##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2004


Commission file number 000-26887





Silicon Image, Inc.


(Exact name of registrant as specified in its charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 77-0396307                          
|(State of incorporation) |  | (IRS employer identification number)

1060 East Arques Avenue


Sunnyvale, CA 94085


(Address of principal executive offices and zip code)


(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





þ o


o


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TABLE OF CONTENTS


|                                                             |  |                                                                                                    |     |      |    | 
|------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                             |  |                                                                                                    |     | Page |   
|                                                             |  |                                                                                                    |     |      |   
|PART I                                                      
|Item 1                                                       |  | Business                                                                                           |     |      | 3  | 
|Item 2                                                       |  | Properties                                                                                         |     |      | 20 | 
|Item 3                                                       |  | Legal Proceedings                                                                                  |     |      | 20 | 
|Item 4                                                       |  | Submission of Matters to a Vote of
    Securities Holders                                          |     |      | 23 | 
|PART II                                                     
|Item 5                                                       |  | Market for the Registrants Common
    Stock and Related Stockholder Matters                       |     |      | 23 | 
|Item 6                                                       |  | Selected Financial Data                                                                            |     |      | 24 | 
|Item 7                                                       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations          |     |      | 24 | 
|Item 7A                                                      |  | Quantitative and Qualitative Disclosures of
    Market Risk                                        |     |      | 65 | 
|Item 8                                                       |  | Financial Statements and Supplementary
    Data                                                    |     |      | 66 | 
|Item 9                                                       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure           |     |      | 66 | 
|Item 9A                                                      |  | Controls and Procedures                                                                            |     |      | 66 | 
|Item 9B                                                      |  | Other Information                                                                                  |     |      | 67 | 
|PART III                                                    
|Item 10                                                      |  | Directors and Executive Officers of the
    Registrant                                             |     |      | 67 | 
|Item 11                                                      |  | Executive Compensation                                                                             |     |      | 68 | 
|Item 12                                                      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |     |      | 68 | 
|Item 13                                                      |  | Certain Relationships and Related
    Transactions                                                 |     |      | 68 | 
|Item 14                                                      |  | Principal Accountant Fees and Services                                                             |     |      | 68 | 
|PART IV                                                     
|Item 15                                                      |  | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K                               |     |      | 68 | 
|Signatures                                                   |  |                                                                                                    | 103 |     
|Index to Exhibits Filed Together with
    this Annual Report |  |                                                                                                    | 104 |     
|EXHIBIT 10.27                                               
|EXHIBIT 10.29                                               
|EXHIBIT 10.30                                               
|EXHIBIT 10.31                                               
|EXHIBIT 10.33                                               
|EXHIBIT 10.34                                               
|EXHIBIT 10.35                                               
|EXHIBIT 10.36                                               
|EXHIBIT 10.37                                               
|EXHIBIT 23.01                                               
|EXHIBIT 31.01                                               
|EXHIBIT 31.02                                               
|EXHIBIT 32.01                                               
|EXHIBIT 32.02                                               







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This Annual Report on Form 10-K 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 Annual Report on Form 10-K entitled
Factors Affecting Future Results, that may cause
actual results to differ materially from those discussed in, or
implied by, such forward-looking statements. Forward-looking
statements within this Annual Report on Form 10-K are
identified by words such as believes,
anticipates, expects,
intends, may, will,
can, should, could,
estimate, based on, intended,
would, projected, forecasted
and other similar expressions. However, these words are not the
only means of identifying such statements. In addition, any
statements that refer to expectations, projections or other
characterizations of future events or circumstances are
forward-looking statements. We undertake no obligation to
publicly release the results of any updates or revisions to
these forward-looking statements that may be made to reflect
events or circumstances occurring subsequent to the filing of
this Form 10-K with the 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

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Markets and Customers






Products




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Consumer Electronics










PanelLink HDMI Transmitters.


|                            |  |         |   |  |            |            |           |           |                     |                                                                                  
|--------------------------- |  | ------- | - |  | ---------- | ---------- | --------- | --------- | ------------------- | ---------------------------------------------------------------------------------
|PanelLink HDMI Transmitters
|                           
|                            |  | HDMI    |   |  | Maximum    |            | Maximum   |           |                    
|Product                     |  | Outputs |   |  | Resolution |            | Bandwidth |           | Target Applications
|                            |  |         |   |  |            |            |           |           |                    
|SiI 9030                    |  |         | 1 |  |            | 1080p      |           | 5 Gbps    |                     | DVD players, DVD recorders, A/V receivers, set-top boxes, PVRs,
    D-VHS players
|SiI 9190                    |  |         | 1 |  |            | 720p/1080i |           | 2.58 Gbps |                     | HDTV digital set-top boxes, DVD and D-VHS players, A/V receivers                 

PanelLink HDMI Receivers.


|                         |  |        |   |  |            |  |            |           |  |                     |  |                                           
|------------------------ |  | ------ | - |  | ---------- |  | ---------- | --------- |  | ------------------- |  | ------------------------------------------
|PanelLink HDMI Receivers
|                        
|                         |  | HDMI   |   |  | Maximum    |  |            | Maximum   |  |                    
|Product                  |  | Inputs |   |  | Resolution |  |            | Bandwidth |  | Target Applications
|                         |  |        |   |  |            |  |            |           |  |                    
|SiI 9011                 |  |        | 1 |  |            |  | 1080p      |           |  | 5 Gbps              |  | DTVs, plasma TVs, LCD TVs, projectors     
|SiI 9021                 |  |        | 2 |  |            |  | 1080p      |           |  | 5 Gbps              |  | DTVs, plasma TVs, LCD TVs, projectors     
|SiI 9031                 |  |        | 2 |  |            |  | 1080p      |           |  | 5 Gbps              |  | A/V receivers, plasma TVs, LCD TVs, DTVs  
|SiI 9993                 |  |        | 1 |  |            |  | 720p/1080i |           |  | 2.58 Gbps           |  | DTVs, plasma displays, LCD TVs, projectors

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Digital Video Processors.


|                         |  |        |   |  |              |                                                                                                                                           |                     |                                                        
|------------------------ |  | ------ | - |  | ------------ | ----------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | -------------------------------------------------------
|Digital Video Processors
|                        
|                         |  | HDMI   |   |  |             
|Product                  |  | Inputs |   |  | Key Features |                                                                                                                                           | Target Applications
|                         |  |        |   |  |              |                                                                                                                                           |                    
|SiI 8100                 |  |        | 1 |  |              | HDMI & component video inputs, 3-D motion adaptive
    deinterlacer, scaling, frame rate conversion, 2:2 & 3:2
    inverse pull-down, PIP |                     | HD-ready TVs, multi-function monitors                  
|SiI 504                  |  |        | 0 |  |              | Horizontal scaler, 3-D motion adaptive deinterlacer,
    2:2 & 3:2 inverse pull-down                                                      |                     | Progressive scan DVD players, DTVs, LCD TVs, projectors

