers to eliminate the need for discrete transmitters by integrating transmitter functionality into their graphic chips, we expect continued DVI adoption to result in increased overall demand
for discrete transmitters. The display portion of the PC market remains predominantly analog or dual-interface, which is capable of receiving either an analog or digital signal. We do not
offer an analog or dual-interface solution, but do partner with other companies to sell multiple-chip solutions into the dual-interface market. These
multiple-chip solutions are typically limited to higher end, larger displays operating at resolutions of SXGA and above. In addition, we have licensed certain of our technologies to
companies for use in making products for the dual-interface market.

Products
sold into the CE market generated 11% of our revenue in 2002, 8% of our revenue in 2001 and 4% of our revenue in 2000. Our CE products offer a secure digital video and audio
transmission for consumer devices. Demand for these products will be driven primarily by the adoption rate of new technologies and industry standards, such as DVI with HDCP and HDMI, respectively.

Semiconductor
products sold into the storage market generated 15% of our revenue in 2002, 5% of our revenue in 2001 and none of our revenue in 2000. Demand for our storage products is
dependent upon the rate at which technology transitions from parallel to serial, and the extent to which serial ATA and
fibre channel functionality are integrated into chip sets and controllers offered by other companies, making our discrete become unnecessary.

Sales
of storage subsystems products generated 8% of our revenue in 2002, 17% of our revenue in 2001 and none of our revenue in 2000. We are phasing out our subsystems products and do
not plan on developing, manufacturing and selling new subsystems products in the future. Therefore, we expect sales of such products to represent less than 2% of our revenue in 2003. In conjunction
with our decision to phase out our storage systems products and change primarily to a licensing business model, we decided to design products and / or license our technology to third parties in this
market segment. We anticipate continuing this business model for our storage systems technology as advancements and developments warrant. In 2002, a large portion of our development, licensing and
royalty revenue was related to storage systems technology we acquired in connection with our acquisition of CMD Technology. The majority of this revenue was related to licensing fees associated with
one storage systems provider. This licensee paid these license fees pursuant to a development and license agreement under which we have worked with the licensee to provide custom hardware designs and
firmware for use in a storage bridge controller board. We are entitled to receive royalties beginning in the second quarter of 2003 based on the unit volume of these controller boards contained in
products shipped by the licensee.

From
our inception in 1995 through the first half of 1997, we were engaged primarily in developing our first generation PanelLink digital transmitter and receiver products, developing
our high-speed digital interconnect technology, establishing our digital interface technology as an open standard, and building strategic customer and foundry relationships. During that
period, we derived substantially all of our revenue from contracts providing for the joint development of technologies for high-speed digital communication and intelligent panel
controllers for flat panel displays, as well as from licensing our high-speed digital interconnect technology.

In
the third quarter of 1997, we began volume shipments of our first generation PanelLink digital transmitter and receiver products. Since that time, we have derived most of our revenue
from the sale of PanelLink products and we have introduced several new generations of transmitter and receiver products providing higher speed and increased functionality. In 1999, we began shipping
our first generation digital display controller product. Our digital display controller products integrate our

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receiver with digital image processing and display controller technology, which enables development of intelligent displays for the mass-market.

In
October 1999, we raised approximately $48 million in our initial public offering. We have incurred losses in each year since our inception and at December 31,
2002, we had an accumulated deficit of $159.8 million.

In
2000, we began focusing our resources on entering two new markets, storage and CE, which we believed would grow significantly and in which we believed we could apply our technology
and expertise
in high-speed serial interfaces. During 2000, we acquired Zillion, a developer of high-speed transmission technology for data storage applications, and DVDO, a provider of
digital video processing systems for the CE market.

In
2001, we focused on accelerating our entry into the CE and storage markets, leveraging our IP into licensing revenue and restructuring the company to improve profitability. During
2001, we acquired CMD, a provider of storage subsystems and semiconductors designed for storage area networks, and Silicon Communication Lab, a provider of mixed-signal and high-speed
circuit designs.

Year 2002

During 2002, we achieved double-digit revenue growth in each fiscal quarter, resulting in record annual revenue of $81.5 million, which was a 57% increase
from 2001 revenue levels. We also began to see the benefits of our diversification strategy, which resulted in establishing a key presence in the CE and storage markets, both of which we expect to
experience significant growth rates during the next several years. Additionally, we were able to successfully leverage our intellectual property to generate $6.7 million of development and
licensing revenue.

In
the CE market, the HDMI (High Definition Multimedia Interface) specification was published. HDMI is a new standard for secure digital video and audio transmission for consumer
devices. This standard was created by Silicon Image, together with Sony, Matsushita Electric (Panasonic), Philips, Thomson (RCA), Hitachi and Toshiba, and with strong support from Fox and Universal
studios, DirecTV and Echostar. We announced our first HDMI products in the fourth quarter and believe every digital TV, DVD and set-top box will include a digital interconnect, whether it
is DVI with high definition content protection (HDCP) or HDMI, within the next five years. During the year, DVI with HDCP was embraced by high-end manufacturers of digital TVs, DVDs and
set-top boxes.

In
the storage market, we announced our new SATALink family of end-to-end serial ATA solutions for the storage market, including a fully integrated
PCI-to-SATA controller. Intel selected our product for inclusion on their next-generation motherboards, and we were able to achieve numerous design wins with our
SATALink products. We believe we are well-positioned for the anticipated transition to serial ATA technology, which has been somewhat limited to this point by the availability of serial
ATA-enabled hard drives. Additionally, we achieved key design wins with our fibre channel products and are positioned to benefit as we anticipate that 2Gb switches will become the industry
standard. Demand declined throughout the year for our parallel ATA and USB 1.0 products as the market began to transition to serial ATA and USB 2.0. We expect demand for these legacy products to
continue to decrease throughout 2003.

In
the PC market, Display Search, an independent research firm, estimates that the DVI adoption rate increased to 12% in 2002, from 7% in 2001. We expect the adoption rate to increase
significantly during the next two years as quality, cost and content will make an all-digital connection more attractive than an analog solution, and we also expect the prices of digital
displays to continue to decrease. Our
transmitter products continued to experience competitive pressure, primarily from Thine and Texas Instruments, resulting in lower average selling prices for these products. We are still the market
leader for discrete transmitter products, but expect graphic card manufacturers to continue to

19

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integrate a transmitter into their graphics chip, thus eliminating the need for a discrete transmitter device in many host products. We believe that integration in the next
two-to-three years will be limited to lower resolution technology, and that higher resolutions will continue to require a discrete transmitter to achieve
high-resolution quality. During 2002, we introduced a low cost add-in card that can be used in conjunction with Intel's 845G chip set to provide an all-digital
connection to flat panels. Prior to this introduction, a more expensive, high-end graphics card was needed for high quality digital video and graphics. We continued to lose market share in
the receiver market during 2002, as OEMs continued to use dual-interface solutions in flat panels to accommodate both digital and analog signals. We were able to partner with other
companies to offer a three-chip discrete solution that we believe is a cost-effective alternative to a dual-interface solution. In addition, we generated licensing
revenue by licensing certain technology to companies for use in making products for the dual-interface market.

During
2002, we also focused on improving the company's profitability and reducing our cash usage rate. Our cash and short-term investments declined by $5.4 million in
2002, versus $19.0 million in 2001.

Outlook

We expect 2003 revenue to increase from the level achieved in 2002, and believe our revenue in the first quarter of 2003 will be flat to slightly up from the
fourth quarter of 2002. We expect to be cash flow positive in 2003.

Our
expectation of overall revenue growth and positive cash flow in 2003 is based on four assumptions. First, we believe the DVI adoption rate will increase in the PC market as the
quality, cost and content capabilities of all-digital solutions become more attractive than those offered by analog solutions and as prices of digital displays become lower. Display Search
forecasts the adoption rate to increase from approximately 12% in the fourth quarter of 2002 to approximately 17% by the end of 2003. Second, we achieved numerous design wins in the CE market for DVI
with HDCP and HDMI products, and expect these designs to go into production in the middle of the year. Although it is difficult to predict exactly when and how aggressively revenue from these products
will ramp during 2003, our expectation is that we will generate significant revenue from these designs in the second quarter and that revenue will grow quarter-over-quarter
throughout the remainder of 2003. Third, we believe that the storage market will continue its transitions to 2 Gb fibre channel switches and serial ATA technology, which should result in increasing
revenue from our fibre channel and SATALink products. We expect the availability of serial ATA-enabled hard drives and other peripherals to improve, which should enable acceleration of the
transition to serial ATA technology. Fourth, we expect licensing and royalty revenue to nearly double during 2003 as we continue to implement our strategy of licensing our technology to companies that
address market segments in which we have chosen not to directly participate, and expect to begin receiving royalties from licenses entered into during 2001 and 2002.

Among
the factors that may cause our actual results to differ materially from those anticipated by our assumptions include the rate at which the PC market adopts DVI, CE market
acceptance of our DVI with HDCP and HDMI products, the rate at which the storage market transitions to 2 Gb fibre channel switches and serial ATA technology, consumer demand in the PC and CE markets,
the availability of serial ATA-enabled hard drives and other peripherals, whether and how quickly OEMs are able to integrate transmitters in their graphics chips, our ability to
leverage our intellectual property into licensing revenue and the ability of our semiconductor foundries to manufacture our products in commercial volumes at an acceptable cost and in a timely manner.
In addition, our revenue remains dependent on competition and general economic and market conditions, none of which can be accurately predicted.

20

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We
expect our gross margin percentage to increase slightly from 2002 levels as a result of higher licensing revenue, for which there is no associated cost of sales, manufacturing cost
reductions on certain of our higher volume products, higher unit volume and shifts in product mix whereby higher margin CE products will generate a higher percentage of our total revenue and lower
margin storage board products will generate nominal revenue. These positive effects will be offset by declining average selling prices (ASPs), especially for products in the PC market, and higher
manufacturing overhead spending to support increased production levels for products in the CE and Storage markets.

Excluding
non-cash charges for stock compensation expense, we expect the dollar amount of our R&D expense to increase approximately 14% in 2003. R&D expense will be incurred
for enhancements to existing products and for further development of technology related to consumer electronics and storage applications. Excluding non-cash charges for stock compensation
expense, we expect SG&A expense for 2003 to increase approximately 7% over 2002, primarily as a result of our scheduled implementation of a new ERP system in 2003 and increased headcount levels
necessary to support our revenue growth. Our plan is to control R&D and SG&A expenses such that these expenses, exclusive of non-cash charges for stock compensation expense, in the fourth
quarter of 2003 represent approximately 36% of our fourth quarter revenue.

We
expect to incur substantial non-cash stock compensation expense in 2003 and future periods as a result of previous stock option repricings, stock options assumed in
connection with our acquisitions in 2000 and 2001, the issuance of stock options to consultants, and modifications to stock options. We may also incur non-cash stock compensation expense
in connection with future acquisitions. The amount of stock compensation expense in each period will fluctuate with changes in our stock price and volatility.

During
2003 and future periods, we may also incur non-cash expenses for the impairment or amortization of intangible assets.

We
will also incur legal fees in 2003 in conjunction with our patent infringement lawsuit against Genesis. The amount of legal fees incurred will depend on the duration of the
litigation, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur with respect to this matter, however, we do
expect to incur substantial amounts through at least the first half of 2003.

In
March 2003, we exercised an option to acquire TransWarp Networks (TransWarp), a privately-held storage networking company. In connection with this acquisition, we
anticipate issuing approximately 2.4 million shares of our common stock in exchange for all outstanding shares of TransWarp capital stock, and converting all outstanding TransWarp stock options
into options to purchase approximately 700,000 shares of our common stock. We also anticipate assuming TransWarp's stock option plan and having a remaining reserve of approximately 75,000 shares
available for issuance under such plan following the acquisition. We anticipate adding approximately 10 employees as a result of this acquisition. Subject to the satisfaction of customary closing
conditions, including due diligence and no material adverse changes, we anticipate that the acquisition will close in April 2003.

In
March 2003, we reorganized our business to better enable customer focus, strategic alignment and operational excellence. As part of this reorganization, we will reduce our
workforce by approximately 35 people, or 15%. These reductions will be primarily in engineering and operations functions. As a result of our workforce reduction, we expect to record a restructuring
expense consisting of severance costs and non-cash expenses for stock option modifications in the first quarter of 2003.

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Commitments, Contingencies and Concentrations

In September 1998, we entered into an agreement with Intel to develop and promote the adoption of a digital display interface specification. In connection
with this agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $1.75 per share. Under the same agreement, we granted Intel a warrant to purchase 285,714 shares of
our common stock at $0.18 per share upon achievement of a specified milestone that was reached during the first quarter of 1999. Both of these warrants were exercised in May 2001. Additionally,
if a second specified milestone is achieved, which we do not believe is likely, we would be required to grant Intel a third warrant to purchase 285,714 shares of our common stock at $0.18 per share.
The estimated fair value of the warrant at December 31, 2002 was $1.7 million.

Historically,
a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our top five customers, including distributors,
generated 41%, 51%, and 57% of our revenue in 2002, 2001 and 2000, respectively. The decrease in 2002 from prior year levels can be attributed to our market diversification. Additionally, the
percentage of revenue generated through distributors tends to be significant, since many OEM's rely upon third party manufacturers or distributors to provide purchasing and inventory management
functions. In 2002, 42%
of revenue was generated through distributors, compared to 40% in 2001 and 66% in 2000. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases, we
would expect a decrease in the percentage of our revenue generated through distributors.

A
significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, generated 64%, 64%, and 71% of our revenue in 2002,
2001, and 2000, respectively. The reason for our geographical concentration in Asia is that most of our products are part of flat panel displays, graphic cards and motherboards, the majority of which
are manufactured in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our
geographic revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has
been denominated in U.S. dollars.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are
relevant. Actual results may differ materially from our estimates. We believe the following accounting policies are critical, either because they relate to financial statement line items that are key
indicators of our financial performance (such as revenue) and/or because their application requires significant management judgment.



For products sold directly to end-users, or to distributors that do not receive price concessions and do not have rights of return, we recognize
revenue upon shipment and title transfer if we believe collection is reasonably assured. Reserves for sales returns and allowances are estimated based primarily on historical experience and are
provided at the time of shipment. The amount of sales returns and allowances has not been, and is not expected to be, material.

22

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For sales to distributors with agreements allowing for price concessions and product returns, we recognize revenue based on our best estimate of when the distributor sold the product to
its end customer. Our estimate of distributor sell-through to end customers is based on point of sales reports received from our distributors. Due to the timing of receipt of these
reports, we recognize distributor sell-through using information that lags quarter end by one month. Revenue is not recognized upon shipment since, due to various forms of price
concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given
period of time. Revenue is earned when the distributor sells the product to an end-user, at which time our sales price to the distributor becomes fixed. Pursuant to our distributor
agreements, older or end-of-life products are sold with no right of return and are not eligible for price concessions. For these products, revenue is recognized upon shipment
and title transfer if we believe collection is reasonably assured.

At
the time of shipment to distributors, we record a trade receivable for the selling price since there is a legally enforceable right to payment, relieve inventory for the carrying
value of goods shipped since legal title has passed to the distributor, and record the gross margin in "deferred margin on sales to distributors", a component of current liabilities on the balance
sheet. Deferred margin represents the gross margin on the sale to the distributor; however, the amount of gross margin we recognize in future periods could be less than the deferred margin as a result
of price concessions. We do not reduce deferred margin by estimated future price concessions; instead, price concessions are recorded when incurred, which is generally at the time the distributor
sells the product to an end-user. The difference between deferred margin and the margin actually recognized has not been material in the past; however, since price concessions are highly
dependent upon market conditions, there can be no assurance that the difference will not be material in the future. Price concessions are not granted for amounts in excess of the deferred margin.

License
revenue is recognized when an agreement with a licensee exists, the price is fixed or determinable, delivery or performance has occurred, and collection is reasonably assured.
Generally, we expect to meet these criteria and recognize revenue at the time we deliver the agreed-upon items. However, we may defer recognition of revenue until cash is received if
collection is not reasonably assured at the time of delivery, and we may enter into agreements requiring customer acceptance of deliverables, in which case we would defer recognition of revenue until
the licensee has accepted the deliverables. Development revenue is recognized when project milestones have been completed and acknowledged by the other party to the development agreement, and
collection is reasonably assured.



We review collectibility of accounts receivable on an on-going basis and provide an allowance for amounts we estimate will not be collectible. During
our review, we consider our historical experience, the age of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency. Write-offs to date have not
been material. At December 31, 2002, we had $12.1 million of gross accounts receivable and an allowance for doubtful accounts of $519,000.



We record inventories at the lower of standard cost, determined on a first-in first-out basis, or market. Standard cost approximates
actual cost. Standard costs are determined based on our estimate of material costs, manufacturing yields, costs to assemble, test and package our products, and allocable indirect costs. We review
differences between standard and actual costs, and, based on the nature of the difference, determine whether to record the amount on our balance sheet or in our statement of operations. Standard costs
are evaluated at least twice each year.

23

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Reserves
are provided for excess and obsolete inventory, and are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer
demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will
be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six months demand are fully reserved and the related
charge is recorded as a cost of revenue. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we
forecast demand for the product. This treatment is in accordance with Accounting Research Bulletin 43 and Staff Accounting Bulletin 100. At December 31, 2002 and 2001, we had gross inventories
of $13.1 million and $10.7 million, respectively, and reserves for excess and obsolete inventory of $5.8 million and $4.2 million, respectively.



Consideration paid in connection with acquisitions is required to be allocated to the assets, including identifiable intangible assets, and liabilities acquired.
Acquired assets and liabilities are recorded based on our estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates.

For
certain long-lived assets, primarily fixed assets and intangible assets, we are required to estimate the useful life of the asset and recognize its cost as an expense
over the useful life. We use the straight-line method to depreciate long-lived assets. Additionally, pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", we periodically assess whether long-lived assets have been impaired. We deem an asset to be impaired if its estimated fair value is less than the cost at
which it is recorded on our balance sheet. Our estimate of fair value is based on the net present value of expected future cash flows attributable to the asset. Predicting future cash flows
attributable to a particular asset is difficult, and requires the use of significant judgment. At December 31, 2002, we had $19.7 million of long-lived assets recorded on our
balance sheet.



We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to
their estimated realizable value. Therefore, we provide a valuation allowance to the extent we do not believe it is more likely than not that we will generate sufficient taxable income in future
periods to realize the benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. At December 31, 2002, we had a net
operating loss carryforward for federal income tax purposes of approximately $63.0 million, against which a full valuation allowance has been provided.



Certain of our accrued liabilities are based largely on estimates. For instance, we record a liability on our balance sheet each period for the estimated cost of
goods and services rendered to us, for which we have not received an invoice. Additionally, a component of our restructuring reserve related to a loss we expect to incur for excess leased facility
space is based on numerous assumptions and estimates, such as the market value of the space and the time it will take to sublease the space. Our estimates are based on historical experience, input
from sources outside the company, and other relevant facts and circumstances. Actual amounts could differ materially from these estimates.

24

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We are required to determine the fair value of stock option grants to non-employees, and to record the amount as an expense over the period during
which services are provided to us. Management calculates the fair value of these stock option grants using the Black-Scholes model, which requires us to estimate the life of the stock option, the
volatility of our stock, an appropriate risk-free interest rate, and our dividend yield. The calculation of fair value is highly sensitive to the expected life of the stock option and the
volatility of our stock, both of which we estimate based primarily on historical experience.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 146 (SFAS No. 146), Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring
activities, costs related to terminating a contract that is not a capital lease and termination benefits provided under a one-time benefit arrangement to involuntarily terminated
employees. SFAS No. 146 requires that an expense associated with an exit or disposal activity be recognized when a liability is incurred, and that fair value be used for the initial measurement
of the liability. SFAS No. 146 is effective for all exit or disposal activities that are initiated after December 31, 2002.

In
November 2002, the FASB issued Interpretation No. 45 (Interpretation 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others". Interpretation 45 clarifies disclosure, recognition and measurement requirements related to certain guarantees. The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the recognition and measurement requirements are effective for guarantees issued or modified after December 31, 2002. The Company does not
expect the adoption of Interpretation 45 to have a significant effect on its results of operations or financial condition.

In
December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS No. 148), "Accounting for Stock-Based CompensationTransition
and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions of SFAS No. 148 are effective for interim
periods beginning after December 15, 2002. We have adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002.

Annual Results of Operations

Revenue.Revenue was $81.5 million for 2002, an increase of 56.9% from $52.0 million for 2001. This increase
was the result of several factors:



25

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These
positive factors were partially offset by the effect of our decision as part of our strategic restructuring program to de-emphasize our storage subsystems board
business in 2002, which resulted in 2002 revenue from such products being $2.7 million less than the 2001 amount, and the effect of declining ASPs during 2002.

Revenue
by market was as follows (in thousands):

Year Ended December 31,2002

2001

2000PC

$
47,405

$
36,535

$
48,092Consumer Electronics


8,993


4,082


1,943Storage IC


12,291


2,489


Storage Systems


6,195


8,860


Development, licensing and royalties


6,655





$
81,539

$
51,966

$
50,035


Revenue
was $52.0 million for 2001, an increase of 3.9% from $50.0 million for 2000. This increase was primarily the result of our acquisition of CMD in June 2001,
which contributed $10.6 million of revenue in 2001. Without CMD, our revenue would have been $41.4 million in 2001, a decrease of 17.4% from 2000. This decrease was primarily the result
of a 7% decrease in unit demand and to a lesser extent, to lower average selling prices. Weaker demand was largely attributable to a downturn in the semiconductor industry that began in the fourth
quarter of 2000. To a lesser extent, increased competition in the PC market from companies offering dual-interface solutions reduced demand and average selling prices for our digital
receiver products.