PCs and Displays






PanelLink DVI Transmitters.


|                           |  |                                       |  |           |          |  |                     |                                                                         
|-------------------------- |  | ------------------------------------- |  | --------- | -------- |  | ------------------- | ------------------------------------------------------------------------
|PanelLink DVI Transmitters
|                          
|                           |  | Maximum                               |  | Maximum   |          |  |                    
|Product                    |  | Resolution                            |  | Bandwidth |          |  | Target Applications
|                           |  |                                       |  |           |          |  |                    
|SiI 1362                   |  | UXGA (1600 x 1200 pixels)             |  |           | 5 Gbps   |  |                     | PC motherboards, notebook PCs                                           
|SiI 1364                   |  | UXGA (1600 x 1200 pixels)             |  |           | 5 Gbps   |  |                     | Intel SDVO ADD2 cards                                                   
|SiI 1160                   |  | UXGA (1600 x 1200 pixels)             |  |           | 5 Gbps   |  |                     | Internal display interfaces, embedded/
    specialty applications       
|SiI 1172                   |  | QXGA (2048 x1536 pixels)              |  |           | 6.8 Gbps |  |                     | Desktop PC motherboards and add-in boards, notebook PCs                 
|SiI 1162                   |  | UXGA (1600 x 1200 pixels)             |  |           | 5 Gbps   |  |                     | Desktop PC motherboards and add-in boards, notebook PCs                 
|SiI 178                    |  | QXGA (dual link) (2048 x 1536 pixels) |  |           | 10 Gbps  |  |                     | Desktop PC motherboards and add-in boards that support Dual-Link
    DVI
|SiI 164                    |  | UXGA (1600 x 1200 pixels)             |  |           | 5 Gbps   |  |                     | Desktop PC motherboards and add-in boards, notebook PCs                 

PanelLink DVI Receivers.


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|                        |  |                                         |  |           |           |  |                     |                                                                                           
|----------------------- |  | --------------------------------------- |  | --------- | --------- |  | ------------------- | ------------------------------------------------------------------------------------------
|PanelLink DVI Receivers
|                       
|                        |  | Maximum                                 |  | Maximum   |           |  |                    
|Product                 |  | Resolution                              |  | Bandwidth |           |  | Target Applications
|                        |  |                                         |  |           |           |  |                    
|SiI 1169                |  | UXGA (1600 x 1200 pixels)               |  |           | 5 Gbps    |  |                     | LCD monitors, data, video and multimedia projectors, plasma
    displays                  
|SiI 1171                |  | QXGA (2048 x1536 pixels)                |  |           | 6.8 Gbps  |  |                     | LCD monitors, data, video and multimedia projectors, plasma
    displays                  
|SiI 1161                |  | UXGA (1600 x 1200 pixels)               |  |           | 5 Gbps    |  |                     | LCD monitors, data, video and multimedia projectors, plasma
    displays                  
|SiI 1151                |  | SXGA (1280 x 1024 pixels)               |  |           | 3.36 Gbps |  |                     | LCD monitors, data, video and multimedia projectors, plasma
    displays                  
|SiI 163B                |  | QXGA (2048 x 1536 pixels)               |  |           | 10 Gbps   |  |                     | Desktop monitors that support Dual-Link DVI                                               
|SiI 141B                |  | High-refresh XGA
    (1024 x768 pixels) |  |           | 2.58 Gbps |  |                     | Flat panel displays, projectors, embedded/ specialty/retail and
    industrial, LCD panels

PanelLink DVI Controllers.


|                          |  |                                |  |           |  |                                                                                             |  |                                                                                         
|------------------------- |  | ------------------------------ |  | --------- |  | ------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|PanelLink DVI Controllers
|                         
|                          |  | Maximum                        |  | Maximum   |  |                                                                                            
|Product                   |  | Resolution                     |  | Bandwidth |  | Key Features                                                                                |  | Target Applications                                                                     
|                          |  |                                |  |           |  |                                                                                             |  |                                                                                         
|SiI 863                   |  | SXGA+
    (1400 x 1050 pixels) |  | 3.36 Gbps |  | LVDS Tx, scaling, on-screen display, power management, gamma
    correction, dithering      |  | Flat panel displays, plasmas, projectors, embedded/ specialty/
    retail and industrial
|SiI 861                   |  | SXGA+
    (1400 x 1050 pixels) |  | 3.36 Gbps |  | HDCP, LVDS Tx, scaling on-screen display, power management,
    gamma correction, dithering |  | LCD and flat panel displays                                                             
|SiI 859                   |  | SXGA+
    (1400 x 1050 pixels) |  | 3.36 Gbps |  | HDCP, scaling, on- screen display, power management, gamma
    correction, dithering        |  | LCD microdisplays                                                                       

Intelligent Panel Controllers.


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|                              |  |                              |  |           |         |  |              |                                               |                     |                                              
|----------------------------- |  | ---------------------------- |  | --------- | ------- |  | ------------ | --------------------------------------------- | ------------------- | ---------------------------------------------
|Intelligent Panel Controllers
|                             
|                              |  | Maximum                      |  | Maximum   |         |  |             
|Product                       |  | Resolution                   |  | Bandwidth |         |  | Key Features |                                               | Target Applications
|                              |  |                              |  |           |         |  |              |                                               |                    
|SiI 1257                      |  | WUXGA                        |  |           | 165MHz  |  |              | PanelLink receiver TTL LCD timing controller  |                     | LCDs for flat panel displays                 
|SiI 263                       |  | UXGA                         |  |           | 140 MHz |  |              | PanelLink receiver RSDS LCD timing controller |                     | LCDs for flat panel displays                 
|SiI 253                       |  | SXGA                         |  |           | 140 MHz |  |              | PanelLink receiver TTL LCD timing controller  |                     | LCDs for flat panel displays                 
|SiI 215A                      |  | WXGA
    (1280 x 768 pixels) |  |           | 85 MHz  |  |              | 1 channel LVDS input interface, RSDS output   |                     | LCDs for notebook PCs and flat panel displays

Storage








tm


SteelVine Storage Systems.


|                          |  |                                                                                                                 |  |                              
|------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|SteelVine Storage Systems
|                         
|                          |  | Key Features                                                                                                    |  | Target Applications          
|                          |  |                                                                                                                 |  |                              
|SV2000                    |  | 5-drive external SATA array with SteelVine processor includes
    proprietary firmware at time of manufacturing |  | SMB data storage applications
|SV-HBA-3124-2(4)          |  | 2 & 4-external port PCI-X-to-SATA II host bus
    adapter                                                       |  | SMB data storage applications





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| |                                                         
| | --------------------------------------------------------
| | SATALink Serial ATA Host Controllers and Device Bridges.



|                                                   |  |           |   |  |              |                                                                                                                                                                                                                                                                                    |                     |                                                                                                                     
|-------------------------------------------------- |  | --------- | - |  | ------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | --------------------------------------------------------------------------------------------------------------------
|SATALink Serial ATA Controllers and Device Bridges
|                                                  
|                                                   |  | Number of |   |  |             
|Product                                            |  | Ports     |   |  | Key Features |                                                                                                                                                                                                                                                                                    | Target Applications
|                                                   |  |           |   |  |              |                                                                                                                                                                                                                                                                                    |                    
|SiI 3132                                           |  |           | 2 |  |              | Single chip, dual-channel, x1 PCI-to-SATA II host
    controller,
    SATARAIDtmsoftware,
    1stParty
    DMA, hot plug, ATAPI, port multiplier with FIS-based switching,
    variable output strengths for backplane support, Supports up to
    3Gb/s per channel.              |                     | PC motherboards, server motherboards, add-in-cards, embedded
    applications                                       
|SiI 3124-2                                         |  |           | 2 |  |              | Single chip, dual-channel, PCI-X-to-SATA II host
    controller,
    SATARAIDtmsoftware, 1st Party DMA, hot plug, ATAPI
    support, port multiplier support with FIS- based switching,
    variable output strengths for backplane support, Supports up to
    3Gb/s per channel. |                     | Server motherboards, server add-in- cards, host bus adapters,
    RAID subsystems, embedded applications            
|SiI 3124-1                                         |  |           | 4 |  |              | Single-chip, quad-channel, PCI-X-to-SATA host controller,
    SATARAIDtmsoftware,
    1st Party DMA, hot plug, ATAPI support, port multiplier
    support with FIS-based switching, variable output strengths for
    backplane support, Supports up to 1.5Gb/s per channel.       |                     | Server motherboards, server add-in- cards, host bus adapters,
    RAID subsystems, embedded applications            
|SiI 3114                                           |  |           | 4 |  |              | Single-chip, quad-channel, PCI-to-SATA host controller,
    SATARAIDtmsoftware,
    hot plug, ATAPI support, variable output strengths for backplane
    support                                                                                                                   |                     | PC motherboards, PC add-in-cards, server motherboards, host bus
    adapters, RAID subsystems, embedded applications
|SiI 3112 ATAPI                                     |  |           | 2 |  |              | Single-chip, dual-channel, low pin-count PCI-to-SATA host
    controller,
    SATARAIDtmsoftware, hot plug, applications                                                                                                                                                           |                     | PC motherboards, PC add-in-cards, server motherboards, host bus
    adapters, RAID subsystems, embedded             
|SiI 3112                                           |  |           | 2 |  |              | Single chip, dual-channel, PCI-to-SATA host controller,
    SATARAIDtmsoftware,
    hot plug, ATAPI support                                                                                                                                                                        |                     | PC motherboards, RAID or non- RAID disk controller add-in cards,
    storage and embedded systems                   

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|                                                   |  |           |   |  |              |                                                         |                     |                                                                               
|-------------------------------------------------- |  | --------- | - |  | ------------ | ------------------------------------------------------- | ------------------- | ------------------------------------------------------------------------------
|SATALink Serial ATA Controllers and Device Bridges
|                                                  
|                                                   |  | Number of |   |  |             
|Product                                            |  | Ports     |   |  | Key Features |                                                         | Target Applications
|                                                   |  |           |   |  |              |                                                         |                    
|SiI 3811                                           |  |           | 1 |  |              | Serial ATA-to-Parallel ATA device bridge, ATAPI support |                     | Notebook and PC motherboards, ATAPI devices                                   
|SiI 3611                                           |  |           | 1 |  |              | Serial ATA-to-Parallel ATA device bridge, ATAPI support |                     | Optical and hard disk drives, storage systems, add-in cards,
    ATAPI devices

Parallel ATA Controller.


|                         |  |                                           |  |                                                                                                    
|------------------------ |  | ----------------------------------------- |  | ---------------------------------------------------------------------------------------------------
|Parallel ATA Controllers
|                        
|Product                  |  | Key Feature                               |  | Target Applications                                                                                
|                         |  |                                           |  |                                                                                                    
|SiI 0680                 |  | Ultra ATA/ 133 PCI-to-ATA host controller |  | PC Motherboards, PC add-in-cards, server motherboards, host bus
    adapters, embedded applications

Fibre Channel SerDes.


|                     |  |           |   |  |              |                                                        |                     |                        
|-------------------- |  | --------- | - |  | ------------ | ------------------------------------------------------ | ------------------- | -----------------------
|Fibre Channel SerDes
|                    
|                     |  | Number of |   |  |             
|Product              |  | Ports     |   |  | Key Features |                                                        | Target Applications
|                     |  |           |   |  |              |                                                        |                    
|SiI 2024             |  |           | 4 |  |              | 2.125G Quad channel, Fibre Channel SerDes, 1.8V core   |                     | HBAs, switches, routers
|SiI 2022             |  |           | 2 |  |              | 2.125G Single channel, Fibre Channel SerDes, 3.3V core |                     | HBAs, switches, routers
|SiI 2020A            |  |           | 1 |  |              | 2.125G Single channel, Fibre Channel SerDes, 2.5V core |                     | HBAs, switches, routers

Promotion of Industry Standards






| |                                            
| | -------------------------------------------
| | High-Definition Multimedia Interface (HDMI)

tm




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| |                                                 
| | ------------------------------------------------
| | High-bandwidth Digital Content Protection (HDCP)







| |                             
| | ----------------------------
| | DVD Copy Control Association





| |                               
| | ------------------------------
| | Digital Visual Interface (DVI)





| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | define, establish and support the DVI specification, an industry
    specification for sending video data between a computer and a
    digital display;                                                                    
|
| |  | encourage broad industry adoption of the DVI specification, in
    part by creating an implementers forum that others may
    join in order to receive information and by providing support
    for the DVI specification;
|
| |  | invite third parties to enter into a Participants
    Agreement in order to consult on the content, feasibility and
    other aspects of the DVI specification.                                                           