Cost of revenue.Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well
as related overhead costs. Gross margin (revenue minus cost of revenue, as a percentage of revenue), excluding non-cash stock compensation expense, was 53.3% for 2002, 51.8% for 2001 and
62.4% for 2000. The increase in gross margin from 2001 to 2002 was due to our ability to generate $6.7 million of licensing revenue in 2002, which has low cost of revenue associated with it and
contributed 4.2% to our gross margin, offset by the effect of declining ASPs and increased revenue from serial ATA products, which have lower margins relative to our other volume products. The
decrease in gross margin from 2000 to 2001 was primarily due to the effect of lower volume and average selling prices during 2001 and, to a lesser extent, our acquisition of CMD in 2001, which had
lower margin board products. Cost of revenue excludes non-cash stock compensation expense of
$1.2 million, $279,000 and $593,000 for 2002, 2001 and 2000, respectively. Including stock compensation expense, our product gross margin would have been 51.8%, 51.2% and 61.2% for 2002, 2001
and 2000, respectively.

Research and Development.R&D expense consists primarily of compensation and related costs for employees, fees for
independent contractors, the cost of software tools used for designing and testing our products, and costs associated with prototype materials. R&D expense, excluding non-cash stock
compensation expense, was $32.8 million, or 40.2% of revenue, for 2002, compared to $25.5 million, or 49.0% of revenue, for 2001, and $12.8 million, or 25.6% of revenue, for 2000.
The increase in absolute

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dollars for 2002 can be attributed primarily to our acquisition of CMD in June 2001, which increased spending by $4.7 million in 2002 due to the inclusion of 12 months of CMD
related expense in 2002, versus only 7 months of expense in 2001. Additionally, we increased our product development efforts in 2002 in order to accelerate our entrance into the storage and CE
markets. We introduced 16 new products in 2002, versus 12 in 2001. These increases were partially offset by an additional one-week shutdown in 2002. The increase in absolute dollars in
2001 was primarily due to additional personnel and acquisitions of CMD and SCL. These acquisitions accounted for $5.1 million of the $12.7 million expense increase from 2000. Increased
R&D expense as a percentage of revenue in 2001 reflected our intentional investment to gain initial penetration into the CE and storage markets. R&D excludes non-cash stock compensation
expense of $7.4 million, $9.3 million, and $10.2 million for 2002, 2001, and 2000, respectively. Including stock compensation expense, R&D expense would have been
$40.2 million, $34.8 million, and $23.0 million, or 49.3%, 67.0%, and 46.0%, of revenue for 2002, 2001, and 2000, respectively.

Selling, General and Administrative.SG&A expense consists primarily of employee compensation and benefits, sales
commissions, and marketing and promotional expenses. Excluding non-cash stock compensation expense, SG&A expense was $17.5 million, or 21.4% of revenue for 2002,
$18.8 million, or 36.1% of revenue, for 2001, and $18.9 million, or 37.8% of revenue, for 2000. The decrease in spending for 2002 can be attributed primarily to a reduction in SG&A
headcount from 88 at December 31, 2001 to 69 at December 31, 2002. Additionally, as part of our expense management efforts in 2002, we implemented an additional one-week
shutdown in 2002 and reduced spending on discretionary items such as advertising, travel and professional fees. Lastly, we were able to reduce spending in 2002 by consolidating space in our
facilities. The change from 2000 to 2001 can be attributed to the acquisitions of CMD and SCL, which contributed $3.3 million of additional SG&A expense in 2001, offset by the effects of our
headcount reduction in 2001 and lower advertising expenses. SG&A excludes non-cash stock compensation expense of $2.5 million for 2002 and $2.8 million for both 2001 and
2000. Including stock compensation expense, SG&A expense would have been $20.0 million, $21.6 million and $21.7 million, or 24.5%, 41.5% and 43.4% of revenue for 2002, 2001, and
2000, respectively.

Stock Compensation.Stock compensation expense was $11.1 million, or 13.6% of revenue, for 2002, $12.4 million,
or 23.8% of revenue, for 2001, and $13.6 million, or 27.2% of revenue, for 2000. The decrease from 2001 to 2002 can be attributed to use of the accelerated method for recognizing expense for
stock options granted to employees and for stock options assumed in connection with acquisitions, which results in a higher proportion of the expense being recognized in earlier periods. These
decreases are partially offset by expense recognized in 2002 for options repriced in 2001 and 2000, as our average stock price in 2002 exceeded the strike price of the repriced options. We did not
recognize expense in
2001 or 2000 in conjunction with our stock option repricings since our average stock price in those periods was less than the exercise price of the repriced options. The decrease in expense from 2000
to 2001 can be attributed primarily to our use of the accelerated method for recognizing expense for certain grants to employees, which results in a higher proportion of the expense being recognized
in the initial year of grant. Additionally, our average stock price was lower during 2001, which also affected the amount of expense we recognized for certain options. Those decreases were partially
offset by expense of $4.2 million associated with our acquisitions of CMD and

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SCL. The following table summarizes the components of our stock compensation expense for 2002, 2001 and 2000 (in thousands).

Year Ended December 31,2002

2001

2000Options granted to employees

$
1,943

$
2,643

$
4,394Options granted to non-employees


2,304


2,322


4,693Option repricings


2,935





Options assumed in connection with acquisitions


3,925


7,425


4,529$
11,107

$
12,390

$
13,616


We
will incur substantial non-cash stock compensation expense in future periods as a result of (1) the issuance of, or modifications to, restricted stock awards and
stock option grants to employees and consultants, (2) the stock option repricing programs we implemented in 2000 and 2001, and (3) amortization of our existing unearned compensation
balance. Since the expense associated with our stock option repricings and stock options issued to consultants is dependent on our stock price and volatility, stock compensation expense may fluctuate
significantly from period to period. Although to date we have recognized only $2.9 million of expense in connection with our stock option repricings, this may become a significant component of
our stock compensation expense in future periods if our weighted average stock price exceeds $5.63, the exercise price of these repriced stock options.
Approximately 4.2 million of our 19.9 million stock options outstanding as of December 31, 2002 were repriced in 2000 and 2001.

Amortization of Goodwill and Intangible Assets.For 2002, we recorded $3.5 million of expense for the amortization of
goodwill and intangible assets, compared to $14.1 million for 2001 and $4.4 million for 2000. The decrease from 2001 to 2002 can be attributed to adoption of a new accounting standard
that required companies to no longer amortize goodwill to expense beginning January 1, 2002, and to the impairment charges recorded against intangible assets in 2001 and 2002 that reduced the
carrying value of the assets subject to amortization. The increase in 2001 can be attributed to additional acquisitions in 2001, and to a full year of expense recorded in 2001, versus a partial year
in 2000, for the acquisitions we completed in 2000.

In-process Research and DevelopmentIn-process research and development represents technology that
has not reached technological feasibility and that has no alternative future use as of the acquisition date.



During
the quarter ended June 30, 2001, we recorded a one-time operating expense of $1.5 million for in-process research and development incurred in
connection with the acquisition of CMD. As of the acquisition date, there were four identified development projects that met the necessary criteriaTitan 2U, Titan.next, SANBox and IDE
Ultra-680. The value of these projects was determined by estimating their future cash flows from the time they were expected to become commercially feasible, discounting the net cash flows
to their present value, and applying a percentage of completion to the calculated values. The net cash flows from the identified projects were based on estimates of revenue, cost of revenue, research
and development expenses, selling general and administrative expenses, and applicable income taxes. These estimates did not take into account any potential synergies that could be realized as a result
of the acquisition, and were in line with industry averages and growth estimates for the storage and semiconductor industries.

Revenue
for Titan 2U was expected to commence in the fourth quarter of 2001 and to extend through 2003. Revenue for IDE Ultra-680 was expected to commence in the fourth
quarter of 2001 and

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extend through 2004, and revenue for both Titan.next and SANBox was expected to commence in 2002 and extend through 2005. We based our revenue projections on estimates of market size and growth,
expected trends in technology and the expected timing of new product introductions by our competitors and us. The discount rate used for all projects was 25%, a rate that is consistent with the
estimated rates of return on our intangible assets. This rate is higher than the industry weighted average cost of capital because of the risks associated with the inherent uncertainties of the
successful development of the in-process research and development, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and
the uncertainty of technological advances.

The
percentage of completion for each project was determined based on research and development expenses incurred immediately prior to the acquisition as a percentage of total estimated
research and development expenses to bring each project to technological feasibility. As of June 30, 2001, we estimated that Titan 2U was 25% complete with total projected costs of $164,000,
that Titan.next was 15% complete with total projected costs of $200,000, that SANBox was 10% complete with total projected costs of $150,000 and that IDE Ultra-680 was 85% complete with
total projected costs of $500,000. Consistent with our projections, revenue related to Titan 2U and IDE Ultra-680 commenced in the fourth of quarter of 2001. Development of Titan.next and
SANBox was not completed.



During
the quarter ended September 30, 2000, a one time in-process research and development expense related to the acquisition of DVDO was recorded in the amount of
$8.4 million. As of the date of our acquisition of DVDO, there was one identified project that met the necessary criteria, the 201 Image Enhancement Chip. The value of this project was
determined by estimating its future cash flows from the time it was expected to become commercially feasible, discounting the net cash flows to their present value, and applying a percentage of
completion to the calculated value. The net cash flows from the identified project were based on estimates of revenue, cost of revenue, research and development expenses, selling general and
administrative expenses, and applicable income taxes for the project. These estimates did not take into account any potential synergies that could be realized as a result of the acquisition, and were
in line with industry averages and growth estimates for the semiconductor industry.

Revenue
for the project was expected to begin in the first quarter of 2001 and extend through 2004. We based our revenue projection on estimates of market size and growth, expected
trends in technology and the expected timing of new product introductions by our competitors and us. The discount rate used was 25%, a rate that is consistent with the estimated rates of return on our
intangible assets. This rate is higher than the industry weighted average cost of capital because of the risks associated with the inherent uncertainties of the successful development of the
in-process research and development, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and the uncertainty of technological
advances.

The
percentage of completion for the project was determined based on research and development expenses incurred immediately prior to the acquisition as a percentage of total research and
development expenses to bring the project to technological feasibility. As of June 30, 2000, we estimated the project to be approximately 86% complete with remaining costs to be incurred on
portions of logic, flow, layout, coding and testing. These costs were expected to be incurred over a six month period and were not expected to be material. The project began shipping to customers in
the second quarter of 2001 and is still offered for sale.

We
expect to make future acquisitions if advisable and may record additional expenses for in-process research and development in connection with those acquisitions.

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Impairment of Goodwill and Intangible Assets.In 2002, we recorded $5.2 million of expense for the impairment of
goodwill and intangible assets recorded in connection with the acquisition of CMD in 2001. These assets became impaired as a result of our decision in the second quarter of 2002 to transition to a
licensing model for our storage subsystem board products, whereby instead of developing, manufacturing and selling board products, we will develop and license board designs in exchange for license
fees and royalties. For 2001, we recorded $29.9 million of expense for the impairment of goodwill and intangible assets recorded in connection with the acquisitions of DVDO and CMD. DVDO
goodwill and intangible assets became impaired primarily as a result of our decision to phase out or de-emphasize certain existing digital video processing products and to cease funding of
certain digital video processing development projects. Additionally, prevailing economic and industry conditions and the departure of certain key DVDO employees during the quarter ended
September 30, 2001 also contributed to the impairment expense of $13.9 million. We recorded impairment expense of $16.0 million in the fourth quarter of 2001 related to goodwill
and intangible assets recorded in connection with our CMD acquisition. This impairment resulted from a decrease in our initial estimate of future revenue from CMD's products.

Restructuring.During the third quarter of 2001, we began a program to focus our business on products and technology,
including those obtained through acquisitions, in which we have, or believe we can achieve, a leadership position. As part of this program, we decided to cancel numerous products under development and
to remove certain projects from our development plan, to phase out or de-emphasize certain existing products and to integrate the operations of our two recently acquired companies, CMD and
SCL. During the quarter ended December 31, 2001, we reduced our workforce by approximately 60 people in connection with our plan to focus on products and technology in which we have, or believe
we can achieve, a leadership position, and as a result of the continued integration of recently acquired companies. In connection with these actions, we recorded a restructuring expense of
$1.5 million, consisting of severance related costs of $902,000, including $303,000 for the intrinsic value of modified stock options, an expected loss on leased facilities of $500,000, and a
fixed asset write-down of $50,000. We estimate that this restructuring will eliminate approximately $5.5 million of annual operating expenses.

In
the first quarter of 2002, we implemented a second workforce reduction in connection with the program discussed above, eliminating an additional 35 positions, or 13% or our workforce.
Positions were eliminated from all functional areas. This reduction resulted from the continued integration of acquired companies, as well as continued execution of our product and technology
strategy, whereby we decided to phase out the legacy storage subsystem board products we acquired from CMD and to develop new board products only if we believed it would facilitate or accelerate the
use of our storage semiconductor products. In connection with this workforce reduction, we recorded a restructuring expense of $2.2 million in the first quarter of 2002, consisting of cash
severance-related costs of $198,000, non-cash severance-related costs of $318,000 representing the intrinsic value of modified stock options, an expected loss on leased facilities of
$1.2 million and fixed asset write-downs of $500,000. In
addition, we reversed $76,000 of unearned compensation, a component of stockholders' equity, for unvested stock options that were cancelled in connection with employee terminations.

In
April 2002, we decided to transition to a licensing model for our storage subsystem board products, whereby instead of developing, manufacturing and selling board products to
facilitate or accelerate the use of our storage semiconductor products, we will develop and license board designs in exchange for license fees, royalties and the use of our semiconductor products. In
connection with this decision, we implemented a third workforce reduction, eliminating 14 positions, or 5%, of our workforce and recorded a restructuring expense of $3.5 million, consisting of
cash severance-related costs of $450,000, non-cash severance-related costs of $1.6 million representing the intrinsic value of modified stock options and fixed asset write-downs of
$1.5 million. We also reversed $302,000 of

30

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unearned compensation, a component of stockholders' equity, for unvested stock options that were cancelled in connection with employee terminations.

In
December 2002, we revised our estimate of the loss we expect to incur on subleased facilities and recorded a restructuring expense of $1.5 million. Real estate market
conditions deteriorated in the fourth quarter of 2002, causing us to reassess the length of time it will take to find tenants and the fair value lease rate of our available space. As of
December 31, 2002, our expected loss on subleased facilities is based on estimated sublease income of $1.6 million over the remaining lease terms. To the extent we are unable to generate
$1.6 million of sublease income, our future results of operations and financial condition will be negatively affected.

Severance
related costs were determined based on the amount of pay people received that was not for services performed and by measuring the intrinsic value of stock options that were
modified to the benefit of terminated employees. The expected loss on leased facilities resulted from our plan to consolidate our remaining workforce to the extent practicable and sublease any excess
space. To determine the expected loss, we compared our lease and operating costs for the space to our estimate of the net amount we would be able to recover by subleasing the space. This estimate was
based on a number of assumptions, including the length of time it will take to secure a tenant, the sublease rate per square foot, the cost of necessary improvements or modifications and real estate
broker commissions. The fixed asset write-downs were determined based on the estimated fair value of assets, primarily computer hardware and software that would no longer be utilized after the
employees' termination date.

We
expect severance and benefits payments to be completed by the second quarter of 2003. Lease payments will be made through the end of the related lease terms of July 2003 and
November 2005. The following table presents restructuring activity for 2002 and 2001 (in thousands).

|                          |  | Severance
and Benefits |        | Leased
Facilities |   | Fixed Assets |   | Total |       
|------------------------- |  | ---------------------- | ------ | ----------------- | - | ------------ | - | ----- | ------
|2001 provision            |  | $                      | 902    |                   | $ | 500          |   | $     | 50    
|Cash payments             |  |                        | (191   | )                 |   |             |   |       |      
|Non-cash                  |  |                        | (303   | )                 |   | (115         | ) |       |      
|                          |  |                        |        |                   |   |              |   |       |       
|December 31, 2001 Balance |  |                        | 408    |                   |   | 385          |   |       | 50    
|2002 provision            |  |                        | 2,547  |                   |   | 2,633        |   |       | 2,013 
|Cash payments             |  |                        | (865   | )                 |   | (420         | ) |       |      
|Non-cash                  |  |                        | (1,952 | )                 |   |             |   |       | (2,063
|                          |  |                        |        |                   |   |              |   |       |       
|December 31, 2002 Balance |  | $                      | 138    |                   | $ | 2,598        |   | $     |      
|                          |  |                        |        |                   |   |              |   |       |       

Patent defense and acquisition integration costs.Patent defense and acquisition integration costs were $7.0 million
for 2002 and $1.8 million for 2001. Patent defense costs are related to the lawsuit we filed against Genesis Microchip in April 2001, and acquisition integration costs represent costs
incurred to integrate CMD and SCL. The increase in 2002 can be attributed to discovery, motions, depositions and other activities in preparation for trial. We expect to incur patent defense costs at
least until the middle of 2003. The amount of legal fees incurred in 2003 will depend on the duration of the litigation, as well
as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur in 2003 with respect to this matter, but do expect the amount to be
substantially less than that incurred in 2002.

Interest Income.Interest income decreased to $1.0 million in 2002, from $2.7 million in 2001 and
$4.1 million in 2000. These year-to-year decreases can be attributed to lower interest rates and decreased average cash and investment balances.

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Interest Expense and Other Net.Net interest expense and other was $240,000 for 2002, $309,000 for 2001 and $112,000 for
2000. The decrease in 2002 can be attributed to lower average outstanding debt balances in 2002. The increase from 2000 to 2001 resulted from the assumption of a bank loan in connection with our
acquisition of CMD.

Provision for Income Taxes.Due to our losses in 2002 and 2001, no provision for income taxes was recorded in either of those
years. In 2000, we recorded a provision for income taxes of $368,000, which was equal to 10.5% of our net income before taxes and non-cash charges, including in-process
research and development, amortization of goodwill and intangible assets and stock compensation and warrant expense.

At
December 31, 2002, we had a net operating loss carryforward for federal income tax purposes of approximately $63.0 million, that expires through 2022. This future tax
benefit has not been recognized as an asset on our balance sheet due to uncertainties surrounding our ability to generate sufficient taxable income in future periods to realize the benefits. Under the
Tax Reform Act of 1986, the amounts of, and benefits from, net operating loss carryforwards may be restricted or limited in certain circumstances.

Liquidity and Capital Resources

Since our inception, we have financed our operations through a combination of private sales of convertible preferred stock, our initial public offering, lines of
credit and capital lease financing. At December 31, 2002, we had $27.8 million of working capital and $35.8 million of cash, cash equivalents and short-term
investments. In the future, we expect to generate positive cash flow on an annual basis. The primary sources of cash flow will be operating activities. If we are not able to generate cash from
operating activities, we will liquidate short-term investments or, to the extent available, utilize credit arrangements to meet our cash needs.

Operating
activities used $8.9 million of cash during 2002, used $14.2 million of cash during 2001, and generated $3.4 million of cash during 2000. For 2002, our net
loss excluding depreciation, stock compensation expense, amortization and impairment of goodwill and intangible assets, in-process research and development and non-cash
restructuring charges was $12.6 million. This was the most significant use of cash for operating activities. In addition, accounts receivable and inventories increased $4.9 million in
2002 as a result of increased business volume. These uses of cash were offset by increases in accounts payable of $5.1 million, accrued liabilities of $2.3 million and deferred margin on
sales to distributors of $731,000. For 2001, net loss excluding depreciation, stock compensation and warrant expense, amortization and impairment of goodwill and intangible assets,
in-process research and development and non-cash restructuring charges was $15.1 million. Inventories and accounts receivable increased from 2000 solely as a result of
our acquisitions of CMD and SCL in 2001. However, decreases in both inventories and accounts receivable from operating activities provided $5.2 million of cash in 2001. Inventory levels at our
distributors also decreased in 2001, causing our deferred margin on sales to distributors to decrease by $1.4 million. Additionally, we reduced accounts payable and accrued liabilities through
operations by $3.1 million during 2001, which used cash. During 2000, net income excluding depreciation, stock compensation and warrant expense, amortization of goodwill and intangible assets
and in-process research and development was $4.2 million and our deferred margin on sales to distributors increased $1.6 million. These sources of cash were partially offset
by increases in accounts receivable and inventories of $2.5 million and $1.9 million, respectively. Accounts receivable and inventories increased as a result of our increased business
volume. Deferred margin on sales to distributors increased as a result of higher inventory levels at our distributors, as demand for our products strengthened from the prior year.

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We generated $9.0 million of cash from investing activities in 2002, generated $12.6 million of cash from investing activities in 2001, and used $15.6 million of
cash for investing activities in 2000. Net proceeds from sales and purchases of short-term investments generated $12.7 million of cash in 2002. During 2002, we used
$3.7 million for purchases of property and equipment, primarily software tools for use in R&D activities. During 2001, we received net proceeds from sales and purchases of
short-term investments of $17.4 million, and used $3.0 million of cash for acquisition costs and $1.8 million of cash for purchases of property and equipment. The
primary uses of cash in 2000 were for net purchases of short-term investments and purchases of property and equipment.