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| |                         
| | ------------------------
| | Serial ATA Working Group









| |                      
| | ---------------------
| | Incits T-13 Committee





| |                      
| | ---------------------
| | CE-ATA Working Group:





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Silicon Image Technology




| |                                                                             
| | ----------------------------------------------------------------------------
| | Multi-Layer Systems Approach to Solving High-Speed
    Interconnect Problems









| |               
| | --------------
| | PanelLink HDMI







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Research and Development






Sales and Marketing






Manufacturing




| |                  
| | -----------------
| | Wafer Fabrication





| |                  
| | -----------------
| | Assembly and Test



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| |                  
| | -----------------
| | Quality Assurance



Intellectual Property






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Competition








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Analog Solutions. Display systems still predominantly
    employ an analog interface. Improvements to analog interface
    display solutions may slow the adoption of all-digital display
    systems. We compete with analog solution vendors such as Analog
    Devices, Genesis Microchip, MRT and a number of Taiwan-based
    companies.                                                                                                                                                                                 
|
| |  | DVI-Compliant Solutions. We believe that over time, the
    DVI specification will become widely adopted in the digital
    display industry and attract additional market entrants. We
    believe the following companies have developed or announced
    intentions to develop DVI-compliant solutions: Analog Devices,
    ATI Technologies, Broadcom, Chrontel, Connexant, Genesis
    Microchip, MRT, National Semiconductor, nVidia, Pixelworks, SIS,
    Smart ASIC, ST Microelectronics, Texas Instruments and Thine.
|
| |  | Dual-Interface Solutions. The following companies have
    developed, or announced intentions to develop, products that
    connect to both analog and digital host systems, also known as a
    dual-interface solution: Genesis Microchip, Macronix, MRT,
    Philips Semiconductor, Pixelworks and a number of Taiwan-based
    companies.                                                                                                                                                                                 
|
| |  | Other Digital Interface Solutions. Texas Instruments,
    Thine, and National Semiconductor offer proprietary digital
    interface solutions based on LVDS, or low voltage differential
    signaling technology. LVDS technology has gained broad market
    acceptance in notebook PCs, and has gained some adoption with PC
    and display manufacturers for use outside of the notebook PC
    market.                                                                                                                  







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Employees




Available Information


www.siliconimage.com.







|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



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






PART II







|        |                                                                             
|------- | ----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Stock and Related
    Stockholder Matters



|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2004           |  |      |       |  |     |   |       | 
|Fourth Quarter |  | $    | 17.86 |  |     | $ | 12.00 | 
|Third Quarter  |  |      | 13.10 |  |     |   | 10.14 | 
|Second Quarter |  |      | 14.00 |  |     |   | 9.44  | 
|First Quarter  |  |      | 12.45 |  |     |   | 7.51  | 
|2003           |  |      |       |  |     |   |       | 
|Fourth Quarter |  | $    | 9.05  |  |     | $ | 4.28  | 
|Third Quarter  |  |      | 6.65  |  |     |   | 4.50  | 
|Second Quarter |  |      | 6.18  |  |     |   | 4.17  | 
|First Quarter  |  |      | 7.65  |  |     |   | 3.98  | 







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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                          |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |        |  
|--------------------------------------------------------- | ----------------------- | -------------------------------------------------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                          |                         | Year Ended December 31,                                        |        
|                                                          |                         |                                                                |        
|                                                          |                         | 2004                                                           |         |        | 2003 |   |         | 2002   |   |   | 2001    |        |   | 2000 |        
|                                                          |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |        
|                                                          |                         | (In thousands, except footnotes, employees and per share data) |        
|Statements of Operations Data:                            |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |       
|Net Sales                                                 |                         | $                                                              | 173,159 |        |      | $ | 103,525 |        |   | $ | 81,539  |        |   | $    | 51,966  |        |   | $ | 50,035  |       
|Gross Margin                                              |                         |                                                                | 104,545 |        |      |   | 56,333  |        |   |   | 42,240  |        |   |      | 26,624  |        |   |   | 30,644  |       
|Cost of revenue:                                          |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |       
|                                                          | Dollars(1)              |                                                                | $       | 68,614 |      |   | $       | 47,192 |   |   | $       | 39,299 |   |      | $       | 25,342 |   |   | $       | 19,391 |  
|                                                          | % of revenue            |                                                                |         | 39.6   | %    |   |         | 45.6   | % |   |         | 48.2   | % |      |         | 48.8   | % |   |         | 38.8   | %
|Research and development:                                 |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |       
|                                                          | Dollars(2)              |                                                                | $       | 61,459 |      |   | $       | 43,386 |   |   | $       | 40,205 |   |      | $       | 34,816 |   |   | $       | 23,022 |  
|                                                          | % of revenue            |                                                                |         | 35.5   | %    |   |         | 41.9   | % |   |         | 49.3   | % |      |         | 67.0   | % |   |         | 46.0   | %
|Selling, general and administrative:                      |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |       
|                                                          | Dollars(3)              |                                                                | $       | 42,183 |      |   | $       | 20,943 |   |   | $       | 19,976 |   |      | $       | 21,541 |   |   | $       | 21,714 |  
|                                                          | % of revenue            |                                                                |         | 24.4   | %    |   |         | 20.2   | % |   |         | 24.5   | % |      |         | 41.5   | % |   |         | 43.4   | %
|Loss from operations                                      |                         | $                                                              | (961    | )      |      | $ | (17,719 | )      |   | $ | (40,850 | )      |   | $    | (78,530 | )      |   | $ | (26,858 | )     
|Net loss                                                  |                         | $                                                              | (324    | )      |      | $ | (12,810 | )      |   | $ | (40,092 | )      |   | $    | (76,108 | )      |   | $ | (23,243 | )     
|Net loss per share:                                       |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |       
|                                                          | Basic and diluted       |                                                                | $       | (0.00  | )    |   | $       | (0.18  | ) |   | $       | (0.62  | ) |      | $       | (1.32  | ) |   | $       | (0.47  | )
|                                                          | Weighted average shares |                                                                |         | 75,081 |      |   |         | 69,412 |   |   |         | 64,283 |   |      |         | 57,790 |   |   |         | 49,720 |  
|Consolidated Balance Sheet and Other Data as of Year End: |                         |                                                                |         |        |      |   |         |        |   |   |         |        |   |      |         |        |   |   |         |       
|Cash, cash equivalents and short-term investments         |                         | $                                                              | 93,520  |        |      | $ | 37,254  |        |   | $ | 35,833  |        |   | $    | 41,218  |        |   | $ | 60,189  |       
|Working capital                                           |                         | $                                                              | 97,107  |        |      | $ | 37,674  |        |   | $ | 27,787  |        |   | $    | 36,179  |        |   | $ | 56,713  |       
|Total assets                                              |                         | $                                                              | 154,908 |        |      | $ | 87,742  |        |   | $ | 77,616  |        |   | $    | 90,162  |        |   | $ | 99,499  |       
|Tangible assets                                           |                         | $                                                              | 140,204 |        |      | $ | 71,693  |        |   | $ | 64,595  |        |   | $    | 68,534  |        |   | $ | 78,146  |       
|Long-term debt obligations                                |                         | $                                                              |        |        |      | $ |        |        |   | $ |        |        |   | $    | 819     |        |   | $ | 1,030   |       
|Total stockholders equity                                |                         | $                                                              | 122,079 |        |      | $ | 62,393  |        |   | $ | 48,170  |        |   | $    | 67,324  |        |   | $ | 83,197  |       
|Tangible net book value                                   |                         | $                                                              | 107,375 |        |      | $ | 46,344  |        |   | $ | 35,149  |        |   | $    | 45,696  |        |   | $ | 61,844  |       
|Regular full-time employees                               |                         |                                                                | 337     |        |      |   | 250     |        |   |   | 249     |        |   |      | 266     |        |   |   | 150     |       






|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-cash stock compensation expense of
    $2.8 million, $583,000, $1.2 million, $279,000, and
    $593,000, for the years ended December 31, 2004, 2003,
    2002, 2001, and 2000, respectively.              
|   
|(2) | Includes non-cash stock compensation expense of
    $16.6 million, $6.9 million, $7.4 million,
    $9.3 million, and $10.2 million, for the years ended
    December 31, 2004, 2003, 2002, 2001, and 2000, respectively.
|   
|(3) | Includes non-cash stock compensation expense of
    $13.4 million, $2.5 million, $2.5 million,
    $2.8 million, and $2.8 million for the years ended
    December 31, 2004, 2003, 2002, 2001, and 2000, respectively.  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview




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tm tm










tm


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Year 2004












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tm




2005 Outlook








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Commitments, Contingencies and Concentrations








Critical Accounting Policies






| |                    
| | -------------------
| | Revenue recognition





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| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |            
| | -----------
| | Inventories



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| |                  
| | -----------------
| | Long-Lived Assets







| |                               
| | ------------------------------
| | Goodwill and intangible assets





| |                    
| | -------------------
| | Deferred Tax Assets





| |                    
| | -------------------
| | Accrued Liabilities



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| |                                 
| | --------------------------------
| | Stock-Based Compensation Expense





| |              
| | -------------
| | Legal Matters



Recent Accounting Pronouncements








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Annual Results of Operations


REVENUE


|                                     |                 |                             |         |         |        |   |       |      |      |      |         |        |      |      |       |      |      |      |        |        |      |  
|------------------------------------ | --------------- | --------------------------- | ------- | ------- | ------ | - | ----- | ---- | ---- | ---- | ------- | ------ | ---- | ---- | ----- | ---- | ---- | ---- | ------ | ------ | ---- | -
|                                     |                 | 2004                        |         |         | Change |   |       | 2003 |      |      | Change  |        |      | 2002 |      
|                                     |                 |                             |         |         |        |   |       |      |      |      |         |        |      |      |      
|                                     |                 | (Dollars in thousands)      |        
|Personal Computers                   |                 | $                           | 41,223  |         |        |   | 24.3  | %    |      | $    | 33,163  |        |      |      | (30.0 | )%   |      | $    | 47,405 |       
|Consumer Electronics                 |                 |                             | 71,377  |         |        |   | 177.1 | %    |      |      | 25,762  |        |      |      | 186.5 | %    |      |      | 8,993  |       
|Storage Products                     |                 |                             | 39,750  |         |        |   | 30.7  | %    |      |      | 30,410  |        |      |      | 64.5  | %    |      |      | 18,486 |       
|                                     |                 |                             |         |         |        |   |       |      |      |      |         |        |      |      |      
|                                     | Product revenue |                             | $       | 152,350 |        |   |       | 70.5 | %    |      | $       | 89,335 |      |      |       | 19.3 | %    |      | $      | 74,884 |     
|                                     |                 |                             |         |         |        |   |       |      |      |      |         |        |      |      |      
|                                     |                 | Percentage of total revenue |         |         | 88.0   | % |       |      | 1.7  | pts  |         |        | 86.3 | %    |       |      | (5.5 | )pts |        |        | 91.8 | %
|Development, licensing and royalties |                 | $                           | 20,809  |         |        |   | 46.6  | %    |      | $    | 14,190  |        |      |      | 113.2 | %    |      | $    | 6,655  |       
|                                     |                 | Percentage of total revenue |         |         | 12.0   | % |       |      | (1.7 | )pts |         |        | 13.7 | %    |       |      | 5.5  | pts  |        |        | 8.2  | %
|                                     |                 |                             |         |         |        |   |       |      |      |      |         |        |      |      |      
|Total revenue                        |                 | $                           | 173,159 |         |        |   | 67.3  | %    |      | $    | 103,525 |        |      |      | 27.0  | %    |      | $    | 81,539 |       
|                                     |                 |                             |         |         |        |   |       |      |      |      |         |        |      |      |      



|                     |  |                        |         |  |        |  |       |      |  |   |         |  |  |      |       |    |  |   |        | 
|-------------------- |  | ---------------------- | ------- |  | ------ |  | ----- | ---- |  | - | ------- |  |  | ---- | ----- | -- |  | - | ------ | 
|                     |  | 2004                   |         |  | Change |  |       | 2003 |  |   | Change  |  |  | 2002 |      
|                     |  |                        |         |  |        |  |       |      |  |   |         |  |  |      |      
|                     |  | (Dollars in thousands) |        
|Personal Computers   |  | $                      | 41,585  |  |        |  | 15.2  | %    |  | $ | 36,108  |  |  |      | (29.2 | )% |  | $ | 51,017 | 
|Consumer Electronics |  |                        | 84,604  |  |        |  | 153.8 | %    |  |   | 33,326  |  |  |      | 267.8 | %  |  |   | 9,061  | 
|Storage Products     |  |                        | 46,970  |  |        |  | 37.8  | %    |  |   | 34,091  |  |  |      | 58.9  | %  |  |   | 21,461 | 
|                     |  |                        |         |  |        |  |       |      |  |   |         |  |  |      |      
|Total revenue        |  | $                      | 173,159 |  |        |  | 67.3  | %    |  | $ | 103,525 |  |  |      | 27.0  | %  |  | $ | 81,539 | 
|                     |  |                        |         |  |        |  |       |      |  |   |         |  |  |      |      