We
generated $7.2 million of cash from financing activities in 2002, used $2.7 million of cash for financing activities in 2001 and generated $1.8 million of cash
from financing activities in 2000. During 2002, we received $7.8 million of proceeds from issuances of common stock through our stock option and stock purchase plans, and our net borrowing
activities, including releases of security deposits and debt repayments, used $0.7 million of cash during 2002. Cash used by financing activities in 2001 was from security deposits on lease
financing and debt payments, partially offset by cash provided by issuances of common stock for stock option exercises and stock purchase plan sales. Cash provided by financing activities in 2000 was
from issuances of common stock and repayments of stockholder notes, partially offset by a security deposit requirement for leased equipment.

Debt and Lease Obligations

In October 2002, we entered into a new debt facility that includes a revolving line of credit of up to $7.5 million, a term loan of
$3.6 million, and equipment advances of $1.0 million. Borrowings under the revolving line are limited to the lesser of $7.5 million or our borrowing base of 80% of eligible
accounts receivable. The revolving line has a maturity date of September 26, 2003. There were no borrowings outstanding under this line at December 31, 2002. The $3.6 million term
loan refinanced $3.1 million of debt acquired in connection with our acquisition of CMD and $500,000 of other bank debt, and requires monthly payments through its maturity of October 1,
2004. Equipment advances are available until March 31, 2003. All borrowings under this credit facility are at prime (4.25% at December 31, 2002) plus 0.25% and the facility is secured by
substantially all of our assets, excluding intellectual property. This facility contains certain quarterly and annual financial covenants with which we must comply. We were not in compliance with one
of the quarterly financial covenants at December 31, 2002; however, we were granted a waiver from the lending institution and are not in default of the loan agreement. However,
non-compliance with these financial covenants in the future could result in all amounts outstanding becoming due and payable immediately. All amounts outstanding under the credit
agreement, including $1.5 million due subsequent to December 31, 2003, have been classified as current liabilities.

In
October 2002, we financed a $351,000 insurance premium at an interest rate of 5.75%. Monthly payments of $40,000 are due through June 2003.

We
lease certain software and equipment under lease agreements accounted for as capital leases. These leases mature in 2003, require monthly payments of $26,000 and bear interest at
rates ranging from 7.5% to 9.1%. Many of these leases include end of lease bargain purchase options that we intend to exercise. Our obligations under these leasing arrangements are secured by the
leased equipment.

In
October 1999, we entered into a noncancelable operating lease through July 2003 for our principal operating facility. This lease requires average monthly rental payments
of approximately $133,000 and is secured by a certificate of deposit in the amount of $283,000, which is included in prepaid expenses and other current assets on our balance sheet. This security
requirement will be reduced to zero in July 2003. In December 2002, we entered into a noncancelable operating lease renewal for our principal operating facility that commences in
August 2003 and expires in July 2010.

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The lease requires initial average monthly rental payments of $76,000 and provides for annual 3% rent increases thereafter. This lease will also require a security deposit of $152,000.

In
June 2001, in connection with our acquisition of CMD, we acquired the lease of an operating facility in Irvine, California with average monthly rental payments of approximately
$100,000 through November 2005. A portion of this facility has been subleased through July 2003, generating monthly sublease income of approximately $35,000 to offset our payment
obligations. Additionally, in connection with our acquisition of SCL in July 2001, we acquired the lease of a facility in Milpitas, California with average monthly rental payments of
approximately $18,000 per month. We do not occupy the Milpitas facility and are attempting to sublease the space.

Rent
expense, net of sublease income, totaled $2,529,000, $2,419,000 and $1,549,000 in 2002, 2001 and 2000, respectively. Future minimum lease payments under operating leases have not
been reduced by expected sublease rental income or by the amount of our restructuring accrual that relates to leased facilities. Future minimum payments for our operating leases, debt and capital
leases outstanding at December 31, 2002 are as follows (in thousands):

Year Ending December 31,

Debt

Capital
Leases

Operating
Leases2003

$
2,269

$
47

$
3,0492004


1,500





2,3282005








2,1662006








9982007








1,009Thereafter








2,746Total minimum payments

$
3,769

$
47

$
12,296


We
plan to spend approximately $5 million during the next 12 months for equipment, furniture and software. Additionally, we plan to implement a new enterprise resource
planning system in the second quarter of 2003, and have entered into a contract for implementation consulting services requiring cash payments of approximately $500,000.

Based
on our estimated cash flow for 2003, we believe our existing cash and short-term investments are sufficient to meet our capital and operating requirements for at least
the next 12 months. Operating and capital requirements depend on many factors, including the levels at which we generate revenue and maintain margins, investments in inventory and accounts
receivable, the cost of securing access to adequate manufacturing capacity, our operating expenses, including patent defense costs, and general economic conditions. In addition, cash may be required
for future acquisitions should we choose to pursue any. To the extent existing resources and cash from operations are insufficient to support our activities, we may need to raise additional funds
through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to us.

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Factors Affecting Future Results

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 make it difficult to evaluate our future prospects.

The revenue and income potential of our business and the markets we serve is unproven. We began volume shipments of our first display products in the third
quarter of 1997. The Digital Visual Interface, or DVI, specification, which is based on technology developed by us and used in many of our products, was first published in April 1999. The DVI
specification defines a high-speed data communication link between computers and digital displays, such as flat panel displays, projectors and cathode ray tubes. We completed our first
generation of consumer electronics and storage IC products in mid-to-late 2001. In addition, the preliminary serial ATA specification was first published in August 2001
and the High Definition Multimedia Interface (HDMI) specification was first released in December 2002. Accordingly, we face risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets. If we do not successfully address these risks and difficulties, our results of operations could be negatively affected.

We have a history of losses and may not become profitable.

We have incurred net losses in each quarter and fiscal year since our inception, including losses of $40.1 million, $76.1 million and
$23.2 million for the years ended December 31, 2002, 2001, and 2000, respectively. We expect to continue to incur net losses for the foreseeable future. Accordingly, we may not achieve
and sustain profitability.

Our quarterly operating results may fluctuate significantly and are difficult to predict.

Our quarterly operating results are likely to vary significantly in the future based on a number of factors over which we have little or no control. These factors
include, but are not limited to:



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Because
we have little or no control over these factors, our operating results are difficult to predict. Any substantial adverse change in any of these factors could negatively affect
our business and results of operations.

Our future quarterly operating results are highly dependent upon how well we manage our business.

Our quarterly operating results may fluctuate based on how well we manage our business. Some of the factors that may affect how well we manage our business
include the following:



If
we fail to effectively manage our business, this could adversely affect our results of operations.

The licensing component of our business strategy may not be successful.

Part of our business strategy is to license certain of our technology to companies that address markets in which we do not want to directly participate. We have
limited experience marketing and selling our technology on a licensing basis. In conjunction with the business strategy we adopted in late 2001, we signed our first license contract in
December 2001, and signed several more during the fiscal year ended December 31, 2002; however, there can be no assurance that additional companies will be interested in licensing our
technology on commercially favorable terms or at all. We also cannot ensure that companies who license our technology will introduce and sell products incorporating our technology, will accurately
report royalties owed to us, will pay agreed upon royalties, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information.
Licensing revenue is heavily dependent on a few key deals being completed, the timing of which is not always predictable and is especially susceptible to delay beyond the period in which they are
expected. Also, generating revenue from licensing arrangements is a lengthy and complex process that may last beyond the period in which efforts begin, and once an agreement is in place, the timing of
revenue recognition may be dependent on customer acceptance of deliverables, achievement of milestones, and other factors. In addition, in any period, our expectation of licensing revenue is or may be
dependent on one or a few licenses being completed. Due to these factors, the amount of license revenue recognized in any period may differ significantly from our expectations.

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Our strategic restructuring program may not be successful.

During the third quarter of 2001, we began a program to focus our business on products and technology, including those obtained through acquisitions, in which we
have, or believe we can achieve, a leadership position. As part of this program, we decided to cancel numerous products under development, to remove certain projects from our development plan, to
phase out or de-emphasize certain existing products, to license our technology to companies that participate in markets we do not address and to integrate the operations of our two
recently acquired companies, CMD and SCL. In particular, we intend to concentrate on our discrete transmitter and receiver products for PCs and displays, and on developing products and promoting
adoption of the HDMI and serial ATA standards for the consumer electronics and storage markets, respectfully. Additionally, in the second quarter of 2002, we transitioned to a licensing model for our
storage systems business and are therefore phasing out our board level products through the middle of 2003. We expect that we will continue to generate revenue from sales of products being phased out
or de-emphasized for a limited period of time and that costs for selling and marketing these products will be minimal due to the limited resources allocated for this purpose. However, if
demand for these products is not sufficient to use our existing inventory, we may incur charges for excess and obsolete inventory. Products to be phased out or de-emphasized represented
approximately 25% of our revenue in 2001 and 10% of our revenue for the year ended December 31, 2002. In connection with this program, we have implemented three workforce reductions eliminating
109 positions, or 36% of our third quarter 2001 workforce, and have recorded restructuring expense of $8.6 million.

There
is no guarantee that our strategic restructuring program will be successful. The markets in which we are promoting new technologies and standards are still developing and evolving,
and there can be no assurance as to the rate or extent of adoption of these new technologies and standards.

We face intense competition in our markets, which may lead to reduced revenue from sales of our products and increased losses.

The PC, CE and storage markets in which we operate are intensely competitive. These markets are characterized by rapid technological change, evolving standards,
short product life cycles and declining selling prices. Our display products face competition from a number of sources, including analog solutions, DVI-based solutions, dual (analog and
DVI based) solutions and other digital interface solutions. We expect competition in the display market to increase. For example, Analog Devices, ATI, Broadcom, Chrontel, Genesis Microchip, Matrox,
National Semiconductor, nVidia, Phillips, Pixelworks, SIS, Smart ASIC, ST Microelectronics, Texas Instruments and Thine have all begun shipping products or announced intentions to introduce products
that we expect will compete with our PanelLink products. Other companies have announced DVI-based solutions and we expect that additional companies are likely to enter the market. In the
future, our current or potential customers may also develop their own proprietary solutions that would likely be the integration of a DVI transmitter into a graphics processing unit or integration of
a DVI receiver into a monitor controller.

In
the CE market, our digital interface products are used to connect cable set-top boxes, satellite set-top boxes and DVD players to digital televisions. These
products incorporate DVI and HDCP, or HDMI with or without HDCP support. Companies that have announced or are shipping DVI-HDCP solutions include TI, Thine, Broadcom and Genesis. In
addition, our video processing products face competition from products sold by AV Science, Broadcom, Focus Enhancements, Genesis, Mediamatics, Micronas Semiconductor, Oplus, Philips, Pixelworks and
Trident. We also compete, in some instances, against in-house processing solutions designed by large original equipment manufacturers. We expect competition for HDMI products from the
other HDMI founders and adopters, including Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba.

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In
the storage market, our Fibre Channel product faces competition from companies selling similar discrete products, including Agilent, PMC Sierra and Vitesse, from other Fibre Channel
SerDes providers who license their core technology, such as LSI Logic, and from companies that sell HBA controllers with integrated SerDes, such as QLogic and Agilent.

Our
serial ATA products compete with similar products from Marvell / Promise. In addition, other companies such as Adaptec, APT, Intel, LSI Logic, ServerWorks and Vitesse, have developed
or announced intentions to develop serial ATA controllers. We also may compete against Intel and other motherboard chip-set makers that may integrate serial ATA functionality into their
chipsets; in fact, Intel has announced its intention to integrate this functionality into one of its upcoming chip sets.

Our
parallel ATA products compete with IC vendors including Promise and Highpoint. Our RAID controller board products face competition from Mylex, Infortrend, and Chaparral.

Some
of these competitors have already established supplier or joint development relationships with current or potential customers and may be able to leverage their existing
relationships to discourage these customers from purchasing products from us or persuade them to replace our storage products with theirs. Many of our competitors have longer operating histories,
greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other
resources than we do. In addition, some of our competitors could merge which may enhance their market presence. As a result, they may be able to adapt more quickly to new or emerging technologies and
customer requirements, or devote more resources to the promotion and sale of their products. We cannot assure you that we can compete successfully against current or potential competitors, or that
competition will not reduce our revenue and increase our losses.

Growth of the market for our PC products depends on the widespread adoption and use of the DVI specification.

Our success is largely dependent upon the rapid and widespread adoption of the DVI specification, which defines a high-speed data communication link
between computers and digital displays. We cannot predict the rate at which manufacturers of computers and digital displays will adopt the DVI specification. To date, relatively few systems
implementing all of the electrical and mechanical aspects of the DVI specification have been shipped. The DVI adoption rate in the PC market increased to 12% in 2002, from 7% in 2001. Adoption of the
DVI specification may be affected by the availability of computer components able to communicate DVI-compliant signals, such as transmitters, receivers, connectors and cables necessary to
implement the specification. Other specifications may also emerge that could adversely affect the acceptance of the DVI specification. For example, a number of companies have promoted alternatives to
the DVI specification using other interface technologies, such as low voltage differential signaling, or LVDS. Further delays in the widespread adoption of the DVI specification could reduce
acceptance of our products, limit or reduce our revenue growth and increase our losses.

Demand for our products for the consumer electronics market is dependent on the adoption and widespread use of the HDMI 1.0 specification.

Our success in the consumer electronics market is largely dependent upon the rapid and widespread adoption of the HDMI 1.0 specification, which combines
high-definition video and multi-channel audio in one digital interface and uses our patented underlying TMDS technology, and optionally Intel's HDCP technology, as the basis for the
interface. Version 1.0 of the specification was published for adoption on December 9, 2002. We cannot predict the rate at which manufacturers will adopt the HDMI specification or if the
specification will be adopted at all. Adoption of the HDMI specification may be affected by the availability of consumer products, such as DVD players and

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televisions, and of computer components that implement this new interface. Other competing specifications may also emerge that could adversely affect the acceptance of the HDMI specification. Delays
in the widespread adoption of the HDMI specification could reduce acceptance of our products, limit or reduce our revenue growth and increase our losses.

Our ability to increase sales of our products for display systems depends on host system manufacturers including DVI-compliant transmitters in their systems.

Our success depends on increasing sales of our receiver products to display manufacturers. To increase sales of our receiver products, we need computer
manufacturers to incorporate DVI-compliant transmitters in their systems, making these systems digital-ready. During 2002, we introduced a low-cost add-in card that
can be used in conjunction with Intel's 845G chip set to provide an all-digital connection to flat panels. Intel's 845G chip set is intended to provide an all-digital path on
the motherboard bus, and should make it easier to provide digital video out. Use of Intel's 845G chip set, or any digital path chip set, is not universal and may not gain market acceptance. If
computers are not digital-ready, they will not operate with their digital displays, which will limit and may reduce the demand for our digital receiver products, including our add-in card.

Our success depends on managing our relationship with Intel

Intel has a dominant role in many of the markets in which we compete, such as PCs and storage, and is a growing power in the CE market. We have a multi-faceted
relationship with Intel that is complex and requires significant management attention, including:



Our
cooperation and competition with Intel can lead to positive benefits if managed effectively. If our relationship with Intel is not managed effectively, it could seriously harm our
business, negatively affect our revenue, and increase our operating expenses.

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Our success depends on the growth of the digital display market.

Our business depends on the growth of the digital display market. The potential size of the digital display market and its rate of development are uncertain and
will depend on many factors, including:



In
order for the digital display market to grow, digital displays must be widely available and affordable to consumers. In the past, the supply of digital displays, such as flat panels,
has been cyclical and consumers have been very price sensitive. Also, some manufacturers have implemented DVI interfaces that are not fully DVI-compliant. These interfaces often interfere
with the operability of our products which function best with a fully DVI-compliant interface. Our ability to sustain or increase our revenue may be limited should there not be an adequate
supply of, or demand for, affordable digital displays with fully DVI-compliant interfaces.

Our success depends on the development and growth of markets for products based on new and emerging storage technologies.

Our product development efforts in the storage market are focused on the development of products using new interface technologies such as fibre channel and serial
ATA. The markets for these new interface technologies are at an early stage of development, and there can be no assurance that they will replace other storage interfaces that are now widely used, such
as parallel ATA and SCSI. The potential size and rate of development of these markets are uncertain and will depend on many factors, including:



In
particular, the rate of implementation of the serial ATA interface will depend on how quickly drive manufacturers, motherboard and PC providers and chipmakers are able to resolve
technical communication and functionality issues to enable a "plug and play" environment in which a computer system is automatically able to recognize and configure storage devices. Resolution of
these issues could be time-consuming, and will depend in good measure on the ability of chipmakers to incorporate the required high-speed serial data transfer capabilities into
their semiconductors without sacrificing manufacturing yields.

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Any
delay in acceptance of new interface technologies, or a reduction in the growth or size of the market for systems based on serial ATA or fibre channel technologies, would limit sales
of our storage products and reduce our revenue. Any delay in the availability of serial ATA compatible drives or acceleration of serial ATA or fibre channel SerDes integration efforts by motherboard
or storage controller manufacturers may also reduce our revenue.

We
have promulgated a SATALite specification to which we have invited key industry members to participate. This program includes certain licenses to our technology that we hope will
increase market acceptance of our serial ATA products. There can be no assurance that this program will succeed, or that SATALite participants will not use our technology to compete against us.

To
date, we have achieved a number of design wins for our serial ATA and fibre channel storage products. Even after we have achieved a design win from an OEM, we may not realize any
revenue, or significant revenue, from that OEM since a design win is not a binding commitment to purchase our products and the OEM may not achieve market acceptance for their product. Further delay in
serial ATA-enabled drive availability may lead OEMS to re-open their designs and designs we have won may be subject to being lost, which could reduce our revenue and increase
our operating expenses in competing to re-win designs.

A significant amount of our revenue is associated with the adoption of new or emerging technologies within the PC industry. The PC industry has slowed and the adoption of these
new technologies may not occur as planned.

Substantially all of our revenue is directly or indirectly related to the PC industry and the adoption of new or emerging technologies within the PC industry.
Accordingly, we are highly dependent on the adoption of new or emerging technologies within the PC industry, which experienced a slowdown in growth during the second half of 2000 that continued
throughout 2001, and 2002. We cannot predict the duration or severity of the downturn in the PC and display market, or in the general economy, or its effect on our revenue and operating results,
including the adoption of these new or emerging technologies. If the market for PCs and PC-related displays continues to grow at a slow rate or contracts whether due to reduced demand from
end users, macroeconomic conditions or other factors, our business and results of operations could be negatively affected.

Although
we are attempting to broaden our product offerings to include more products for the consumer electronics market, there can be no guarantee that we will succeed in this effort.
To date, we have only achieved limited design wins in the consumer electronics industry. If we fail to consistently achieve design wins in the consumer electronics market, we will remain highly
dependent on the PC industry.

We do not have long-term commitments from our customers and we allocate resources based on our estimates of customer demand.

Substantially all of our sales are made on the basis of purchase orders, rather than long-term agreements. In addition, our customers may cancel or
reschedule purchase orders. We purchase inventory components and build our products according to our estimates of customer demand. This process requires us to make multiple assumptions, including
volume and timing of customer demand for each product, manufacturing yields and product quality. If we overestimate customer demand or product quality or under estimate manufacturing yields, we may
build products that we may not be able to sell at an acceptable price or at all. As a result, we would have excess inventory, which would increase our losses. Additionally, if we underestimate
customer demand or if sufficient manufacturing capacity is unavailable, we will forego revenue opportunities or incur significant costs for rapid increases in production, lose market share and damage
our customer relationships.

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Our lengthy sales cycle can result in a delay between incurring expenses and generating revenue, which could harm our operating results.

Because our products are based on new technology and standards, a lengthy sales process, typically requiring several months or more, is often required before
potential customers begin the technical evaluation of our products. This technical evaluation can exceed nine months, and it can then be an additional nine months before a customer commences volume
shipments of systems incorporating our products, if at all. Given our lengthy sales cycle, we may experience a delay between the time we incur expenditures and the time we generate revenue, if any. As
a result, our operating results could be seriously harmed if a significant customer reduces or delays orders, or chooses not to release products incorporating our products.

We depend on a few key customers and the loss of any of them could significantly reduce our revenue.

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For the year ended December 31,
2002, shipments to World Peace International, an Asian distributor, generated 15% of our revenue and shipments to Weikeng, an Asian distributor, generated 11% of our revenue. For the year 2001,
shipments to Samsung, a Korean customer, and Compaq, a global customer, each generated 12% of our revenue, and shipments to World Peace International generated 11% of our revenue. In addition, an
end-customer may buy through multiple distributors, contract manufacturers, and / or directly, which could create an even greater concentration. We cannot be certain that customers and key
distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products and generate revenue. As a result of this concentration of our
customers, our results of operations could be negatively affected if any of the following occurs:



Due
to our entrance into new markets, our customer base has broadened significantly and we therefore anticipate being less dependent on a relatively small number of customers to generate
revenue. However, as product mix may fluctuate from quarter to quarter, we may become more dependent on a small number of customers or a single customer for a significant portion of our revenue in a
particular quarter, the loss of which could adversely affect our operating results.

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.

Many original equipment manufacturers rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors
generated 42% of our revenue for the year ended December 31, 2002 and 40% of our revenue for 2001. We expect the percentage of revenue generated through distributors in 2003 to decrease as our
licensing revenue, which is direct, becomes a higher percentage of our revenue. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business,
requiring us to:



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Any
failure to manage these challenges could disrupt or reduce sales of our products.