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COST OF REVENUE AND GROSS MARGIN


|                                                                                      |                               |                        |         |      |        |  |       |      |     |   |        |      |   |      |       |      |      |   |        |      |  
|------------------------------------------------------------------------------------- | ----------------------------- | ---------------------- | ------- | ---- | ------ |  | ----- | ---- | --- | - | ------ | ---- | - | ---- | ----- | ---- | ---- | - | ------ | ---- | -
|                                                                                      |                               | 2004                   |         |      | Change |  |       | 2003 |     |   | Change |      |   | 2002 |      
|                                                                                      |                               |                        |         |      |        |  |       |      |     |   |        |      |   |      |      
|                                                                                      |                               | (Dollars in thousands) |        
|Product gross margin (excluding licensing revenue)                                    |                               | $                      | 83,736  |      |        |  | 98.7  | %    |     | $ | 42,143 |      |   |      | 18.4  | %    |      | $ | 35,585 |     
|                                                                                      | Percentage of product revenue |                        |         | 55.0 | %      |  |       | 7.8  | pts |   |        | 47.2 | % |      |       | (0.3 | )pts |   |        | 47.5 | %
|Total gross margin                                                                    |                               | $                      | 104,545 |      |        |  | 85.6  | %    |     | $ | 56,333 |      |   |      | 33.4  | %    |      | $ | 42,240 |     
|                                                                                      | Percentage of total revenue   |                        |         | 60.4 | %      |  |       | 6.0  | pts |   |        | 54.4 | % |      |       | 2.6  | pts  |   |        | 51.8 | %
|                                                                                      |                               |                        |         |      |        |  |       |      |     |   |        |      |   |      |      
|Stock compensation expense                                                            |                               | $                      | 2,777   |      |        |  | 376.3 | %    |     | $ | 583    |      |   |      | (51.0 | )%   |      | $ | 1,190  |     
|                                                                                      |                               |                        |         |      |        |  |       |      |     |   |        |      |   |      |      
|Product gross margin (excluding stock compensation expense and
    licensing revenue) |                               | $                      | 86,513  |      |        |  | 102.5 | %    |     | $ | 42,726 |      |   |      | 16.2  | %    |      | $ | 36,775 |     
|                                                                                      | Percentage of product revenue |                        |         | 56.8 | %      |  |       | 9.0  | pts |   |        | 47.8 | % |      |       | (1.3 | )pts |   |        | 49.1 | %
|Total gross margin (excluding stock compensation expense)                             |                               | $                      | 107,322 |      |        |  | 88.6  | %    |     | $ | 56,916 |      |   |      | 31.1  | %    |      | $ | 43,430 |     
|                                                                                      | Percentage of total revenue   |                        |         | 62.0 | %      |  |       | 7.0  | pts |   |        | 55.0 | % |      |       | 1.7  | pts  |   |        | 53.3 | %



OPERATING EXPENSES


|                                                          |                             |                        |        |      |        |  |        |      |      |   |        |      |   |      |       |      |      |   |        |      |  
|--------------------------------------------------------- | --------------------------- | ---------------------- | ------ | ---- | ------ |  | ------ | ---- | ---- | - | ------ | ---- | - | ---- | ----- | ---- | ---- | - | ------ | ---- | -
|                                                          |                             | 2004                   |        |      | Change |  |        | 2003 |      |   | Change |      |   | 2002 |      
|                                                          |                             |                        |        |      |        |  |        |      |      |   |        |      |   |      |      
|                                                          |                             | (Dollars in thousands) |       
|Research and development(1)                               |                             | $                      | 44,812 |      |        |  | 22.7   | %    |      | $ | 36,523 |      |   |      | 11.3  | %    |      | $ | 32,809 |     
|                                                          | Percentage of total revenue |                        |        | 25.9 | %      |  |        | (9.4 | )pts |   |        | 35.3 | % |      |       | (4.9 | )pts |   |        | 40.2 | %
|Selling, general and administrative(2)                    |                             | $                      | 28,824 |      |        |  | 56.6   | %    |      | $ | 18,401 |      |   |      | 5.4   | %    |      | $ | 17,454 |     
|                                                          | Percentage of total revenue |                        |        | 16.6 | %      |  |        | (1.2 | )pts |   |        | 17.8 | % |      |       | (3.6 | )pts |   |        | 21.4 | %
|Total stock compensation expense (incl. amount from COGS) |                             | $                      | 32,783 |      |        |  | 228.2  | %    |      | $ | 9,988  |      |   |      | (10.1 | )%   |      | $ | 11,107 |     
|                                                          | Percentage of total revenue |                        |        | 18.9 | %      |  |        | 9.3  | pts  |   |        | 9.6  | % |      |       | (4.0 | )pts |   |        | 13.6 | %
|Amortization of goodwill and intangible assets            |                             | $                      | 1,345  |      |        |  | 21.9   | %    |      | $ | 1,103  |      |   |      | (68.3 | )%   |      | $ | 3,482  |     
|Patent assertion and acquisition integration costs        |                             | $                      | 519    |      |        |  | (75.9  | )%   |      | $ | 2,152  |      |   |      | (69.4 | )%   |      | $ | 7,034  |     
|Restructuring                                             |                             | $                      |       |      |        |  | (100.0 | )%   |      | $ | 986    |      |   |      | (86.3 | )%   |      | $ | 7,193  |     
|In-process research and development                       |                             | $                      |       |      |        |  | (100.0 | )%   |      | $ | 5,482  |      |   |      | 100.0 | %    |      | $ |       |     
|Gain on escrow settlement, net                            |                             | $                      |       |      |        |  | (100.0 | )%   |      | $ | 4,618  |      |   |      | 100.0 | %    |      | $ |       |     
|Interest income and other, net                            |                             | $                      | 718    |      |        |  | 146.7  | %    |      | $ | 291    |      |   |      | (61.6 | )%   |      | $ | 758    |     
|Gain on derivative investment security                    |                             |                        | 926    |      |        |  | 100.0  | %    |      |   |       |      |   |      | *     |      |      |   |       |     






|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes non-cash stock compensation expense of
    $16.6 million, $6.9 million, and $7.4 for 2004, 2003,
    and 2002, respectively        
|   
|(2) | Excludes non-cash stock compensation expense of
    $13.4 million, $2.5 million, and $2.5 million for
    2004, 2003, and 2002, respectively



| |   |                 
| | - | ----------------
| | * |  Not Meaningful

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Research and Development.


Selling, General and Administrative.


Stock Compensation.




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Amortization of Goodwill and Intangible Assets.


In-process Research and Development.




| |    
| | ---
| | TWN



Impairment of Goodwill and Intangible Assets.




Restructuring.




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|                                |  |              |        |   |            |   |       |              |  |   |        |   |  |   |        |  
|------------------------------- |  | ------------ | ------ | - | ---------- | - | ----- | ------------ |  | - | ------ | - |  | - | ------ | -
|                                |  | Severance    |        |   | Leased     |   |       |              |  |  
|                                |  | and Benefits |        |   | Facilities |   |       | Fixed Assets |  |   | Total  |  
|                                |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2001 |  | $            | 408    |   |            | $ | 385   |              |  | $ | 50     |   |  | $ | 843    |  
|2002 provision                  |  |              | 2,547  |   |            |   | 2,633 |              |  |   | 2,013  |   |  |   | 7,193  |  
|Cash payments                   |  |              | (865   | ) |            |   | (420  | )            |  |   |       |   |  |   | (1,285 | )
|Non-cash activity               |  |              | (1,952 | ) |            |   |      |              |  |   | (2,063 | ) |  |   | (4,015 | )
|                                |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2002 |  |              | 138    |   |            |   | 2,598 |              |  |   |       |   |  |   | 2,736  |  
|2003 provision                  |  |              | 986    |   |            |   |      |              |  |   |       |   |  |   | 986    |  
|Cash payments                   |  |              | (441   | ) |            |   | (760  | )            |  |   |       |   |  |   | (1,201 | )
|Non-cash activity               |  |              | (646   | ) |            |   |      |              |  |   |       |   |  |   | (646   | )
|                                |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2003 |  |              | 37     |   |            |   | 1,838 |              |  |   |       |   |  |   | 1,875  |  
|Cash payments                   |  |              | (5     | ) |            |   | (834  | )            |  |   |       |   |  |   | (839   | )
|                                |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2004 |  | $            | 32     |   |            | $ | 1,004 |              |  | $ |       |   |  | $ | 1,036  |  
|                                |  |              |        |   |            |   |       |              |  |   |        |  

Patent assertion and acquisition integration costs.


Interest Income.


Interest Expense and Other Net.


Gain on derivative investment security.


Provision for Income Taxes.


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Gain on escrow settlement, net.


Liquidity and Capital Resources


|                                                     |                                                         |                        |         |        |        |   |         |        |     |   |         |        |   |      |        |       |      |   |         |        |  
|---------------------------------------------------- | ------------------------------------------------------- | ---------------------- | ------- | ------ | ------ | - | ------- | ------ | --- | - | ------- | ------ | - | ---- | ------ | ----- | ---- | - | ------- | ------ | -
|                                                     |                                                         | 2004                   |         |        | Change |   |         | 2003   |     |   | Change  |        |   | 2002 |       
|                                                     |                                                         |                        |         |        |        |   |         |        |     |   |         |        |   |      |       
|                                                     |                                                         | (Dollars in thousands) |        
|Cash and cash equivalents                            |                                                         | $                      | 23,280  |        |        | $ | 5,346   |        |     | $ | 17,934  |        |   | $    | 3,021  |       |      | $ | 14,913  |       
|Short term investments                               |                                                         |                        | 70,240  |        |        |   | 50,920  |        |     |   | 19,320  |        |   |      | (1,600 | )     |      |   | 20,920  |       
|                                                     |                                                         |                        |         |        |        |   |         |        |     |   |         |        |   |      |       
|                                                     | Total cash, cash equivalents and short term investments |                        | $       | 93,520 |        |   |         |        |     |   | $       | 37,254 |   |      |        |       |      |   | $       | 35,833 |  
|                                                     | Percentage of total assets                              |                        |         | 60.4   | %      |   |         | 17.9   | pts |   |         | 42.5   | % |      |        | (3.7  | )pts |   |         | 46.2   | %
|Total current assets                                 |                                                         | $                      | 129,936 |        |        |   | 66,913  |        |     | $ | 63,023  |        |   | $    | 5,790  |       |      | $ | 57,233  |       
|Total current liabilities                            |                                                         |                        | (32,829 | )      |        |   | (7,480  | )      |     |   | (25,349 | )      |   |      | 4,097  |       |      |   | (29,446 | )     
|                                                     |                                                         |                        |         |        |        |   |         |        |     |   |         |        |   |      |       
|                                                     | Working capital                                         |                        | $       | 97,107 |        |   |         | 59,433 |     |   | $       | 37,674 |   |      |        | 9,887 |      |   | $       | 27,787 |  
|Cash (used in) operating activities                  |                                                         |                        | 36,446  |        |        |   | 39,339  |        |     |   | (2,893  | )      |   |      | 5,985  |       |      |   | (8,878  | )     
|Cash provided by (used in) investing activities      |                                                         |                        | (53,140 | )      |        |   | (49,793 | )      |     |   | (3,347  | )      |   |      | (7,896 | )     |      |   | 4,549   |       
|Cash provided by financing activities                |                                                         |                        | 22,040  |        |        |   | 12,779  |        |     |   | 9,261   |        |   |      | 2,065  |       |      |   | 7,196   |       
|Net increase (decrease) in cash and cash equivalents |                                                         |                        | 5,346   |        |        |   | 2,325   |        |     |   | 3,021   |        |   |      | 154    |       |      |   | 2,867   |       





| |                     
| | --------------------
| | Operating activities





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| |                                   
| | ----------------------------------
| | Investing and financing activities





Debt and Lease Obligations






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|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |       |  |  |   |     | 
|---------------------------------- |  | ----- | ------ | --------------- | ------ | - | ----- | --------- | --------- | - | --------- |  |  | ------- | ----- |  |  | - | --- | 
|                                   |  |       |        | Payments Due in |       
|                                   |  |       |        |                 |       
|                                   |  |       |        | Less Than       |        |   |       |           | More Than |  
|Contractual Obligations            |  | Total |        |                 | 1 Year |   |       | 1-3 Years |           |   | 3-5 Years |  |  | 5 Years |      
|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |      
|Debt and capital lease obligations |  | $     | 528    |                 |        | $ | 288   |           |           | $ | 240       |  |  | $       |      |  |  | $ |    | 
|Operating lease obligations        |  |       | 9,746  |                 |        |   | 3,155 |           |           |   | 2,818     |  |  |         | 2,900 |  |  |   | 873 | 
|Inventory purchase commitments     |  |       | 3,534  |                 |        |   | 3,534 |           |           |   |          |  |  |         |      |  |  |   |    | 
|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |      
|Total                              |  | $     | 13,808 |                 |        | $ | 6,977 |           |           | $ | 3,058     |  |  | $       | 2,900 |  |  | $ | 873 | 
|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |      





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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 makes it
    difficult to evaluate our future prospects.