We
are sometimes required to maintain certain levels of our inventory at a customer's or intermediary's site in line with a customer's projection of their requirements. These customer
projections are generally non-binding and we risk excess and obsolete inventory in the event that the customer's projections decrease or do not materialize and we cannot
re-allocate the inventory to other customers. Any of these events may adversely affect our results of operations.

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.

The development of new products is highly complex, and we have experienced delays, some of which exceeded one year, in the development and introduction of new
products on several occasions in the past. In 2001 and 2002, we announced our first products for the storage market and we expect to introduce new consumer electronics, storage and DVI products in the
future. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design, manufacture and debug. Successful product development and introduction
depends on a number of factors, including, but not limited to:



Accomplishing
all of this is extremely challenging, time-consuming and expensive and there is no assurance that we will succeed. Product development delays may result from
unanticipated engineering complexities, changing market or competitive product requirements or specifications, difficulties in overcoming resource limitations, the inability to license third party
technology or other factors. If we are not able to develop and introduce our products successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would
adversely affect our operating results. In addition, it is possible that we may experience delays in generating revenue from these products or that we may never generate revenue from these products.
We must work with a semiconductor foundry and with potential customers to complete new product development and to validate manufacturing methods and processes to support volume production and
potential re-work. Each of these steps may involve unanticipated difficulties, which could delay product introduction and reduce market acceptance of the product. In addition, these
difficulties and the increasing complexity of our products may result in the introduction of products that contain defects or that do not perform as expected, which would harm our relationships with
customers and our ability to achieve market acceptance of our new products. There can be no assurance that we will be able to achieve design wins for our planned new products, that we will be able to
complete development of these products when anticipated, or that these products can be manufactured in commercial volumes at acceptable yields, or that any design wins will
produce any revenue. Failure to develop and introduce new products, successfully and in a timely manner, may adversely affect our results of operations.

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We have made acquisitions in the past and may make acquisitions in the future, if advisable, and these acquisitions involve numerous risks.

Our growth depends upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. One of the ways we develop
new products and enter new markets is through acquisitions of other companies. In 2000, we completed the acquisitions of Zillion and DVDO, and in 2001, we completed the acquisitions of CMD and SCL. We
may acquire additional companies or technologies. Acquisitions involve numerous risks, including, but not limited to, the following:



No
assurance can be given that our acquisitions of Zillion, DVDO, CMD or SCL, or our future acquisitions, if any, will be successful or provide the anticipated benefits, or that they
will not adversely affect our business, operating results or financial condition. Failure to manage growth effectively and to successfully integrate acquisitions made by us could materially harm our
business and operating results.

The cyclical nature of the semiconductor industry may create fluctuations in our foundry, test and assembly capacity.

In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. For example, demand in the
semiconductor industry rose to record levels in 1999, but is currently in a downward cycle. The industry has also experienced significant fluctuations in anticipation of changes in general economic
conditions. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third party suppliers. Production capacity for semiconductors
fabricated using 0.18 micro technology could be subject to allocation, whereby not all of our production requirements would be met. This may impact our ability to meet demand and could also increase
our production costs. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in
industry-wide conditions.

We depend on third-party sub-contractors to manufacture, assemble and test nearly all of our products, which reduces our control over the production process.

We do not own or operate a semiconductor fabrication facility. We rely almost entirely on Taiwan Semiconductor Manufacturing Company (TSMC), an outside foundry,
to produce all of our display-related semiconductor products. We also rely on Kawasaki, UMC and Atmel, who are also outside foundries, to produce our storage semiconductor products and we rely on
Amkor and ASE to test certain of our semiconductor products. Our reliance on independent foundries, assembly and test facilities involves a number of significant risks, including, but not limited to:



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In
addition, our semiconductor products are assembled and tested by several independent sub-contractors. We do not have a long-term supply agreement with our
sub-contractors, and instead
obtain production services on a purchase order basis. Our outside sub-contractors have no obligation to supply products to us for any specific period of time, in any specific quantity or
at any specific price, except as set forth in a particular purchase order. Our requirements represent a small portion of the total production capacity of our outside foundries, assembly and test
facilities and our sub-contractors may reallocate capacity to other customers even during periods of high demand for our products. These foundries may allocate or move production of our
products to different foundries under their control, even in different locations, which may be time consuming, costly, and difficult, have an adverse affect on quality, yields, and costs, and require
us and/or our customers to re-qualify the products, which could open up design wins to competition and result in the loss of design wins and design-ins. If our
sub-contractors are unable or unwilling to continue manufacturing our products in the required volumes, at acceptable quality, yields and costs, and in a timely manner, our business will
be substantially harmed. As a result, we would have to identify and qualify substitute contractors, which would be time-consuming, costly and difficult. This qualification process may also
require significant effort by our customers, and may lead to re-qualification of parts, opening up design wins to competition, and loss of design wins and design-ins. Any of
these circumstances could substantially harm our business. In addition, if competition for foundry, assembly and test capacity increases, our product costs may increase and we may be required to pay
significant amounts or make significant purchase commitments to secure access to production services.

The nature of our production process is complex, which reduces identification of problems until well into the production cycle or in some cases, after the product has been
shipped.

The manufacture of semiconductors is a complex process, and it is often difficult for semiconductor foundries to achieve acceptable product yields. Product yields
depend on both our product design and the manufacturing process technology unique to the semiconductor foundry. Since low yields may result from either design or process difficulties, identifying
yield problems can only occur well into the production cycle, when an actual product exists that can be analyzed and tested.

Further,
we only test our products after they are assembled, as their high-speed nature makes earlier testing difficult and expensive. As a result, defects often are not
discovered until after assembly. This could result in a substantial number of defective products being assembled and tested or shipped, thus lowering our yields and increasing our costs. These risks
could result in product shortages or increased costs of assembling, testing or even replacing our products.

Although
we test our products before shipment, they are complex and may contain defects and errors. In the past we have encountered defects and errors in our products. Because our
products are sometimes integrated with products from other vendors, it can be difficult to identify the source of any particular problem. Delivery of products with defects or reliability, quality or
compatibility problems, may damage our reputation and our ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development
costs, diversion of technical resources, delayed product shipments, increased product returns, warranty and product liability claims against us that may not be fully covered by insurance. Any of these
circumstances could substantially harm our business.

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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.

A substantial portion of our business is conducted outside of the United States, and as a result, we are subject to foreign business, political and economic
risks. Nearly all of our products are manufactured in Taiwan or elsewhere in Asia, and for the year ended December 31, 2002 and 2001, 72% and 79%, respectively, of our revenue was generated
from customers and distributors located outside of the United States, primarily in Asia. We anticipate that sales outside of the United States will continue to account for a substantial portion of our
revenue in future periods. Accordingly, we are subject to international risks, including, but not limited to:



These
risks could adversely affect our business and our results of operations. In addition, original equipment manufacturers that design our semiconductors into their products sell them
outside of the United States. This exposes us indirectly to foreign risks. Because sales of our products are denominated exclusively in United States dollars, relative increases in the value of the
United States dollar will increase the foreign currency price equivalent of our products, which could lead to a reduction in sales and profits in that country.

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

We rely on a combination of patent, copyright, trademark, mask work and trade secret laws, as well as nondisclosure agreements and other methods, to protect our
proprietary technologies. We have been issued patents and have a number of pending patent applications. However, we cannot assure you that any patents will be issued as a result of any applications
or, if issued, that any claims allowed will protect our technology. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some
jurisdictions. It is possible that existing or future patents may be challenged, invalidated or circumvented and effective patent, copyright, trademark and trade secret protection may be unavailable
or limited in foreign countries. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or
design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our
intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive, and the outcome often is not predictable. As a result, despite our

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efforts and expenses, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business.

Our participation in the Digital Display Working Group requires us to license some of our intellectual property for free, which may make it easier for others to compete with us
in the DVI PC market.

We are a promoter of the Digital Display Working Group, which published and promotes the DVI specification. Our strategy includes establishing the DVI
specification as the industry standard, promoting and enhancing this specification and developing and marketing products based on this specification and future enhancements. As a result:



Accordingly,
companies that implement the DVI specification in their products can use specific elements of our intellectual property for free to compete with us.

Our participation as a founder in the working group developing HDMI requires us to license some of our intellectual property, which may make it easier for others to compete
with us in the market.

In April 2002, together with Sony, Philips, Thomson, Toshiba, Matsushita and Hitachi, we announced the formation of a working group to define the
next-generation digital interface specification for consumer electronics products. Version 1.0 of the specification was published for adoption on December 9, 2002. The HDMI
specification combines high-definition video and multi-channel audio in one digital interface and uses Silicon Image's patented underlying TMDS technology along with Intel's HDCP as the
basis for the interface. The founders of the working group have signed a founder's agreement in which each commits to license certain intellectual property to each other, and to adopters of the
specification.

Our
strategy includes establishing the HDMI specification as the industry standard, promoting and enhancing this specification and developing and marketing products based on this
specification and future enhancements. As a result:



Accordingly,
companies that implement the HDMI specification in their products can use specific elements of our intellectual property to compete with us. Although there will be license
fees and royalties associated with the adopters agreements, there can be no assurance that such license fees and royalties will adequately compensate us for having to license our intellectual
property. Fees and royalties received during the early years of adoption will be used to cover costs we incur to promote the HDMI standard and to develop and perform interoperability tests; in
addition, after an initial
period, the HDMI founders may reallocate the license fees and royalties amongst themselves to reflect each founder's relative contribution of intellectual property to the HDMI specification.

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We have granted Intel rights with respect to our intellectual property, which could allow Intel to develop products that compete with ours or otherwise reduce the value of our
intellectual property.

We
have entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the grantor's patents, except for identified types of products. We
believe that the scope of our license to Intel excludes our current products and anticipated future products. Intel could, however, exercise its rights under this agreement to use our patents to
develop and market other products that compete with ours, without payment to us. Additionally, Intel's rights to our patents could reduce the value of our patents to any third party who otherwise
might be interested in acquiring rights to use our patents in such products. Finally, Intel could endorse competing products, including a competing digital interface, or develop its own proprietary
digital interface. Any of these actions could substantially harm our business and results of operations.

We are and may continue to become the target of securities class action suits which could result in substantial costs and divert management attention and resources.

Securities class action suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their
securities. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management. We and certain of our officers and directors,
together with certain investment banks, have been named as defendants in a securities class action suit filed against us on behalf of purchasers of our securities between October 5, 1999 and
December 6, 2000. It is alleged that the prospectus related to our initial public offering was misleading because it failed to disclose that the underwriters of our initial public offering had
solicited and received excessive commissions from certain investors in exchange for agreements by investors to buy our shares in the aftermarket for predetermined prices. Due to inherent uncertainties
in litigation, we cannot accurately predict the outcome of this litigation. We believe that these claims are without merit and we intend to defend vigorously against them. However, these claims and
any other that may be brought, even if meritless, could require us to incur expenses and could divert our management's attention and resources. In addition, any unfavorable outcome of this possible
litigation could adversely impact our business, financial condition and results of operations.

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

In recent years, there has been significant litigation in the United States and in other jurisdictions involving patents and other intellectual property rights.
This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring infringement claims. In addition, in recent
years, there has been an increase in the filing of so-called "nuisance suits," alleging infringement of intellectual property rights. These claims may be asserted as counterclaims in
response to claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits,
regardless of merit. In addition, as is common in the semiconductor industry, from time to time we have been notified that we may be infringing certain patents or other intellectual property rights of
others. Responding to such claims, regardless of their merit, can be time consuming, result in costly litigation, divert management's attention and resources and cause us to incur significant
expenses. As each claim is evaluated, we may consider the desirability of entering into settlement or licensing agreements. No assurance can be given that settlements will occur or that licenses can
be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting us from marketing or selling certain of our products,
or a

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successful claim of infringement against us requiring us to pay damages or royalties to a third party, and we fail to develop or license a substitute technology, our business, results of operations
or financial condition could be materially adversely affected.

In
April 2001, we filed suit against Genesis Microchip for infringement of one of our U.S. patents. At that time, we also filed a complaint against Genesis for unlawful trade
practices related to the importation of articles infringing our patent. In February 2002, our motion to dismiss the unlawful trade practices complaint was granted and we filed an amended
complaint against Genesis alleging infringement of two of our U.S. patents. These patents relate to our DVI receiver products, which generate a significant portion of our revenue. The amended
complaint seeks a declaration that Genesis has infringed our patents, that Genesis's behavior is not licensed, an injunction to halt the importation, sale, manufacture and use of Genesis DVI receiver
chips that infringe our patents, and monetary damages. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud,
antitrust, unfair competition and patent misuse. We filed a motion to dismiss certain of Genesis's counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent
the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us
for fraud and patent misuse. We filed another motion to dismiss these counterclaims. In August 2002, the Court granted our motion and dismissed Genesis's re-filed counterclaims with
prejudice. In September 2002, we filed a motion for summary judgment, upon which the Court has yet to rule. In October 2002, both parties filed several more motions for summary judgment,
upon which the Court has yet to rule. Several dispositive motions have subsequently been filed under seal and were heard by the Court in March 2003; the Court has yet to rule on these motions.
Depending on the outcome of such motions, a trial date may be set, the case may be dismissed, or other orders may be entered. We intend to prosecute our position vigorously until this matter is
resolved.

There
can be no assurance that we will prevail in this litigation. While this litigation is pending, Genesis can use the technology covered by these patents to develop products that
might compete with ours. If we are unsuccessful in this litigation, we could be unable to prevent Genesis or others from using the technology covered by this patent. Even if we do prevail in this
litigation, uncertainties regarding the outcome prior to that time may reduce demand for our products. In addition, disputes may occur regarding whether any intellectual property licenses were granted
and the scope of any such licenses, based on our interactions in various standards bodies, including the Digital Display Working Group and for HDMI. These disputes may result in additional costly and
time-consuming litigation or the license of additional elements of our intellectual property for free.

Any
potential intellectual property litigation against us could also force us to do one or more of the following:



If
we are forced to take any of these actions, we may be unable to manufacture and sell our products. We may be exposed to liability for monetary damages, the extent of which would be
very difficult to accurately predict. In addition, we may be exposed to customer claims, for potential indemnity obligations, and to customer dissatisfaction and a discontinuance of purchases of our
products while the litigation is pending. Any of these consequences could substantially harm our business and results of operations.

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We have entered into, and may again be required to enter into, patent or other intellectual property cross-licenses.

Many
companies have significant patent portfolios or key specific patents, or other intellectual property in areas in which we compete. Many of these companies appear to have policies of
imposing cross-licenses on other participants in their markets, which may include areas in which we compete. As a result, we have been required, either under pressure of litigation or by significant
vendors or customers, to enter into cross licenses or non-assertion agreements relating to patents or other intellectual property. This permits the cross-licensee, or beneficiary of a
non-assertion agreement, to use certain or all of our patents and/or certain other intellectual property for free to compete with us.

We must attract and retain qualified personnel to be successful, and competition for qualified personnel is increasing in our market.

Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult
to replace. The loss of one or more of these employees could harm our business. Although we have entered into a limited number of employment contracts with certain executive officers, we generally do
not have employment contracts with our key employees. We do not have key person life insurance for any of our key personnel. Our success also depends on our ability to identify, attract and retain
qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our location. This makes it difficult to
retain our key personnel and to recruit highly-qualified personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications.
To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees.

The
pressure on our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to
attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our
business. In addition, new regulations proposed by The NASDAQ National Market requiring shareholder approval for all stock option plans, as well as new regulations proposed by the New York Stock
Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more
difficult for us to grant options to employees in the future. There have been several proposals on whether and/or how to account for stock options. To the extent that new regulations make it more
difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our
business.

We
use contractors to provide services to the company, which often involves contractual complexity, tax and employment law compliance, and being subject to audits and other governmental
actions. We have been audited for our contracting policies in the past, and may be in the future. Burdening our ability to freely use contractors to provide services to the company may increase the
expense of obtaining such services, and/or require us to discontinue using contractors and attempt to find, interview, and hire employees to provide similar services. Such potential employees may not
be available in a reasonable time, or at all, or may not be hired without undue cost.

In the past, we implemented mandatory unpaid company-wide shutdowns as a cost reduction measure, but we may not continue to implement these programs.

In the last two fiscal years, we have implemented mandatory company-wide shutdowns. Although these shutdown periods represent a cost savings to us,
they may be perceived negatively by our customers, vendors and employees. We currently intend to implement a company-wide shutdown in the

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first quarter of 2003, and another during the second half of 2003. In addition, we may continue to implement company-wide shutdowns in future periods, which may negatively impact employee
morale or the perception of our company by our customers and vendors. If we elect not to implement these shutdowns, our operating expenses will increase.

Our workforce reductions may seriously harm our business.

In connection with the program we began in the third quarter of 2001 to focus our business on products and technology in which we have, or believe we can achieve,
a leadership position, we have implemented three workforce reductions, eliminating a total of 109 positions. As a result of the elimination of these positions, our marketing, sales and customer
support capabilities could be reduced, our ability to respond to unexpected challenges may be impaired, and we may be unable to take advantage of new opportunities. These workforce reductions, or
future workforce reductions, if any, may reduce employee morale and create concern among existing employees about job security, which could lead to increased turnover. Workforce reductions may also
raise concerns among customers, suppliers and other corporate partners regarding our continued viability. Further, these workforce reductions may subject us to the risk of litigation, which could be
costly to defend, divert the attention of management and subject us to possible liability for damages.

Industry cycles may strain our management and resources.

Cycles of growth and contraction in our industry may strain our management and resources. To manage these industry cycles effectively, we must:



If
we cannot manage industry cycles effectively, our business could be seriously harmed.

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.

Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes, and the operations of CMD, which we acquired, are based in
the Los Angeles area, which is also susceptible to earthquakes. TSMC and UMC, the outside foundries that produce the majority of our semiconductor products, are located in Taiwan. Advanced
Semiconductor Engineering, or ASE, one of the subcontractors that assembles and tests our semiconductor products, is also located in Taiwan. For the year ended December 31, 2002, customers and
distributors located in Taiwan generated 34% of our revenue and customers and distributors located in Japan generated 12% of our revenue. For 2001, customers and distributors located in Taiwan
generated 25% of our revenue and customers and distributors located in Japan generated 16% of our revenue. Both Taiwan and Japan are susceptible to earthquakes, typhoons and other natural disasters.

Our
business would be negatively affected if any of the following occurred:



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Our implementation of a new ERP system may negatively affect our business.

In order to respond to the growth we anticipate in our business, we have decided implement a new enterprise resource planning (ERP) system to replace the
multiple, sometimes non-interoperable systems currently used in various aspects of our business. We have entered into commitments to purchase software licenses and services, many of which
we expect to be expensed and introduced during future periods, particularly our second fiscal quarter of 2003. The ERP system will affect numerous operational and financial systems, reporting and
processes. Even after introduction of the new system, it will need to be tested further. In the event that the ERP system is delayed, lacks necessary features, or has runtime errors, or we are unable
to train our personnel to use the ERP system in an efficient and timely manner, our business could be adversely affected. Moreover, there can be no assurance that the ERP system will be able to
support the anticipated growth of our business. Additionally, systems conversions can be disruptive to a company's business.

Changes in environmental rules and regulations could increase our costs and reduce our revenue.

Several jurisdictions are considering whether to implement rules that would require that certain products, including semiconductors, be made
lead-free. We anticipate that some jurisdictions may finalize and enact such requirements. Some jurisdictions are also considering whether to require abatement or disposal obligations for
products made prior to the enactment of any such rules. Although several of our products are available to customers in a lead-free condition, most of our products are not
lead-free. Any requirement that would prevent or burden the development, manufacture or sales of lead-containing semiconductors would likely reduce our revenue for such
products and would require us to incur costs to develop substitute lead-free replacement products, which may take time and may not always be economically or technically feasible, and may
require disposal of non-compliant inventory. In addition, any requirement to dispose or abate previously-sold products would require us to incur the costs of setting up and
implementing such a program.

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.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable.
These provisions include:



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Provisions
of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us.

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

The stock market has experienced extreme price and volume fluctuations that have affected the market valuation of many technology companies, including Silicon
Image. These factors, as well as general economic and political conditions, may materially and adversely affect the market price of our common stock in the future. The market price of our common stock
has fluctuated significantly and may continue to fluctuate in response to a number of factors, including, but not limited to:



Due
to these factors, the price of our stock may decline. In addition, the stock market experiences volatility that is often unrelated to the performance of particular companies. These
market fluctuations may cause our stock price to decline regardless of our performance.

Continued terrorist attacks or war could lead to further economic instability and adversely affect our operations, results of operations and stock price.

The United States has taken, and continues to take, military action against terrorism and has engaged in war with Iraq. In addition, the current nuclear arms
crisis in North Korea could escalate into armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or result in instability in the general economy and financial markets and in
consumer demand for the OEM's products that incorporate our products. Disruptions and instability in the general economy could reduce demand for our products or disrupt the operations of our
customers, suppliers, distributors and contractors, many of whom are located in Asia, which would in turn adversely affect our operations and results of operations. Disruptions and instability in
financial markets could adversely affect our stock price. Armed hostilities or war in South Korea could disrupt the operations of the research and development contractors we utilize there, which would
adversely affect our research and development capabilities and ability to timely develop and introduce new products and product improvements.

Item 7A. Quantitative and Qualitative Disclosures of Market Risk

Interest Rate Risk

Our cash equivalents and short-term investments consist primarily of fixed-income securities that are subject to interest rate risk and will decline
in value if interest rates increase. Due to the short duration of our cash equivalents and short-term investments, an immediate 10% change in interest rates would not be expected to have a
material effect on our near-term results of operations or financial condition. Our long-term capital lease obligations bear interest at fixed rates; therefore, our results of
operations would not be affected by immediate changes in interest rates. Also, components of

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our stock compensation expense are tied to our stock price. Changes in our stock price can have a significant affect on the amount recorded as stock compensation expense.

Foreign Currency Exchange Risk

All of our sales are denominated in U.S. dollars, and substantially all of our expenses are incurred in U.S. dollars, thus limiting our exposure to foreign
currency exchange risk. We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or
speculative purposes. The direct effect of an immediate 10% change in foreign currency exchange rates should not have a material effect on our future operating results or cash flows; however, a long
term increase in foreign currency rates would likely result in increased wafer, packaging, assembly or testing costs. Additionally, many of our foreign distributors price our products in the local
currency of the countries in which they sell. Therefore, significant strengthening of the U.S. dollar relative to those foreign currencies could result in reduced demand or lower U.S. dollar prices
for our products, which would negatively affect our operating results.

Item 8. Financial Statements and Supplementary Data

The Financial Statements and Supplemental Data required by this item are set forth at the pages indicated at Item 15(a).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

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PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item, which will be set forth under the captions "Proposal No. 1 Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Compliance" in Silicon Image's Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item, which will be set forth under the captions "Director Compensation," "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" in Silicon Image's Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item regarding ownership of Silicon Image's securities, which will be set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in Silicon Image's Proxy Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference. The information required by this Item regarding
Silicon Image's equity compensation plans, which will be set forth under the caption "Equity Compensation Plans" in Silicon Image's Proxy Statement for its 2003 Annual Meeting of Stockholders, is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this Item, which will be set forth under the caption "Certain Relationships and Related Transactions" in Silicon Image's Proxy
Statement for its 2003 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 14. Controls and Procedures

A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all errors, control issues and instances of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is also based
in part on certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become

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inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



Financial
statement schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the
information required is included in the financial statements or the notes to those financial statements.



The
exhibits listed in the Index to Exhibits are filed as a part of this Report on Form 10-K.



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SILICON IMAGE, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share amounts)

|                                             |                                                  | Year Ended December 31, |        
|-------------------------------------------- | ------------------------------------------------ | ----------------------- | -------
|
|Revenue:                                     |                                                  |                         |        
|                                             | Product                                          |                         | $      
|                                             | Development, licensing and royalties             |                         |        
|                                             |                                                  |                         |        
|Total revenue                                |                                                  |                         | 81,539 
|Cost of revenue and operating expenses:      |                                                  |                         |        
|                                             | Cost of revenue(1)                               |                         |        
|                                             | Research and development(2)                      |                         |        
|                                             | Selling, general and administrative(3)           |                         |        
|                                             | Stock compensation                               |                         |        
|                                             | Amortization of goodwill and intangible assets   |                         |        
|                                             | In-process research and development              |                         |        
|                                             | Impairment of goodwill and intangible assets     |                         |        
|                                             | Restructuring                                    |                         |        
|                                             | Patent defense and acquisition integration costs |                         |        
|                                             |                                                  |                         |        
|Total cost of revenue and operating expenses |                                                  |                         | 122,389
|                                             |                                                  |                         |        
|Loss from operations                         |                                                  |                         | (40,850
|Interest income                              |                                                  |                         | 998    
|Interest expense and other, net              |                                                  |                         | (240   
|                                             |                                                  |                         |        
|Net loss before provision for income taxes   |                                                  |                         | (40,092
|Provision for income taxes                   |                                                  |                         |       
|                                             |                                                  |                         |        
|Net loss                                     |                                                  | $                       | (40,092
|                                             |                                                  |                         |        
|Net loss per share:                          |                                                  |                         |        
|                                             | Basic and diluted                                |                         | $      
|                                             |                                                  |                         |        
|                                             | Weighted average shares                          |                         |        
|                                             |                                                  |                         |        

---

See
accompanying Notes to Consolidated Financial Statements

57

---

SILICON IMAGE, INC.        CONSOLIDATED BALANCE SHEETS        (in thousands, except share and per share amounts)

|                                               |                                                                                                                                   | December 31,                               |       
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------
|
|Assets                                         |                                                                                                                                   |                                            |       
|Current Assets:                                |                                                                                                                                   |                                            |       
|                                               | Cash and cash equivalents                                                                                                         |                                            | $     
|                                               | Short-term investments                                                                                                            |                                            |       
|                                               | Accounts receivable, net of allowances for doubtful accounts of $519 in 2002 and $450 in 2001                                     |                                            |       
|                                               | Inventories                                                                                                                       |                                            |       
|                                               | Prepaid expenses and other current assets                                                                                         |                                            |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total current assets                       |       
|Property and equipment, net                    |                                                                                                                                   |                                            | 6,653 
|Goodwill                                       |                                                                                                                                   |                                            | 13,021
|Intangible assets, net                         |                                                                                                                                   |                                            |      
|Other assets                                   |                                                                                                                                   |                                            | 709   
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total assets                               |       
|                                               |                                                                                                                                   |                                            |       
|Liabilities and Stockholders' Equity           |                                                                                                                                   |                                            |       
|Current Liabilities:                           |                                                                                                                                   |                                            |       
|                                               | Accounts payable                                                                                                                  |                                            | $     
|                                               | Accrued liabilities                                                                                                               |                                            |       
|                                               | Capital lease and debt obligations, current                                                                                       |                                            |       
|                                               | Deferred margin on sales to distributors                                                                                          |                                            |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total current liabilities                  |       
|Capital lease and other obligations, long-term |                                                                                                                                   |                                            |      
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total liabilities                          |       
|                                               |                                                                                                                                   |                                            |       
|Commitments and contingencies (Notes 7 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: 66,639,5222002 and 63,515,7422001 |                                            |       
|                                               | Additional paid-in capital                                                                                                        |                                            |       
|                                               | Notes receivable from stockholders                                                                                                |                                            |       
|                                               | Unearned compensation                                                                                                             |                                            |       
|                                               | Accumulated deficit                                                                                                               |                                            |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total stockholders' equity                 |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total liabilities and stockholders' equity |       
|                                               |                                                                                                                                   |                                            |       

See
accompanying Notes to Consolidated Financial Statements

58

---



SILICON IMAGE, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (in thousands)

|                                              |  | Common Stock |  |   |    | Notes
Receivable
From
Stockholders |   |         |   |   |        |   |  
|--------------------------------------------- |  | ------------ |  | - | -- | ---------------------------------- | - | ------- | - | - | ------ | - | -
|
|
|Balance at December 31, 1999                  |  | 51,486       |  | $ | 51 |                                    | $ | 85,390  |   | $ | (1,455 | ) | $
|Net issuances of common stock                 |  | 710          |  |   | 1  |                                    |   | 998     |   |   |       |   |  
|Common stock issued for ESPP                  |  | 194          |  |   |   |                                    |   | 1,013   |   |   |       |   |  
|Common stock issued for acquisitions (Note 2) |  | 1,498        |  |   | 2  |                                    |   | 31,953  |   |   |       |   |  
|Common stock issued for warrant exercise      |  | 61           |  |   |   |                                    |   |        |   |   |       |   |  
|Repayments of notes receivable                |  |             |  |   |   |                                    |   |        |   |   | 1,293  |   |  
|Unearned compensation                         |  |             |  |   |   |                                    |   | 13,086  |   |   |       |   |  
|Stock compensation expense                    |  |             |  |   |   |                                    |   | 4,707   |   |   |       |   |  
|Net loss                                      |  |             |  |   |   |                                    |   |        |   |   |       |   |  
|                                              |  |              |  |   |    |                                    |   |         |   |   |        |   |  
|Balance at December 31, 2000                  |  | 53,949       |  |   | 54 |                                    |   | 137,147 |   |   | (162   | ) |  
|Net issuances of common stock                 |  | 845          |  |   | 2  |                                    |   | 569     |   |   |       |   |  
|Common stock issued for ESPP                  |  | 342          |  |   |   |                                    |   | 1,491   |   |   |       |   |  
|Common stock issued for acquisitions (Note 2) |  | 7,931        |  |   | 8  |                                    |   | 45,477  |   |   |       |   |  
|Common stock issued for warrant exercise      |  | 449          |  |   |   |                                    |   |        |   |   |       |   |  
|Expense on option acceleration                |  |             |  |   |   |                                    |   | 303     |   |   |       |   |  
|Interest on notes receivable                  |  |             |  |   |   |                                    |   |        |   |   | (5     | ) |  
|Unearned compensation                         |  |             |  |   |   |                                    |   | 6,892   |   |   |       |   |  
|Stock compensation expense                    |  |             |  |   |   |                                    |   | 2,401   |   |   |       |   |  
|Net loss                                      |  |             |  |   |   |                                    |   |        |   |   |       |   |  
|                                              |  |              |  |   |    |                                    |   |         |   |   |        |   |  
|Balance at December 31, 2001                  |  | 63,516       |  |   | 64 |                                    |   | 194,280 |   |   | (167   | ) |  
|Net issuances of common stock                 |  | 2,456        |  |   | 2  |                                    |   | 5,693   |   |   |       |   |  
|Common stock issued for ESPP                  |  | 593          |  |   | 1  |                                    |   | 2,125   |   |   |       |   |  
|Common stock issued for acquisitions (Note 2) |  | 75           |  |   |   |                                    |   |        |   |   |       |   |  
|Expense on option acceleration                |  |             |  |   |   |                                    |   | 1,952   |   |   |       |   |  
|Repayments of note receivable                 |  |             |  |   |   |                                    |   |        |   |   | 70     |   |  
|Interest on notes receivable                  |  |             |  |   |   |                                    |   |        |   |   | (12    | ) |  
|Unearned compensation                         |  |             |  |   |   |                                    |   | (459    | ) |   |       |   |  
|Stock compensation expense                    |  |             |  |   |   |                                    |   | 10,868  |   |   |       |   |  
|Net loss                                      |  |             |  |   |   |                                    |   |        |   |   |       |   |  
|                                              |  |              |  |   |    |                                    |   |         |   |   |        |   |  
|Balance at December 31, 2002                  |  | 66,640       |  | $ | 67 |                                    | $ | 214,459 |   | $ | (109   | ) | $
|                                              |  |              |  |   |    |                                    |   |         |   |   |        |   |  

See
accompanying Notes to Consolidated Financial Statements

59

---

SILICON IMAGE, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

|                                                                                      |                                                                         | Year Ended December 31,                         |        
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------- | -------
|
|Cash flows from operating activities:                                                 |                                                                         |                                                 |        
|Net loss                                                                              |                                                                         | $                                               | (40,092
|Adjustments to reconcile net loss to cash provided by (used in) operating activities: |                                                                         |                                                 |        
|                                                                                      | Depreciation and amortization                                           |                                                 |        
|                                                                                      | Provision for doubtful accounts                                         |                                                 |        
|                                                                                      | Stock compensation expense                                              |                                                 |        
|                                                                                      | Amortization of goodwill and intangible assets                          |                                                 |        
|                                                                                      | In-process research and development                                     |                                                 |        
|                                                                                      | Impairment of goodwill and intangible assets                            |                                                 |        
|                                                                                      | Non-cash restructuring                                                  |                                                 |        
|                                                                                      | Changes in assets and liabilities, net of amounts acquired:             |                                                 |        
|                                                                                      |                                                                         | Accounts receivable                             |        
|                                                                                      |                                                                         | Inventories                                     |        
|                                                                                      |                                                                         | Prepaid expenses and other assets               |        
|                                                                                      |                                                                         | Accounts payable                                |        
|                                                                                      |                                                                         | Accrued liabilities                             |        
|                                                                                      |                                                                         | Deferred margin on sales to distributors        |        
|                                                                                      |                                                                         |                                                 |        
|                                                                                      |                                                                         | Cash provided by (used in) operating activities |        
|                                                                                      |                                                                         |                                                 |        
|Cash flows from investing activities:                                                 |                                                                         |                                                 |        
|                                                                                      | Purchases of short-term investments                                     |                                                 |        
|                                                                                      | Proceeds from sales of short-term investments                           |                                                 |        
|                                                                                      | Purchases of property and equipment                                     |                                                 |        
|                                                                                      | Acquisition costs, net of cash acquired                                 |                                                 |        
|                                                                                      |                                                                         |                                                 |        
|                                                                                      |                                                                         | Cash provided by (used in) investing activities |        
|                                                                                      |                                                                         |                                                 |        
|Cash flows from financing activities:                                                 |                                                                         |                                                 |        
|                                                                                      | Proceeds from issuances of common stock                                 |                                                 |        
|                                                                                      | Net repayments of stockholders' notes receivable                        |                                                 |        
|                                                                                      | Borrowings                                                              |                                                 |        
|                                                                                      | Repayments of debt                                                      |                                                 |        
|                                                                                      | Security deposits on leasing arrangements                               |                                                 |        
|                                                                                      |                                                                         |                                                 |        
|                                                                                      |                                                                         | Cash provided by (used in) financing activities |        
|                                                                                      |                                                                         |                                                 |        
|Net increase (decrease) in cash and cash equivalents                                  |                                                                         |                                                 | 7,317  
|Cash and cash equivalentsbeginning of period                                         |                                                                         |                                                 | 18,946 
|                                                                                      |                                                                         |                                                 |        
|Cash and cash equivalentsend of period                                               |                                                                         | $                                               | 26,263 
|                                                                                      |                                                                         |                                                 |        
|Supplemental cash flow information:                                                   |                                                                         |                                                 |        
|                                                                                      | Acquisitions of property and equipment under capital lease arrangements |                                                 | $      
|                                                                                      |                                                                         |                                                 |        
|                                                                                      | Cash payments for interest                                              |                                                 | $      
|                                                                                      |                                                                         |                                                 |        
|                                                                                      | Cash payments (refunds) for income taxes                                |                                                 | $      
|                                                                                      |                                                                         |                                                 |        

See
accompanying Notes to Consolidated Financial Statements

60

---



SILICON IMAGE, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

We design, develop and market semiconductors, including transmitters, receivers, monitor controllers, video processors and storage ICs, for applications that
require high-bandwidth, cost-effective solutions for high-speed digital data communications.

The
semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. Our financial results are affected by a wide
variety of factors, including general global economic conditions, economic conditions specific to the semiconductor industry, the timely implementation of new manufacturing technologies, the ability
to safeguard patents and intellectual property in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors. In addition,
the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. As a result, we may experience significant
period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.

Basis of presentation

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the
amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from these estimates. The consolidated financial statements include the accounts of Silicon Image, Inc. and our
subsidiaries after elimination of intercompany balances and transactions.

Revenue recognition

For products sold directly to end-users, or to distributors that do not receive price concessions and do not have rights of return, we recognize
revenue upon shipment and title transfer if we believe collection is reasonably assured. Reserves for sales returns and allowances are estimated based primarily on historical experience and are
provided at the time of shipment.

For
sales to distributors with agreements allowing for price concessions and product returns, we recognize revenue based on our best estimate of when the distributor sold the product to
its end customer. Our estimate of distributor sell-through to end customers is based on point of sales reports received from our distributors. Due to the timing of receipt of these
reports, we recognize distributor sell-through using information that lags quarter end by one month. Revenue is not recognized upon shipment since, due to various forms of price
concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given
period of time. Revenue is earned when the distributor sells the product to an end-user, at which time our sales price to the distributor becomes fixed. Pursuant to our distributor
agreements, older or end-of-life products are sold with no right of return and are not eligible for price concessions. For these products, revenue is recognized upon shipment
and title transfer if we believe collection is reasonable assured.

At
the time of shipment to distributors, we record a trade receivable for the selling price since there is a legally enforceable right to payment, relieve inventory for the carrying
value of goods shipped since legal title has passed to the distributor, and record the gross margin in "deferred margin on sales to distributors", a component of current liabilities on the balance
sheet. Deferred margin represents the gross margin on the sale to the distributor; however, the amount of gross margin we recognize in future

61

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periods could be less than the deferred margin as a result of price concessions. We do not reduce deferred margin by estimated future price concessions; instead, price concessions are recorded when
incurred, which is generally at the time the distributor sells the product to an end-user. The difference between deferred margin and the margin actually recognized has not been material
in the past; however, since price concessions are highly dependent upon market conditions, there can be no assurance that the difference will not be material in the future. Price concessions are not
granted for amounts in excess of the deferred margin.

License
revenue is recognized when an agreement with a licensee exists, the price is fixed or determinable, delivery or performance has occurred, and collection is reasonably assured.
Generally, we expect to meet these criteria and recognize revenue at the time we deliver the agreed-upon items. However, we may defer recognition of revenue until cash is received if
collection is not reasonably
assured at the time of delivery, and we may enter into agreements requiring customer acceptance of deliverables, in which case we would defer recognition of revenue until the licensee has accepted the
deliverables. Development revenue is recognized when project milestones have been completed and acknowledged by the other party to the development agreement, and collection is reasonably assured.

Allowance for Doubtful Accounts

We review collectibility of accounts receivable on an ongoing basis and provide an allowance for amounts we estimate will not be collectible. During our review,
we consider our historical experience, the age of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency. Write-offs to date have been minimal.
At December 31, 2002, we had $12.1 million of gross accounts receivable and an allowance for doubtful accounts of $519,000.

Inventories and Related Reserves

We record inventories at the lower of standard cost, determined on a first-in first-out basis, or market. Standard cost approximates
actual cost. Standard costs are determined based on our estimate of material costs, manufacturing yields, costs to assemble, test and package our products, and allocable indirect costs. We review
differences between standard and actual costs, and, based on the nature of the difference, determine whether to record the amount on our balance sheet or in our statement of operations. Standard costs
are evaluated at least twice each year.

Reserves
are provided for excess and obsolete inventory, and are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer
demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will
be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six months demand are fully reserved and the related
charge is recorded as a cost of revenue. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we
forecast demand for the product. This treatment is in accordance with Accounting Research Bulletin 43 and Staff Accounting Bulletin 100. At December 31, 2002 and 2001, we had gross inventories
of $13.1 million and $10.7 million, respectively, and reserves for excess and obsolete inventory of $5.8 million and $4.2 million, respectively.

62

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Long-lived assets

Consideration paid in connection with acquisitions is required to be allocated to the assets, including identifiable intangible assets, and liabilities acquired.
Acquired assets and liabilities are recorded based on our estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates.

For
certain long-lived assets, primarily fixed assets and intangible assets, we are required to estimate the useful life of the asset and recognize its cost as an expense
over the useful life. We use the straight-line method to depreciate long-lived assets. Additionally, pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," we periodically assess whether long-lived assets have been impaired. We deem an asset to be impaired if its estimated fair value is less than the cost at
which it is recorded on our balance sheet. Our estimate of fair value is based on the net present value of expected future cash flows attributable to the asset. Predicting future cash flows
attributable to a particular asset is difficult, and requires the use of significant judgment.

We
assign the following useful lives to our fixed assetsthree years for computers and software, three to five years for equipment and five to seven years for furniture and
fixtures. Leasehold improvements and assets held under capital leases are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life, which ranges
from two to five years.

Goodwill and intangible assets

On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets."
SFAS No. 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets," and discontinues the amortization of goodwill. In addition, SFAS No. 142 includes
provisions regarding: 1) reclassification of amounts between goodwill and identifiable intangible assets in accordance with the new definition of identifiable intangible assets set forth in
Statement of Financial Accounting Standards No. 141, "Business Combinations;" 2) reassessment of the useful lives of existing recognized intangibles; and 3) testing for impairment
of existing goodwill and other intangibles using the discounted cash flow method. In accordance with SFAS No. 142, beginning January 1, 2002, goodwill is no longer amortized, but is
reviewed at least annually for impairment. We completed the first step of the transitional goodwill impairment test as of the beginning of fiscal 2002, and the results of that test indicated that our
goodwill and other intangible assets were not impaired at January 1, 2002. (See Note 3 for discussion of second quarter 2002 goodwill and impairment expenses.) We identified
$1.8 million of net identifiable intangible assets (acquired workforce) to be reclassified to goodwill pursuant to the new definition of intangible assets. Acquired technology, patents and
other intangible assets continued to be amortized over their estimated useful lives of 18 to 42 months using the straight-line method. No changes were made to the useful lives of
amortizable intangible assets in connection with the adoption of SFAS No. 142.

63

---

Components of intangible assets, including the reclassification of intangible assets as of January 1, 2002, were as follows (in thousands):

|                                               |                     | December 31, 2002 |        | December 31, 2001 |  
|---------------------------------------------- | ------------------- | ----------------- | ------ | ----------------- | -
|
|Intangible assets subject to amortization:     |                     |                   |        |                   |  
|                                               | Acquired technology |                   | $      | 10,726            |  
|                                               | Patents and other   |                   |        | 2,599             |  
|                                               | Goodwill            |                   |        |                  |  
|                                               |                     |                   |        |                   |  
|                                               |                     | $                 | 13,325 |                   | $
|                                               |                     |                   |        |                   |  
|Intangible assets not subject to amortization: |                     |                   |        |                   |  
|                                               | Goodwill            |                   | $      | 13,021            |  
|                                               |                     |                   |        |                   |  

The
changes in the carrying value of goodwill for year ended December 31, 2002 are as follows (in thousands):

Balance as of December 31, 2001:Goodwill subject to amortization

$
13,341Accumulated amortization


(8,562
)Goodwill not subject to amortization


10,863Net goodwill as of December 31, 2001


15,642Reclassification of acquired workforce upon adoption of SFAS 142 on January 1, 2002


1,770Fiscal year 2002 impairment (Note 3)


(4,391
)Balance as of December 31, 2002

$
13,021


Amortization
of goodwill and intangible assets was $3.5 million, $14.1 million and $4.4 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Our net loss, excluding goodwill amortization expense, for the years ended December 31, 2001 and 2000 would have been as follows had we adopted SFAS No. 142 on
January 1, 2000 (in thousands, except per share amounts):

Year Ended
December 31,2001

2000Net loss-as reported

$
(76,108
)
$
(23,243
)SFAS 142 amortization adjustment


6,995


2,247Net loss-adjusted

$
(69,113
)
$
(20,996
)Basic and diluted net loss per share-as reported

$
(1.32
)
$
(0.47
)Impact of SFAS 142 amortization adjustment


0.12


0.05Basic and diluted net loss per share-adjusted

$
(1.20
)
$
(0.42
)


64

---

Income taxes

We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to
their estimated realizable value. Therefore, we provide a valuation allowance to the extent we do not believe it is more likely than not that we will generate sufficient taxable income in future
periods to realize the benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. At December 31, 2002, we had a net
operating loss carryforward for federal income tax purposes of approximately $63.0 million, against which a full valuation allowance has been provided.

Accrued liabilities

Certain of our accrued liabilities are based largely on estimates. For instance, we record a liability on our balance sheet each period for the estimated cost of
goods and services rendered to us, for which we have not received an invoice. Additionally, a component of our restructuring reserve related to a loss we expect to incur for excess leased facility
space is based on numerous assumptions and estimates, such as the market value of the space and the time it will take to sublease the space. Our estimates are based on historical experience, input
from sources outside the company, and other relevant facts and circumstances. Actual amounts could differ materially from these estimates.

Warranty Accrual

At the time of revenue recognition, we provide an accrual for estimated costs to be incurred pursuant to our warranty obligation. Our estimate is based primarily
on historical experience.

Year Ended
December 31, 2002(in thousands)Balance at January 1, 2002

$
473Provision for warranties issued during the period


71Accruals related to pre-existing warranties


(186
)Cash and other settlements made during the period


(135
)Balance at December 31, 2002

$
223


Stock-based compensation

We account for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and related interpretations, and comply with the disclosure provisions of Statement of Financial Accounting Standard No. 148 (SFAS 148), "Accounting for
Stock-Based CompensationTransition and Disclosure (an amendment of FASB Statement No. 123)." Expense associated with stock-based compensation is amortized over the vesting period
of the individual award using an accelerated method, as described in Financial Accounting Standards Board Interpretation No. 28.

65

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We
are required to determine the fair value of stock option grants to non-employees, and to record the amount as an expense over the period during which services are provided
to us. Management calculates the fair value of these stock option grants using the Black-Scholes model, which requires us to estimate the life of the stock option, the volatility of our stock, an
appropriate risk-free interest rate, and our dividend yield. The calculation of fair value is highly sensitive to the expected life of the stock option and the volatility of our stock,
both of which we estimate based primarily on historical experience.

Pro forma Net Loss

Had we recorded compensation cost for our options based on the grant-date fair value as prescribed by SFAS 123 and SFAS 148, our net
loss would have been as follows (in thousands):

Year Ended December 31,2002

2001

2000Net loss-as reported

$
(40,092
)
$
(76,108
)
$
(23,243
)Stock-based employee compensation expense determined using fair value method


(24,766
)

(29,944
)

(19,502
)Stock-based employee compensation cost included in the determination of net loss as reported


8,803


10,068


8,923Pro forma net loss

$
(56,055
)
$
(95,984
)
$
(33,822
)Basic and diluted net loss per sharepro forma

$
(0.87
)
$
(1.66
)
$
(0.68
)Basic and diluted net loss per shareas reported

$
(0.62
)
$
(1.32
)
$
(0.47
)


Cash equivalents and short-term investments

We consider all highly-liquid investments maturing within three months from the date of purchase to be cash equivalents. All of our short-term
investments are categorized as available-for-sale at the balance sheet dates, and have been presented at fair value, which approximates amortized cost. When material, any
temporary difference between the cost and fair value of an investment would be presented as a
separate component of stockholder's equity. At December 31, 2002, the average remaining contractual maturity of all short-term investments was approximately three months.

66

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Cash
equivalents and short-term investments, by security type, were as follows (in thousands):

December 31,2002

2001Cash and Cash Equivalents:Cash

$
2,100

$
594Commercial paper


8,763


9,637Market auction preferred securities


11,350


6,900Money market funds


4,050


1,815$
26,263

$
18,946Short-term investments:Corporate notes and bonds

$
9,570

$
13,157US government agencies





6,022Bank certificates of deposit





3,093$
9,570

$
22,272


Concentration of credit risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents, short-term
investments and accounts receivable. We may invest in a variety of financial instruments and, by policy, we limit the amount of credit exposure through diversification and by investing only in
instruments of high-grade government or commercial issuers. We perform on-going credit evaluations of our customers' financial condition and may require collateral, such as
letters of credit, to secure accounts receivable if deemed necessary. We maintain an allowance for potentially uncollectible accounts receivable based on our assessment of collectibility.

Advertising and Research and Development

Advertising and research and development costs are expensed as incurred.

Comprehensive income (loss)

Comprehensive income (loss) approximated reported net loss for all periods presented.

Net loss per share

Basic net loss per share is based on weighted average common shares outstanding, excluding shares subject to repurchase, and diluted net loss per share is based
on weighted average common shares and

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dilutive equivalents outstanding, if any. The following tables set forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

|                    |                                                    | Year Ended December 31, |       
|------------------- | -------------------------------------------------- | ----------------------- | ------
|
|Numerator:          |                                                    |                         |       
|                    | Net loss                                           |                         | $     
|Denominator:        |                                                    |                         |       
|                    | Weighted average shares                            |                         |       
|                    | Less: unvested common shares subject to repurchase |                         |       
|                    |                                                    |                         |       
|                    |                                                    |                         | 64,283
|                    |                                                    |                         |       
|Net loss per share: |                                                    |                         |       
|                    | Basic and diluted net loss per share               |                         | $     
|                    |                                                    |                         |       

As
a result of our net losses, all common share equivalents would have been anti-dilutive and have therefore been excluded from the diluted net loss per share calculation.
The following table summarizes weighted average securities outstanding that were anti-dilutive and excluded from our calculation of diluted net loss per share (in thousands):

December 31,2002

2001

2000Unvested common shares subject to repurchase

475

1,532

2,879Stock options

20,028

14,712

7,102Common stock warrants



180

58220,503

16,424

10,563


Had
we been profitable for the year ended December 31, 2002, the number of weighted average securities outstanding that would have been added to weighted average shares for
purposes of calculating diluted earnings per share would have been (in thousands):

Unvested common shares subject to repurchase

414Stock options

8,567


Recent accounting pronouncements

In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement No. 146 (SFAS No. 146), Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring
activities, costs related to terminating a contract that is not a capital
lease and termination benefits provided under a one-time benefit arrangement to involuntarily terminated employees. SFAS No. 146 requires that an expense associated with an exit or
disposal activity be recognized when a liability is incurred, and that fair value be used for the initial measurement of the liability. SFAS No. 146 is effective for all exit or disposal
activities that are initiated after December 31, 2002.

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In
November 2002, the FASB issued Interpretation No. 45 (Interpretation 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others. Interpretation 45 clarifies disclosure, recognition and measurement requirements related to certain guarantees. The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the recognition and measurement requirements are effective for guarantees issued or modified after December 31, 2002. The Company does not
expect the adoption of Interpretation 45 to have a significant effect on its results of operations or financial condition. The required warranty disclosure is included above under "Warranty accrual."

In
December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS No. 148), "Accounting for Stock-Based CompensationTransition
and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions of SFAS No. 148 are effective for interim
periods beginning after December 15, 2002. We have adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002.

NOTE 2BUSINESS COMBINATIONS

CMD Technology ("CMD")

On June 7, 2001, we issued approximately 6.4 million shares, including 1.4 million that are held in escrow, of our common stock in exchange
for all outstanding shares of CMD, a provider of storage subsystems and semiconductors. The total purchase price for this acquisition was $45.1 million, consisting of common stock with a fair
value of $30.6 million, 3.7 million stock options with a fair value of $13.6 million, and transaction costs, consisting of investment advisory, legal and other professional
service fees, of $865,000. Common stock was valued at $4.94 per share using our average closing stock
price for the four-day period ended June 7, 2001, and has been reduced for known contingencies pursuant to an Escrow Agreement. Stock options were valued using the Black-Scholes
option pricing model, applying a weighted average expected life of 2.75 years, a weighted average risk-free rate of 5.0%, an expected dividend yield of zero percent, a volatility of
90% and a deemed fair value of $4.94 per share. The intrinsic value of the unvested options, totaling approximately $6.3 million, was recorded as unearned compensation.

A
certain number of shares were being held in escrow as our security for indemnification obligations of CMD's shareholders (refer to Note 12Subsequent Events).

The
allocation of the aggregate purchase price was based on management's analysis and estimates of the fair values of tangible assets, intangible assets and in-process
research and development, which was expensed during the quarter ended September 30, 2001. Intangible assets recorded in connection with this acquisition will be amortized to expense ratably
over the estimated useful lives referenced below. However, effective January 1, 2002, when we adopted SFAS No. 142, goodwill acquired was no

69

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longer amortized to expense. The purchase price allocation and related amortization periods are summarized below (in thousands):

Net assets acquired

$
4,155Acquired technology


10,178

18-42 monthsUnearned compensation


6,314

30 monthsAssembled workforce


2,340

24 monthsCustomer agreement


1,939

24 monthsIn-process research and development expense


1,500Trade name


435

42 monthsGoodwill


18,270

42 months$
45,131


Refer
to Note 3 for discussion of impairment of certain intangible assets during 2002. As of December 31, 2002, all amortizing intangible assets recorded in connection with
the CMD acquisition have been fully amortized and $1.9 million of goodwill associated with the acquisition is carried on our balance sheet.

CMD's
in-process research and development was valued at the discounted expected future cash flows attributable to the in-process technology. To arrive at this
amount, the estimated future cash flows derived from the technology was multiplied by the percentage of completion of the in-process technology, and was then discounted using a rate of
25%, which Silicon Image believes is appropriate based on the risk associated with technology that is not commercially feasible. Future cash flow is estimated taking into consideration the percentage
of completion of products utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and
future markets, and the technological risk associated with completing development of the technology. The percentage of completion for each in-process project is the ratio of elapsed time
invested in the project to the total expected time required to complete the project to technical and commercial feasibility.

Acquired
technology was valued at the discounted expected future cash flows attributable to products that were commercially feasible at the acquisition date. Future expected cash flows
were discounted using rates of 15% to 20%, which we believe were appropriate given the business risks inherent in manufacturing and marketing these products. Factors considered in estimating future
cash flows include risks related to the characteristics and applications of the technology, existing and future markets, and assessment of the age of the technology relative to its expected life span.

Assembled
workforce was valued based on the estimated costs to replace the existing staff, including recruiting, hiring and training costs for employees in all categories, and to fully
deploy a work force of similar size and skill to the same level of productivity as the existing work force. The customer agreement was valued based on the estimated contributed gross margin of product
to be sold over the agreement's two-year remaining life. The trade name was valued based on the estimated amount a third party would pay to use and benefit from the trade name.

Upon
closing, we refinanced $3.1 million of CMD's outstanding bank debt. The loan matured in April 2002 and was subsequently refinanced (see Note 7).

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NOTE 2BUSINESS COMBINATIONS (Continued)

The
following unaudited pro forma information gives effect to the acquisition of CMD as if it had occurred on January 1 of each period presented (in thousands).

|                                     |  | Year Ended
December 31, 2001 |         | Year Ended
December 31, 2000 |  
|------------------------------------ |  | ---------------------------- | ------- | ---------------------------- | -
|
|Revenue                              |  | $                            | 64,296  |                              | $
|Net loss                             |  | $                            | (93,332 | )                            | $
|Basic and diluted net loss per share |  | $                            | (1.54   | )                            | $
|Weighted average shares              |  |                              | 60,526  |                              |  

Unaudited
pro forma information is not necessarily indicative of the actual results of operations that would have been reported if the acquisition had actually occurred as of the
beginning of the period indicated above, nor is such information indicative of our future results of operations. In the opinion of management, all adjustments necessary to present fairly such pro
forma information have been made.

Silicon Communication Lab, Inc. ("SCL")

On July 6, 2001, we completed our acquisition of SCL, a provider of mixed-signal and high-speed circuit designs, including
analog-to-digital converters, for the purpose of enhancing our engineering design team. In connection with this transaction, we acquired all outstanding shares of SCL in
exchange for approximately 1.3 million shares of our common stock and $2.3 million in cash. The acquisition has been accounted for using the purchase method of accounting. The total
purchase price for this acquisition was $12.2 million, consisting of $2.3 million of cash, common stock with a fair value of $5.6 million, stock options to purchase
1.0 million common shares with a fair value of $4.1 million, and transaction costs, consisting of legal and other professional service fees, of $150,000. Common stock was valued at $4.30
per share using our average closing stock price for the five-day period ending June 29, 2001. Stock options were valued using the Black-Scholes option pricing model, applying a
weighted average expected life of 3-3.5 years, a weighted average risk-free interest rate of 5.0%, an expected dividend yield of zero percent, a volatility of 90%
resulting in a deemed fair value of $4.30 per share. The intrinsic value of the unvested options, totaling approximately $2.1 million, has been recorded as unearned compensation and is being
amortized to expense over the vesting periods.

Escrow
shares and cash were held as our security for indemnification obligations of SCL's shareholders. No claims were submitted by us, and in July 2002, the escrow
shares and cash were released to the SCL shareholders.

The
allocation of the aggregate purchase price was based on management's analysis and estimates of the fair values of tangible and intangible assets. Goodwill recorded in connection with
this acquisition will not be amortized to expense, but will be subject to periodic testing for impairment in accordance with SFAS No. 142. As of December 31, 2002, our balance sheet
includes $10.9 million of goodwill from the SCL acquisition. Unearned compensation will be amortized to expense over a period

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of 24 months using an accelerated method, and acquired technology will be amortized to expense ratably over 24 months. The purchase price allocation is summarized below (in thousands):

Net liabilities acquired

$
(977
)Unearned compensation


2,102Acquired technology


162Goodwill


10,863$
12,150


The
fair values of SCL's net liabilities as of the acquisition date were (in thousands):

Cash

$
226Accounts receivable


12Fixed assets


43Other assets


18Accounts payable


(120
)Accrued liabilities


(656
)Short term debt


(500
)$
(977
)


Acquired
technology was valued at the discounted expected future cash flows attributable to products that were commercially feasible at the acquisition date. Future expected cash flows
were discounted using rates of 15% to 20%, which we believe were appropriate given the business risks inherent in manufacturing and marketing these products. Factors considered in estimating future
cash flows include risks related to the characteristics and applications of the technology, existing and future markets, and assessment of the age of the technology relative to its expected life span.

We
did not expect to continue development of products that SCL was developing as of the acquisition date, or to incorporate SCL's existing technology into our future
products. Accordingly, no value was assigned to in-process research and development.

SCL's
results of operations prior to the acquisition date were not material in relation to those of Silicon Image for any of the periods presented herein.

DVDO, Inc. ("DVDO")

On July 6, 2000, we issued approximately 1,288,000 shares, of which approximately 110,000 shares were originally held in escrow, of our common stock in
exchange for all outstanding shares of DVDO, a privately-held provider of digital video processing systems for the consumer electronics industry. The total purchase price for this
acquisition was $37.8 million, consisting of stock with a fair value of $35.8 million, stock options with a fair value of $1 million, and transaction costs of $1 million.
The acquisition has been accounted for using the purchase method of accounting.

Escrow
shares were held as our security for indemnification obligations of DVDO's shareholders. No claims were submitted by us, and in July 2002, the escrow shares were released
to the DVDO shareholders.

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In
addition to the shares issued in exchange for the outstanding shares of DVDO, we issued 166,000 shares of restricted stock to key employees of DVDO. The value of the restricted stock
was recorded as unearned compensation, which is being amortized over the period during which the restrictions lapse. Restricted stock was subject to our repurchase at the original purchase price in
the event of termination of employment. Our right to repurchase expires over a 33-month period. During 2001, we repurchased and subsequently canceled approximately 106,000 shares of
restricted stock upon the departure of DVDO employees, and reduced the balance of our unearned compensation accordingly. The remaining 60,000 shares had vested during the year. As of
December 31, 2002, there were no restricted shares outstanding pursuant to the DVDO acquisition.

The
purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values. The purchase price allocation was as follows (in thousands):

Inventory

$
355Other current assets


270Fixed assets


179Intangible assets


25,709Current liabilities


(1,996
)Unearned compensation


4,897In-process research and development expense


8,410$
37,824


Refer
to Note 3 for discussion of impairment of certain intangible assets during 2001 and 2002.

In-process
research and development represents technology that has not reached technological feasibility and that has no alternative future use. Intangible assets consist of
goodwill, purchased technology, acquired workforce, trade name and patents. Goodwill, purchased technology, and patents are being amortized over their estimated useful lives of three years and the
acquired workforce and trade name are being amortized over their estimated useful lives of two years.

DVDO's
in-process technology was valued at the discounted expected future cash flow attributable to the in-process technology. To arrive at this amount, the
estimated future cash flow derived from the technology was multiplied by the percentage of completion of the in-process technology, and was then discounted using a rate of 25%, which we
believe is appropriate based on the risk associated with technology that is not commercially feasible. Future cash flow is estimated taking into consideration the percentage of completion of products
utilizing this technology, utilization of pre-existing technology, the risks related to the characteristics and applications of the technology, existing and future markets, and the
technological risk associated with completing the development of the technology. The percentage of completion for each in-process project is the elapsed time invested in the project as a
ratio of the total expected time required to complete the project to technical and commercial feasibility.

Acquired
technology was valued at the discounted expected future cash flows attributable to products that were commercially feasible at the acquisition date. Future expected cash flows
were discounted using rates of 15% to 20%, which we believe was appropriate given the business risks inherent in manufacturing and marketing these products. Factors considered in estimating future
cash flows include risks related to the characteristics and applications of the technology, existing and future markets, and an assessment of the age of the technology relative to its expected life
span.

73

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Assembled
workforce was valued based on the estimated costs to replace the existing staff, including recruiting, hiring and training costs for employees in all categories, and to fully
deploy a workforce of similar size and skill to the same level of productivity as the existing work force. The trade name was valued based on the estimated amount a third party would pay to use and
benefit from the trade name.

Unearned
compensation consists of the value of the restricted stock issued ($4.1 million), plus the intrinsic value of unvested stock options assumed in the acquisition
($803,000). The difference between the fair value of stock options assumed and the intrinsic value of the unvested stock options assumed has been allocated to intangible assets. Unearned compensation
is being amortized to expense over the remaining vesting periods using an accelerated method. Approximately $2.2 million was amortized in 2000.

Zillion Technologies, LLC ("Zillion")

During the quarter ended June 30, 2000, we completed our acquisition of Zillion, a privately-held developer of high-speed
transmission technology for data storage applications. In exchange for all membership interests in Zillion, we agreed to issue 300,000 shares of our common stock ratably over a four-year
period. The vesting of these shares is based on continuing employment of these members. The total value of the shares to be issued was $5.5 million, which is being expensed over the issuance
period using an accelerated method. A total of $2.3 million was expensed in 2000. Net assets acquired, and the related acquisition costs, were immaterial. In the fourth quarter of 2001, an
additional 120,544 shares were issued to the Zillion stockholders based upon a contractual below-market guarantee. No additional shares will be issued in connection with the below-market guarantee.

NOTE 3ASSET IMPAIRMENT AND RESTRUCTURING ACTIVITIES

During the third quarter of 2001, we began a program to focus our business on products and technology, including those obtained through acquisitions, in which we
have, or believe we can achieve, a market leadership position. As part of this program, we decided to cancel numerous products under
development, to remove certain projects from our development plan, to phase out or de-emphasize certain existing products and to integrate the operations of our two recently acquired
companiesCMD Technology (CMD) and Silicon Communication Lab (SCL).

In
connection with this program, we reduced our workforce in the fourth quarter of 2001 by approximately 60 people, or 20%. This workforce reduction was the initial step in eliminating
duplicate positions that resulted from our acquisitions, and also represented the elimination of other positions based on our new product and technology focus. Positions were eliminated from all
functional areasoperations, R&D and SG&A. Because of this workforce reduction, we recorded a restructuring expense of $1.5 million in the fourth quarter of 2001, consisting of cash
severance-related costs of $599,000, non-cash severance-related costs of $303,000 representing the intrinsic value of modified stock options, an expected loss on leased facilities of
$500,000 and fixed asset write-downs of $50,000. In addition, we reversed $286,000 of unearned compensation, a component of stockholders' equity, for unvested stock options that were cancelled in
connection with employee terminations.

In
the first quarter of 2002, we implemented a second workforce reduction in connection with the program discussed above, eliminating an additional 35 positions, or 13% or our workforce.
Positions were eliminated from all functional areas. This reduction resulted from the continued integration of

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acquired companies, as well as continued execution of our product and technology strategy, whereby we decided to phase out the legacy storage subsystem board products we acquired from CMD and to
develop new board products only if we believed it would facilitate or accelerate the use of our storage semiconductor products. In connection with this workforce reduction, we recorded a restructuring
expense of $2.2 million in the first quarter of 2002, consisting of cash severance-related costs of $198,000, non-cash severance-related costs of $318,000 representing the intrinsic
value of modified stock options, an expected loss on leased facilities of $1.2 million and fixed asset write-downs of $500,000. In addition, we reversed $76,000 of unearned compensation, a
component of stockholders' equity, for unvested stock options that were cancelled in connection with employee terminations.

In
April 2002, we decided to transition to a licensing model for our storage subsystem board products, whereby instead of developing, manufacturing and selling board products to
facilitate or accelerate the use of our storage semiconductor products, we will develop and license board designs in exchange for license fees, royalties and the use of our semiconductor products. In
connection with this decision, we implemented a third workforce reduction, eliminating 14 positions, or 5% of our workforce, and recorded a restructuring expense of $3.5 million, consisting of
cash severance-related costs of $450,000, non-cash severance-related costs of $1.6 million representing the intrinsic value of modified stock options and fixed asset write-downs of
$1.5 million. We also reversed $302,000 of unearned compensation, a component of stockholders' equity, for unvested stock options that were cancelled in connection with employee terminations.

In
connection with our decision to stop selling board products and to transition to a licensing model, we assessed recoverability of our intangible assets subject to amortization in
accordance with SFAS No. 144. During the quarter ended June 30, 2002, an impairment expense of $749,000 was recognized for acquired technology and $60,000 was recognized for patent and
other intangible assets, based upon our
projection of significantly reduced future cash flows. Additionally, we reduced our estimate of the useful lives of the remaining intangible assets subject to amortization such that these assets were
fully amortized by the end of 2002. We also tested the carrying value of goodwill for impairment in accordance with SFAS No. 142 and used the services of a third party to assist with the
analysis. As a result of our impairment test, a goodwill impairment expense of $4.4 million was recognized during the second quarter of 2002. To determine the amount of the impairment, we
estimated the fair value of our storage systems business (based primarily on expected future cash flows), reduced the amount by the fair value of identifiable tangible and intangible assets other than
goodwill (also based primarily on expected future cash flows), and then compared the unallocated fair value of the business to the carrying value of goodwill. To the extent goodwill exceeded the
unallocated fair value of the business, an impairment expense was recognized.

In
December 2002, we revised our estimate of the loss we expect to incur on subleased facilities and recorded a restructuring expense of $1.5 million. Real estate market
conditions deteriorated in the fourth quarter of 2002, causing us to reassess the length of time it will take to find tenants and the fair value lease rate of our available space. As of
December 31, 2002, our expected loss on subleased facilities is based on estimated sublease income of $1.6 million over the remaining lease terms. To the extent we are unable to generate
$1.6 million of sublease income, our future results of operations and financial condition will be negatively affected.

Severance
related costs were determined based on the amount of pay people received that was not for services performed and by measuring the intrinsic value of stock options that were
modified to the

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benefit of terminated employees. The expected loss on leased facilities resulted from our plan to consolidate our remaining workforce to the extent practicable and sublease any excess space. To
determine the expected loss, we compared our lease and operating costs for the space to our estimate of the net amount we would be able to recover by subleasing the space. This estimate was based on a
number of assumptions, including the length of time it will take to secure a tenant, the sublease rate per square foot, the cost of necessary improvements or modifications and real estate broker
commissions. The fixed asset write-downs were determined based on the estimated fair value of assets, primarily computer hardware and software that would no longer be utilized after the employees'
termination dates.

We
expect severance and benefits payments to be completed by the second quarter of 2003. Lease payments will be made in the form of cash through the end of the related lease terms of
July 2003 and November 2005. The following table presents restructuring activity for 2001 and 2002 (in thousands).

|                          |  | Severance
and Benefits |        | Leased
Facilities |   | Fixed Assets |   | Total |       
|------------------------- |  | ---------------------- | ------ | ----------------- | - | ------------ | - | ----- | ------
|2001 provision            |  | $                      | 902    |                   | $ | 500          |   | $     | 50    
|Cash payments             |  |                        | (191   | )                 |   |             |   |       |      
|Non-cash                  |  |                        | (303   | )                 |   | (115         | ) |       |      
|                          |  |                        |        |                   |   |              |   |       |       
|December 31, 2001 Balance |  |                        | 408    |                   |   | 385          |   |       | 50    
|2002 provision            |  |                        | 2,547  |                   |   | 2,633        |   |       | 2,013 
|Cash payments             |  |                        | (865   | )                 |   | (420         | ) |       |      
|Non-cash                  |  |                        | (1,952 | )                 |   |             |   |       | (2,063
|                          |  |                        |        |                   |   |              |   |       |       
|December 31, 2002 Balance |  | $                      | 138    |                   | $ | 2,598        |   | $     |      
|                          |  |                        |        |                   |   |              |   |       |       

NOTE 4RELATED PARTY TRANSACTIONS

In 1999, we issued 1,485,000 shares of Common Stock to several of our officers in exchange for notes receivable totaling $1,385,000. The notes outstanding at
December 31, 2002 bear interest at rates
ranging from 5.30% to 5.98% per annum, and are due in June and September 2004. Principal and interest payments totaling $70,000 and $1,293,000 were received in 2002 and 2000, respectively. The
outstanding principal and interest under these notes at December 31, 2002 was $109,000, all of which is owed by a single officer and all of which has been repaid subsequent to
December 31, 2002.

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NOTE 5BALANCE SHEET COMPONENTS

December 31,2002

2001(in thousands)Inventories:Raw materials

$
1,376

$
1,911Work in process


2,487


1,337Finished goods


3,438


3,288$
7,301

$
6,536Property and equipment:Computers and software

$
7,495

$
8,041Equipment


4,551


4,582Furniture and fixtures


1,208


1,26213,254


13,885Less: accumulated depreciation


(6,601
)

(5,191
)$
6,653

$
8,694Accrued liabilities:Accrued payroll and related expenses

$
2,502

$
3,053Restructuring accrual (see Note 3)


2,736


843Accrued legal fees


1,865


527Warranty accrual


223


473Other accrued liabilities


3,857


3,866$
11,183

$
8,762


NOTE 6INCOME TAXES

Our provision for income taxes for 2000 was $368,000 and consisted of approximately $328,000 for Federal taxes and $40,000 for State taxes. No provision for
income taxes was recorded for the years ended December 31, 2002 and 2001 since we generated both book and tax losses. Our effective tax rate differs from the federal statutory tax rate due to
the following (in thousands):

Years Ended December 31,2002

2001

2000Tax benefit at federal statutory rate

$
(14,032
)
$
(26,638
)
$
(7,778
)Nondeductible expenses


6,926


20,263


8,970Tax losses not benefited


7,106


6,375


(506
)Tax credits and other








(318
)Tax provision

$


$


$
368


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Deferred
income tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The components of net deferred income tax assets were (in thousands):

December 31,2002

2001Net operating loss carryforwards

$
22,302

$
11,856Deferred revenue


1,998


1,683Tax credits


4,336


2,234Inventory valuation


3,824


2,822Other items not currently deductible


2,039


1,33234,499


19,927Less: valuation allowance


(34,499
)

(19,927
)$


$



Tax
benefits from employee stock transactions of $6.0 million, $243,000 and $4.5 million were generated in 2002, 2001 and 2000, respectively. If realized, such benefits
will be recorded as a reduction of income taxes payable, with a corresponding increase to stockholders' equity. Therefore, these benefits will not have the effect of reducing any future income tax
provision.

Management
believes that available objective evidence creates sufficient uncertainty regarding the realizability of deferred tax assets, and therefore we have recorded a full valuation
allowance to reduce the carrying value of such assets to zero. Objective evidence includes our history of losses, the highly-competitive industry in which we operate and the uncertainty regarding
continued market acceptance of our products. We will continue to assess the realizability of deferred tax assets based on actual and forecasted operating results.

At
December 31, 2002, we had a net operating loss carryforward for federal income tax purposes of approximately $63.0 million that expires through 2022. In the event of a
cumulative ownership change of greater than 50%, the availability of net operating losses to offset future taxable income may be limited.

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NOTE 7DEBT, LEASE AND OTHER OBLIGATIONS

In October 2002, we entered into a new debt facility that includes a revolving line of credit of up to $7.5 million, a term loan of
$3.6 million, and equipment advances of $1.0 million. Borrowings under the revolving line are limited to the lesser of $7.5 million or our borrowing base of 80% of eligible
accounts receivable. The revolving line has a maturity date of September 26, 2003. There were no borrowings outstanding under this line at December 31, 2002. The $3.6 million term
loan refinanced $3.1 million of debt acquired in connection with our acquisition of CMD and $500,000 of other bank debt, and requires monthly payments through its maturity of October 1,
2004. Equipment advances are available until March 31, 2003. All borrowings under this credit facility are at prime (4.25% at December 31, 2002) plus 0.25% and the facility is secured by
substantially all of our assets, excluding intellectual property. This facility contains certain quarterly and annual financial covenants with which we must comply. We were not in compliance with one
of the quarterly covenants at December 31, 2002; however, we were granted a waiver from the lending institution and are not in default of the loan agreement. However, non-compliance
with these financial covenants in the future could result in all amounts outstanding becoming due and payable immediately. All amounts outstanding under the credit agreement, including
$1.5 million due subsequent to December 31, 2003, have been classified as current liabilities.

In
October 2002, we financed a $351,000 insurance premium at an interest rate of 5.75%. Monthly payments of $40,000 are due through June 2003.

Additionally,
we plan to implement a new ERP system in the second quarter of 2003, and have entered into a contract for implementation consulting services requiring cash payments of
approximately $500,000 during 2003.

We
lease certain software and equipment under lease agreements accounted for as capital leases. These leases mature in 2003, require monthly payments of $26,000 and bear interest at
rates ranging from 7.5% to 9.1%. Many of these leases include end of lease bargain purchase options that we intend to exercise. Our obligations under these leasing arrangements are secured by the
leased equipment.

In
October 1999, we entered into a noncancelable operating lease through July 2003 for our principal operating facility. This lease requires average monthly rental payments
of approximately $133,000 and is secured by a certificate of deposit in the amount of $283,000, which is included in prepaid expenses and other current assets on our balance sheet. This security
requirement will be reduced to zero in July 2003. In December 2002, we entered into a noncancelable operating lease renewal for our principal operating facility, including an additional
30,000 square feet of space in an adjacent building, that commences in August 2003 and expires in July 2010. The lease requires initial average monthly rental payments of $76,000 and
provides for 3% annual rent increases thereafter. This lease will also require a security deposit of $152,000.

In
June 2001, in connection with our acquisition of CMD, we acquired the lease of an operating facility in Irvine, California with average monthly rental payments of approximately
$100,000 through November 2005. A portion of this facility has been subleased through July 2003, generating monthly sublease income of approximately $35,000 to offset our payment
obligations. Additionally, in connection with our acquisition of SCL in July 2001, we acquired the lease of a facility in Milpitas, California with average monthly rental payments of
approximately $18,000 per month. We do not occupy the Milpitas facility and are attempting to sublease the space.

Rent
expense, net of sublease income, totaled $2,529,000, $2,419,000 and $1,549,000 in 2002, 2001 and 2000, respectively. Future minimum lease payments under operating leases have not
been reduced

79

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by expected sublease rental income or by the amount of our restructuring accrual that relates to leased facilities. Future minimum payments for our operating leases, debt and capital leases
outstanding at December 31, 2002 are as follows (in thousands):

Year Ending December 31,

Debt

Capital
Leases

Operating
Leases2003

$
2,269

$
47

$
3,0492004


1,500





2,3282005








2,1662006








9982007








1,009Thereafter








2,746Total minimum payments

$
3,769

$
47

$
12,296


NOTE 8STOCKHOLDERS' EQUITY

Stock split

On July 12, 2000, our Board of Directors approved a two-for-one stock split of Silicon Image common stock, effective
August 18, 2000 for stockholders of record as of July 28, 2000. All prior period common stock and per share amounts have been restated to reflect this stock split.

Common stock

In 1999, we sold 2,444,000 shares of common stock to founders, certain executives, two non-employees (as defined by FIN 44) and an employee for
a total of $1,405,000. We have the right to repurchase all or any portion of the unvested shares of restricted stock at the original purchase price, which right lapses over a four-year
period. At December 31, 2002, 2001 and 2000, 143,000, 585,000 and 1,062,000 shares of restricted common stock, respectively, were subject to our repurchase option.

Stock warrants

In September 1998, we entered into an agreement with Intel to develop and promote the adoption of a digital display interface specification. In connection
with this agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $1.75 per share. This warrant was immediately exercisable. Under the same agreement, we granted Intel
a warrant to purchase 285,714 shares of our common stock at $0.18 per share upon achievement of a specified milestone. This warrant became exercisable during the quarter ended March 31, 1999
when the milestone was achieved. Both of these
warrants were exercised in May 2001. We recorded expense of $595,000 in 1999 associated with these warrants. Additionally, if a second specified milestone is achieved, which we do not believe
is likely, we will grant Intel another warrant to purchase 285,714 shares of our common stock at $0.18 per share. Upon achievement of the milestone, we will record an expense equal to the fair value
of the warrant at the time of issuance. The estimated fair value of the warrant at December 31, 2002 was $1.7 million.

In
February 1999, we granted a leasing company a warrant to purchase up to 64,284 shares of our common stock at $1.75 per share. This warrant was immediately exercisable and was
exercised in

80

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March 2000. We did not record an expense for this warrant since the estimated fair market value of the warrant on the date of grant was immaterial.

1999 Equity Incentive Plan (the "1999 Plan")

In September 1995, the Board of Directors adopted the 1995 Equity Incentive Plan (the "1995 Plan), which provides for the granting of incentive stock
options ("ISOs") and non-qualified stock options ("NSOs") to employees, directors and consultants. In accordance with the 1995 Plan, the stated exercise price shall not be less than 100%
and 85% of the fair market value of our common stock on the date of grant for ISOs and NSOs, respectively. In September 1998, the 1995 Plan was amended to allow ISOs to be exercised prior to
vesting. We have the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such rights expire as the options vest.

In
October 1999, the 1999 Plan became the successor to the 1995 Plan and was changed to prohibit early exercise of stock options. The number of shares reserved for issuance under
the 1999 Plan will be increased automatically on January 1 of each year by an amount equal to 5% of our total outstanding common shares as of the immediately preceding December 31.

In
June and July 2001, in connection with the CMD and SCL acquisitions, we assumed all outstanding options and options available for issuance under the CMD 1999 Stock Incentive
Plan and SCL 1999 Stock Option Plan. The terms of these Plans are very similar to those of the 1999 Plan. Our assumption of the CMD and SCL Plans and the outstanding options did not require the
approval of, and was not approved by, our stockholders.

Options
granted under all Plans are exercisable over periods not to exceed ten years and vest over periods ranging from one to five years. Some options provide for accelerated vesting if
certain identified milestones are achieved.

Non-plan options

There were no non-plan options granted in 2002. In 2001 and 2000, our Board of Directors granted non-plan options to purchase
1.6 million and 500,000 shares, respectively, of our common stock to three executives and an employee. In 2001, 350,000 of the options granted in 2000 were repriced in connection with our stock
option exchange program and are included in both the 2001 and 2000 option grants described above. The repriced options are expensed in accordance with APB 25/FIN 44. All non-plan options
were granted with exercise prices equal to the fair market value on the date of grant and with vesting periods ranging from four to five years, and expire in ten years, except that the repriced
options were priced above our stock's fair market value on the date of the repricing and expire in six years. The 500,000 shares granted in 2001 may be exercised prior to vesting. Our
non-plan option grants did not require the approval of, and were not approved by, our stockholders.

81

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Option Data

The following table summarizes information with respect to our stock option Plans, including options granted outside of the Plans (in thousands except per share
data):

|                     |            | Options Available
for Future Issuance |        | Number of Option Shares Outstanding
|-------------------- | ---------- | ------------------------------------- | ------ | -----------------------------------
|
|
|
|At December 31, 1999 |            | 1,678                                 |        |                                   
|                     | Authorized |                                       | 2,584  |                                    
|                     | Granted    |                                       | (6,631 | )                                  
|                     | Assumed    |                                       |       |                                    
|                     | Canceled   |                                       | 3,143  |                                    
|                     | Exercised  |                                       |       |                                    
|                     |            |                                       |        |                                    
|At December 31, 2000 |            | 774                                   |        |                                   
|                     | Authorized |                                       | 2,697  |                                    
|                     | Assumed    |                                       |       |                                    
|                     | Granted    |                                       | (5,865 | )                                  
|                     | Canceled   |                                       | 2,457  |                                    
|                     | Exercised  |                                       |       |                                    
|                     |            |                                       |        |                                    
|At December 31, 2001 |            | 63                                    |        | 216                                
|                     | Authorized |                                       | 3,176  |                                    
|                     | Granted    |                                       | (3,053 | )                                  
|                     | Canceled   |                                       | 1,000  |                                    
|                     | Exercised  |                                       |       |                                    
|                     |            |                                       |        |                                    
|At December 31, 2002 |            | 1,186                                 |        | 268                                
|                     |            |                                       |        |                                    

---

At
December 31, 2002, 7,839,000 options were vested and 155,000 unvested shares had been exercised and remain subject to our repurchase rights. Of the options outstanding at
December 31, 2002, and in
the absence of acceleration of vesting or cancellations, approximately 3,991,000 shares will vest in 2003, 3,400,000 in 2004, 2,914,000 in 2005, 1,301,000 in 2006 and 456,000 in 2007 and thereafter.

82

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Information
with respect to options outstanding at December 31, 2002 is as follows:

|               |  | Options Outstanding |  | Options Exercisable
|-------------- |  | ------------------- |  | -------------------
|
|
|$0.06 - $1.00  |  | 1,061               |  | $                  
|$1.14 - $1.14  |  | 3,499               |  |                    
|$1.37 - $2.88  |  | 3,168               |  |                    
|$2.97 - $3.44  |  | 2,487               |  |                    
|$3.50 - $4.44  |  | 2,738               |  |                    
|$4.45 - $5.52  |  | 950                 |  |                    
|$5.63 - $5.63  |  | 4,139               |  |                    
|$5.84 - $26.50 |  | 1,859               |  |                    
|               |  |                     |  |                    
|               |  | 19,901              |  | $                  
|               |  |                     |  |                    

The
weighted average grant-date fair value of options granted was $3.72, $1.89 and $11.15 per option during 2002, 2001 and 2000, respectively. The grant-date fair
value was estimated using the Black-Scholes pricing model with the following assumptions:

Year Ended December 31,2002

2001

2000Expected life (years)

5.0

5.0

5.0Risk-free interest rate

3.5
%
3.5
%
5.8
%Dividend yield





Volatility

90
%
90
%
90
%


Stock Option Exchange (Repricing)

On December 22, 2000, we implemented an option exchange program to allow employees and certain consultants to exchange approximately 3,000,000 stock
options with a weighted average exercise price of $25.39 for new options with an exercise price of $5.63 (the fair market value on that date). On April 4, 2001, this program was extended to
executives at the December 22, 2000 price (which was greater than the fair market value of our stock on April 4, 2001). Under this program, new options vest over a four-year
period and expire in six years. Compensation expense associated with the option exchange program will be recorded until the options are exercised or expire and the expense or benefit for the increase
or decrease, respectively, in the fair market value of our common stock in excess of the option's exercise price is recognized immediately for vested options and is recognized over the vesting period
using an accelerated method for unvested employee options.

Employee Stock Purchase Plan

In October 1999, we adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 500,000 shares of common stock for issuance under the
Purchase Plan. The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during two-year offering periods

83

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with exercise dates every six months. Shares are purchased using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of our common stock at either the
first day of each offering period or the date of purchase. In 2002, 2001 and 2000, 593,000, 342,000 and 194,000 shares of common stock, respectively, were sold under the Purchase Plan at average
prices of $3.59, $4.36 and $5.22 per share, respectively. A total of 1,062,000 shares were reserved for future issuance at December 31, 2002. The number of shares reserved for issuance under
the Purchase Plan is increased automatically on January 1 of each year by an amount equal to 1% of our total outstanding common shares as of the immediately preceding December 31.

The
weighted average, grant-date fair value of stock purchase rights granted in 2002 and 2001 was $2.64 and $2.39 per share. The grant date fair value was estimated using the
Black-Scholes pricing model with the following assumptions:

Year Ended December 31,2002

2001

2000Expected life (years)

1.49

1.49

1.35Risk-free interest rate

1.7
%
1.8
%
5.5
%Dividend yield





Volatility

90
%
90
%
90
%


Stock compensation expense

The following table summarizes the components of our stock compensation expense for the years ended December 31, 2002, 2001 and 2000 (in thousands):

Year Ended December 31,2002

2001

2000Options granted to employees

$
1,943

$
2,643

$
4,394Options granted to non-employees


2,304


2,322


4,693Option repricings


2,935





Options assumed in connection with acquisitions


3,925


7,425


4,529$
11,107

$
12,390

$
13,616


Unearned
stock compensation is amortized to expense over the vesting period using an accelerated method, and may decrease if employees terminate service prior to vesting.

Option Grants to Non-employees

During 2002, 2001 and 2000, we granted non-employees options to purchase 305,000, 757,000 and 703,000 shares of our stock at weighted average exercise
prices of $4.35, $4.15 and $17.37 per share, respectively in return for engineering, administration and consultancy services.. In 2001, 300,000 of the options granted in 2000 were repriced in
connection with our stock option exchange program and are included in the 2001 option grants above. The expense associated with these option grants is determined using the Black-Scholes model, and is
recognized over the term of the consulting agreement or service period.

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NOTE 9BENEFIT PLANS

Effective January 1, 1995, we adopted a 401(k) Savings Plan that allows all employees age 21 or older to make salary deferral contributions ranging from 1%
to 20% of their eligible earnings. We were permitted to make discretionary contributions to the 401(k) Savings Plan upon approval by the Board of Directors; however, we made no contributions to the
Plan.

Effective
June 7, 2001, we assumed the CMD Technology 401(k) Profit Sharing Plan that allows all employees age 18 or older to make salary deferral contributions ranging from 1% to
20% of their eligible earnings. We have made no contributions to this Plan.

On
March 1, 2002, these two Plans were merged to form the Silicon Image 401(k) Savings Plan. This Plan allows all employees age 18 or older to make salary deferral contributions
ranging from 1% to 20% of their eligible earnings. We may make discretionary contributions to the 401(k) Savings Plan upon approval by the Board of Directors; however, we have made no contributions to
date.

NOTE 10SEGMENT AND GEOGRAPHIC INFORMATION

We operate in a single industry segment (as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information") encompassing
the design, development and sale of solutions for applications that require high-bandwidth cost-effective solutions for high-speed data communications.

Revenue
by geographic area was as follows (in thousands):

Year Ended December 31,2002

2001

2000Taiwan

$
27,540

$
12,816

$
16,662Japan


9,585


8,252


12,709United States


22,992


10,831


10,657Hong Kong


8,853


3,485


4,503Korea


6,386


8,450


1,801Canada


499


1,261


751Other


5,684


6,871


2,952$
81,539

$
51,966

$
50,035


Revenue
by product line was as follows (in thousands):

Year Ended December 31,2002

2001

2000PC

$
47,405

$
36,535

$
48,092Consumer Electronics


8,993


4,082


1,943Storage IC


12,291


2,489


Storage Systems


6,195


8,860


Development, licensing and royalties


6,655





$
81,539

$
51,966

$
50,035


For
all periods presented, substantially all of our long-lived assets were located within the United States.

85

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In
2002, two customers generated 15% and 11% of total revenue, and at December 31, 2002, two customers represented 13% and 10% of gross accounts receivable. In 2001, three
customers generated 12%, 12%, and 11% of total revenue and at December 31, 2001, three customers represented 17%, 16% and 12% of gross accounts receivable. In 2000, two customers generated 18%
and 16% of total revenue.

NOTE 11LEGAL PROCEEDINGS

On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis
Microchip, Inc. (collectively, Genesis) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the Federal
Suit).
On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the
importation of articles infringing our patent (the ITC investigation). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our
patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on
February 7, 2002. We filed an amended complaint for the Federal Suit as of February 28, 2002. In April 2002, Genesis answered and made counterclaims against us for
non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis'
counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain
of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims. In
August 2002, the Court granted our motion and dismissed Genesis' counterclaims without leave to amend. In September 2002, we filed a motion for summary judgment, upon which the Court has
yet to rule. In October 2002, both parties filed several more motions for summary judgment, upon which the Court has yet to rule. Several dispositive motions have subsequently been filed under
seal and were heard by the Court; the Court has yet to rule on these motions. Depending on the outcome of such motions, a trial date may be set, the case may be dismissed, or other orders may be
entered. Management intends to prosecute our position vigorously until this matter is resolved. To date, we have spent approximately $8.3 million on this matter and expect to continue to incur
significant costs through at least the first half of 2003.

Silicon
Image, certain officers and directors, and Silicon Image's underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et
al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all Defendants were part of a scheme to
manipulate the price of Silicon Image's stock in the aftermarket following Silicon Image's initial public offering in October 1999. Response to the complaint and discovery in this action on
behalf of the Company and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the
Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for now. In February 2003, the Court denied underwriters' motion to dismiss
and ordered that the case may proceed against issuers including against Silicon Image. At this time, Silicon Image cannot predict the outcome of this lawsuit; however, Silicon Image intends to defend
itself vigorously.

86

---

On
August 7, 2002, we filed a demand for arbitration with the American Arbitration Association, file #74 Y 117 01399 02 GAP, against the principal shareholders of CMD Technology
(CMD) relating to shares held in escrow in connection with our acquisition of CMD. Pursuant to agreements by which we acquired CMD, a portion of the Silicon Image common stock issued to the principal
shareholders of CMD was held in two separate escrow pools as collateral for the indemnification obligations of these shareholders (refer to Note 12Subsequent Events).

In
addition, we are involved in a number of judicial and administrative proceedings incidental to our business. We intend to prosecute or defend, as appropriate, such matters vigorously,
and although
adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on
our results of operations or financial position.

The
amount of legal fees we incur in 2003 with respect to the matters discussed above will depend on the duration of our litigation matters, as well as the nature and extent of the
litigation activities. We are not able to accurately estimate the amount of legal fees we will incur in 2003 with respect to the matters discussed above, but do expect the amount to be considerably
less than that incurred in 2002.

NOTE 12SUBSEQUENT EVENTS

On August 7, 2002, Silicon Image filed an arbitration claim against the four principal shareholders of CMD Technology (collectively, the "Significant
Shareholders") for indemnification claims under the Severance Escrow Agreement and General Escrow Agreement. Subsequently, on February 28, 2003, Silicon Image and the Significant Shareholders
entered into a Settlement Agreement and Mutual Release pursuant to which they resolved such indemnification claims and agreed upon the respective numbers of Severance Escrow Shares and General Escrow
Shares to be released to Silicon Image and the Significant Shareholders. As a result of the settlement, we expect to receive 949,780 of the escrowed shares, valued at approximately
$4.8 million.

Silicon
Image, certain officers and directors, and Silicon Image's underwriters have been named as defendants in a securities class action lawsuit captioned Liu v. Credit Suisse First
Boston Corp., et al., No. 03-20459 (S.D. Fla. 2003) pending in Federal District Court for the Southern District of Florida. Plaintiff filed an action on behalf of a putative class
of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The lawsuit alleges that Silicon Image and
certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image's stock through the dissemination of allegedly false analysts' reports. Silicon
Image has not been served with a copy of the complaint. At this time, we cannot predict the outcome of this lawsuit; however, we intend to defend this matter vigorously.

In
March 2003, we exercised an option to acquire TransWarp Networks (TransWarp), a privately-held storage networking company. In connection with this acquisition, we
anticipate issuing approximately 2.4 million shares of our common stock in exchange for all outstanding shares of TransWarp capital stock, and converting all outstanding TransWarp stock options
into options to purchase approximately 700,000 shares of our common stock. We also anticipate assuming TransWarp's stock option plan and having a remaining reserve of approximately 75,000 shares
available for issuance under such plan following the acquisition. We anticipate adding approximately 10 employees as a result of this acquisition. Subject to the satisfaction of customary closing
conditions, including due diligence and no material adverse changes, we anticipate that the acquisition will close in April 2003.

87

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In
March 2003, we reorganized our business to better enable customer focus, strategic alignment and operational excellence. As part of this reorganization, we will reduce our
workforce by approximately 35 people, or 15%. These reductions will be primarily in engineering and operations functions. As a result of our workforce reduction, we expect to record a restructuring
expense consisting of severance costs and non-cash expenses for stock option modifications in the first quarter of 2003.

NOTE 13UNAUDITED QUARTERLY FINANCIAL DATA

Three Months EndedMar 31

Jun 30

Sep 30

Dec 31(in thousands, except per share amounts)2002Total revenue

$
17,087

$
19,272

$
21,385

$
23,795Gross profit(1)


7,678


10,728


11,732


12,101Loss from operations(2)


(17,970
)

(9,771
)

(4,809
)

(8,300
)Net loss(2)


(17,700
)

(9,608
)

(4,645
)

(8,139
)Basic and diluted net loss per share

$
(0.28
)
$
(0.15
)
$
(0.07
)
$
(0.12
)Weighted average shares


63,360


64,580


65,587


66,1982001Total revenue

$
10,451

$
12,001

$
14,051

$
15,463Gross profit(3)


6,010


6,427


6,861


7,326Loss from operations(4)


(7,436
)

(10,706
)

(31,331
)

(29,057
)Net loss(4)


(6,539
)

(10,001
)

(30,855
)

(28,713
)Basic and diluted net loss per share

$
(0.13
)
$
(0.18
)
$
(0.51
)
$
(0.46
)Weighted average shares


51,965


54,181


60,945


62,211


---

88

---

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Silicon
Image, Inc.:

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Silicon Image, Inc. and its subsidiaries, at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance
with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" on January 1, 2002.

/s/PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers
LLP

San
Jose, California
January 15, 2003, except for Note 12, as to which the date is March 21, 2003.

89

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

|Dated: March 27, 2003 |  | SILICON IMAGE, INC.
|--------------------- |  | -------------------
|                      |  | By:                

Power of Attorney

Each person whose signature appears below constitutes and appoints David D. Lee his attorney-in-fact for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.

Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated:

|Signature                                 |  | Title                                                                                                                                 |  | Date          
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|/s/DAVID D. LEEDavid D. Lee               |  | Chief Executive Officer and Chairman of the Board (Principal Executive Officer)                                                       |  | March 27, 2003
|/s/ROBERT G. GARGUSRobert G. Gargus       |  | Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | March 27, 2003
|/s/DAVID A. HODGESDavid A. Hodges         |  | Director                                                                                                                              |  | March 27, 2003
|/s/KEITH MCAULIFFEKeith McAuliffe         |  | Director                                                                                                                              |  | March 27, 2003
|/s/ANDREW S. RAPPAPORTAndrew S. Rappaport |  | Director                                                                                                                              |  | March 27, 2003
|/s/RONALD V. SCHMIDTRonald V. Schmidt     |  | Director                                                                                                                              |  | March 27, 2003
|/s/DOUGLAS C. SPRENGDouglas C. Spreng     |  | Director                                                                                                                              |  | March 27, 2003

90

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Certifications

I,
David D. Lee, certify that:





Date:
March 27, 2003

|/s/DAVID D. LEEDavid D. Lee Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer) |  | 
|----------------------------------------------------------------------------------------------------------- |  | 

91

---

I,
Robert G. Gargus, certify that:





Date:
March 27, 2003

|/s/ROBERT G. GARGUSRobert G. Gargus Vice President, Finance and
Administration
and Chief Financial Officer
(Principal Financial Officer) |  | 
|---------------------------------------------------------------------------------------------------------------------------------------- |  | 

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INDEX TO EXHIBITS

|Number  |  | Title                                                                                                                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.01    |  | Amended and Restated Agreement and Plan of Reorganization, dated as of May 19, 2000, by and among the Registrant, Video Acquisition Corp., and DVDO, Inc. and Laurence A. Thompson, Dale R. Adams, Cheng Hwee Chee, and
David Buuck (Incorporated by reference from Exhibit 2.01 of the Form 10-K/A filed by Registrant on May 19, 2000).                      
|2.02    |  | First Amendment to the Amended and Restated Agreement and Plan of Reorganization, dated as of May 31, 2000, by and among the Registrant, Video Acquisition Corp., and DVDO, Inc. and Laurence A. Thompson, Dale R. Adams, Cheng Hwee Chee, and David Buuck
(Incorporated by reference from Exhibit 2.02 of the Form 10-K filed by Registrant on April 2, 2001).
|2.03    |  | Agreement and Plan of Reorganization, dated June 1, 2001, among the Registrant, Duke Acquisition Corp., CMD Technology Inc. and the principal shareholders of CMD Technology Inc. (Incorporated by reference from Exhibit 2.01 of the
Form 8-K filed by Registrant on June 20, 2001).                                                                          
|2.04    |  | Agreement and Plan of Reorganization, dated June 15, 2001, among the Registrant, Slice Acquisition Corp., Silicon Communication Lab, Inc. and certain shareholders of Silicon Communication Lab, Inc. (Incorporated by reference from Exhibit 2.01 of
the Form 8-K filed by Registrant on June 20, 2001).                                                      
|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 4.03 of the Form S-8 filed by the Registrant on January 28, 2003).                                                                                                                                                                                                                   
|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).                                                                                                                                                                                                                                      
|4.02    |  | Third Amended and Restated Investors Rights Agreement dated July 29, 1998, as amended October 15, 1999 (Incorporated by reference from Exhibit 4.04 of the Form S-1).                                                                                                                                                                                          
|10.01   |  | Form of Indemnity Agreement entered into between the Registrant and its directors and officers (Incorporated by reference from Exhibit 10.01 of the Form S-1).                                                                                                                                                                                                 
|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, and related forms of stock option agreements and stock option exercise agreements (Incorporated by reference from Exhibit 4.05 of the Form S-8 filed by the Registrant on May 18, 2001).                                                                                                                               
|10.04** |  | 1999 Employee Stock Purchase Plan and related enrollment form, notice of suspension and notice of withdrawal (Incorporated by reference from Exhibit 10.04 of the Form S-1).                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                

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|10.05** |  | Employment Agreement with Dan Atler dated June 15, 1998 (Incorporated by reference from Exhibit 10.05 of the Form S-1).                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.06** |  | Employment Agreement with Parviz Khodi dated June 10, 1999 (Incorporated by reference from Exhibit 10.06 of the Form S-1).                                                                                                                                                               
|10.07** |  | Amended and Restated Severance Agreement with David Lee dated August 15, 1997 (Incorporated by reference from Exhibit 10.07 of the Form S-1).                                                                                                                                            
|10.08** |  | Consulting Agreement with Deog-Kyoon Jeong dated March 1, 1999 (Incorporated by reference from Exhibit 10.09 of the Form S-1).                                                                                                                                                           
|10.09*  |  | License Agreement dated March 15, 1995 between Deog-Kyoon Jeong and the Registrant, as amended through June 18, 1997 (Incorporated by reference from Exhibit 10.10 of the Form S-1).                                                                                                     
|10.10   |  | Lease Agreement dated April 9, 1997 between Elisabeth Griffinger and the Registrant (Incorporated by reference from Exhibit 10.11 of the Form S-1).                                                                                                                                      
|10.11*  |  | 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).                                                                                        
|10.12*  |  | 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).                                                                                                                           
|10.13   |  | 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).                                                                                                                           
|10.14   |  | Revolving Credit Loan & Security Agreement dated December 17, 1998 between Comerica Bank-California and the Registrant (Incorporated by reference from Exhibit 10.15 of the Form S-1).                                                                                                   
|10.15   |  | Research and Development Contract for Gigabit Links and Multimedia Information Delivery Systems dated July 1, 1998 between Inter-University Semiconductor Research Center of Seoul National University and the Registrant (Incorporated by reference
from Exhibit 10.16 of the Form S-1).
|10.16   |  | Research and Development Contract for 1000BASE-T Gigabit Ethernet PHY Chip dated July 1, 1999 between Inter-University Semiconductor Research Center of Seoul National University and the Registrant (Incorporated by reference from Exhibit 10.17 of
the Form S-1).                     
|10.17   |  | Master Lease Agreement and Addendum with Comdisco, Inc. dated February 17, 1999 (Incorporated by reference from Exhibit 10.18 of the Form S-1).                                                                                                                                          
|10.18** |  | Letter Agreement between Steve Tirado and the Registrant and Addendum thereto (Incorporated by reference from Exhibit 10.19 of the Form S-1).                                                                                                                                            
|10.19** |  | Form of Restricted Stock Purchase Agreement and Secured Full Recourse Promissory Note entered into between Registrant and its officers and consultants (Incorporated by reference from Exhibit 10.20 of the Form S-1).                                                                   
|10.20** |  | 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).                                                                                                                             
|10.21   |  | Letter of Intent dated August 26, 1999 between Intel Corporation and the Registrant (Incorporated by reference from Exhibit 10.22 of the Form S-1).                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                          

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|10.22   |  | Research and Development Contract for 1000BASE-T Gigabit Ethernet PHY Chip dated January 1, 2000 between Inter-University Semiconductor Research Center of Seoul National University and the Registrant (Incorporated by reference from Exhibit 10.22 of
the Form 10-K filed by the Registrant on March 20, 2000).
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23   |  | Sublease Agreement with Mitsubishi Electronics America, Inc. dated October 15, 1999 (Incorporated by reference from Exhibit 10.23 of the Form 10-K filed by the Registrant on March 30, 2000).                                                                                                                    
|10.24** |  | Letter Agreement between Steve Tirado and the Registrant dated November 18, 1999 (Incorporated by reference from Exhibit 10.25 of the Form 10-K filed by the Registrant on March 30, 2000).                                                                                                                       
|10.25** |  | Amendment No. 1 to Amended and Restated Severance Agreement with David Lee dated January 23, 2000 (Incorporated by reference from Exhibit 10.26 of the Form 10-K filed by the Registrant on March 30, 2000).                                                                                                      
|10.26** |  | Executive Bonus Plan adopted by Registrant on July 28, 2000 (Incorporated by reference from Exhibit 10.27 of the Form 10-Q filed by the Registrant on August 14, 2000).                                                                                                                                           
|10.27   |  | Variable Rate Installment Note and Security Agreement dated October 18, 2000 between Comerica Bank-California and the Registrant (Incorporated by reference from Exhibit 10.28 of the Form 10Q filed by the Registrant on November 14,
2000).                                                                     
|10.28** |  | Letter Agreement between Badar Baqai and the Registrant dated November 13, 2000 (Incorporated by reference from Exhibit 10.29 of the Form 10-K filed by the Registrant on April 2, 2001).                                                                                                                         
|10.29** |  | Non-Plan Stock Option Agreement between Badar Baqai and the Registrant dated November 22, 2000 (Incorporated by reference from Exhibit 10.30 of the Form 10-K filed by the Registrant on April 2, 2001).                                                                                                          
|10.30** |  | Amendment No. 2 to Amended and Restated Severance Agreement with David Lee dated March 29, 2001 (Incorporated by reference from Exhibit 10.31 of the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                          
|10.31** |  | Amendment No. 1 to Consulting Agreement with Deog-Kyoon Jeong dated March 29, 2001 (Incorporated by reference from Exhibit 10.32 of the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                                       
|10.32** |  | Letter Agreement between Jaime Garcia-Meza and the Registrant dated April 5, 2001 (Incorporated by reference from Exhibit 10.33 of the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                                        
|10.33** |  | Non-Plan Stock Option Agreement between Jaime Garcia-Meza and the Registrant dated April 5, 2001 (Incorporated by reference from Exhibit 10.34 of the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                         
|10.34** |  | Non-Plan Stock Option Agreement between Badar Baqai and the Registrant dated April 4, 2001 (Incorporated by reference from Exhibit 10.35 of the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                               
|10.35** |  | 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).                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                   

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|10.36** |  | 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).         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.37** |  | 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).
|10.38** |  | Letter Agreement between Robert Gargus and the Registrant dated October 30, 2001 (Incorporated by reference from Exhibit 10.35 of the Form 10-Q filed by the Registrant on November 14, 2001).                              
|10.39** |  | Letter Agreement between Michael Kelley and the Registrant dated August 19, 1999. (Incorporated by reference from Exhibit 10.40 of the Form 10-K filed by the Registrant on March 29, 2002).                                
|10.40** |  | Non-Plan Stock Option Agreement between Robert Gargus and the Registrant dated October 30, 2001. (Incorporated by reference from Exhibit 10.41 of the Form 10-K filed by the Registrant on March 29, 2002).                 
|10.41** |  | Non-Plan Stock Option Agreement between Hyun Jong 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).                
|10.42   |  | Lease Agreement dated April 20, 2000 between LBA-VF III, LLC and CMD Technology (Incorporated by reference from Exhibit 10.43 of the Form 10-Q filed by the Registrant on May 15, 2002).                                    
|10.43   |  | Amended and Restated Loan and Security Agreement dated October 1, 2002 between Comerica Bank and the Registrant (Incorporated by reference from Exhibit 10.43 of the Form 10-Q filed by the Registrant on November 8, 2002).
|10.44   |  | Lease Agreement dated December 12, 2002 between iSTAR Sunnyvale Partners, L.P. and the Registrant.                                                                                                                          
|10.45** |  | Non-Plan Stock Option Agreement between John LeMoncheck and the Registrant dated January 6, 2003 (Incorporated by reference from Exhibit 4.08 of the Form S-8 filed by the Registrant on January 28, 2003).                 
|10.46** |  | Letter Agreement between John LeMoncheck and the Registrant dated December 3, 2002.                                                                                                                                         
|10.47** |  | Non-Plan Stock Option Agreement between Robert Bagheri and the Registrant dated February 20, 2003.                                                                                                                          
|10.48** |  | Letter Agreement between Robert Bagheri and the Registrant dated February 11, 2003.                                                                                                                                         
|10.49** |  | Executive Bonus Plan adopted by Registrant on December 11, 2002                                                                                                                                                             
|23.01   |  | Consent of Independent Accountants.                                                                                                                                                                                         
|24.01   |  | Power of Attorney (included on signature page).                                                                                                                                                                             

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