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





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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the growth, evolution and rate of adoption of industry standards
    for our key markets, including digital-ready PCs and displays,
    consumer electronics and storage devices;                                                                                                                                                                                                                                                             
|
| |  | the fact that our licensing revenue is heavily dependent on a
    few key licensing transactions being completed for any given
    period, the timing of which is not always predictable and is
    especially susceptible to delay beyond the period in which
    completion is expected, and our concentrated dependence on a few
    licensees in any period for substantial portions of our expected
    licensing revenue and profits;   
|
| |  | competitive pressures, such as the ability of competitors to
    successfully introduce products that are more cost-effective or
    that offer greater functionality than our products, including
    integration into their products functionality offered by our
    products, and the prices set by competitors for their products,
    and the potential for alliances, combinations, mergers and
    acquisitions among our competitors;
|
| |  | average selling prices of our products, which are influenced by
    competition and technological advancements, among other factors;                                                                                                                                                                                                                                                                                                          
|
| |  | government regulations regarding the timing and extent to which
    digital content must be made available to consumers;                                                                                                                                                                                                                                                                                                                      
|
| |  | the availability of other semiconductors or other key components
    that are required to produce a complete solution for the
    customer; usually, we supply one of many necessary components;                                                                                                                                                                                                                                              

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| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the cost of components for our products and prices charged by
    the third parties who manufacture, assemble and test our
    products;                                                                                                                                                                 
|
| |  | fluctuations in the price of our common stock, which drive a
    substantial portion of our non-cash stock compensation
    expense; and                                                                                                                                                                 
|
| |  | the nature and extent of litigation activities, particularly
    relating to our patent infringement suit against Genesis
    Microchip, and any subsequent legal proceedings related to the
    matters raised in that suit; and class action lawsuits against
    us that were initiated in early 2005;





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





| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to manage product introductions and transitions,
    develop necessary sales and marketing channels, and all other
    things necessary to enter new market segments;                    
|
| |  | our ability to successfully manage our business in multiple
    markets such as PC, storage and CE; which may involve additional
    research and development, marketing or other costs and expenses;
|
| |  | our ability to close licensing deals and make timely
    deliverables and milestones on which recognition of revenue
    often depends;                                                              
|
| |  | our ability to engineer customer solutions that adhere to
    industry standards in a timely, and cost-effective manner;                                                                             
|
| |  | our ability to achieve acceptable manufacturing yields and
    develop automated test programs within a reasonable time frame
    for our new products;                                              
|
| |  | our ability to manage joint ventures and projects, design
    services, and our supply chain partners;                                                                                               
|
| |  | our ability to monitor the activities of our licensees to ensure
    compliance with license restrictions and remittance of royalties;                                                               
|
| |  | our ability to structure our organization to enable achievement
    of our operating objectives and to meet the needs of our
    customers and markets;                                              
|
| |  | the success of the distribution and partner channels through
    which we choose to sell our products; and                                                                                           
|
| |  | our ability to manage expenses and inventory levels.                                                                                                                                                 





| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | The licensing component of our business strategy increases
    business risk and volatility.



45



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







46



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



47



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



48



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





| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | the number of digital-ready computers that are being produced
    and consumer demand for these computers;                     
|
| |  | the rate at which display manufacturers replace analog or
    non-compliant DVI interfaces with fully DVI-compliant interfaces;
|
| |  | the availability of cost-effective semiconductors that implement
    a fully DVI-compliant interface; and                      
|
| |  | improvements to analog technology, which may decrease consumer
    demand for our digital display products.                    





| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.







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| |                                                                
| | ---------------------------------------------------------------
| | Our success depends in part on new strategic
    relationships.





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





| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate at which manufacturers of storage subsystems adopt new
    interface technologies, which may be more costly to implement
    than existing interface technologies until volumes are
    sufficient to bring costs to competitive levels;   
|
| |  | the availability of cost-effective semiconductors and components
    for storage subsystems, such as SATA-enabled hard drives and
    SATA-enabled optical drives (CD and DVD) that implement new
    interface technologies for the storage market;
|
| |  | whether and to the degree Intel or other motherboard
    manufacturers integrate the functionality of our products, such
    as SATA, into their chips and chipsets; and                                                                            
|
| |  | improvement to existing storage interface technologies such as
    parallel ATA and SCSI, or the introduction of other new storage
    interface technologies, either of which may decrease consumer
    demand for our storage products.           





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





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





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



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| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | one or more of our customers, including distributors, becomes
    insolvent or goes out of business;                                                
|
| |  | one or more of our key customers or distributors significantly
    reduces, delays or cancels orders; or                                            
|
| |  | one or more significant customers selects products manufactured
    by one of our competitors for inclusion in their future product
    generations.





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We sell our products through distributors, which limits
    our direct interaction with our customers, therefore reducing
    our ability to forecast sales and increasing the complexity of
    our business.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | manage a more complex supply chain;                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | monitor and manage the level of inventory of our products at
    each distributor;                                                                                                                                                                                                                                                                                                                                                              
|
| |  | estimate the impact of credits, return rights, price protection
    and unsold inventory at distributors; and                                                                                                                                                                                                                                                                                                                                   
|
| |  | monitor the financial condition and credit-worthiness of our
    distributors, many of which are located outside of the United
    States, and the majority of which are not publicly traded;                                                                                                                                                                                                                                                   
|
| |  | Since we have limited ability to forecast inventory levels at
    our end customers, it is possible that there may be significant
    build-up of inventories in the retail channel, with the OEM or
    the OEMs contract manufacturer. Such a buildup could
    result in a slowdown in orders, requests for returns from
    customers, or requests to move out planned shipments. This could
    adversely impact our revenues and profits.





| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success depends on the development and introduction of
    new products, which we may not be able to do in a timely manner
    because the process of developing high-speed semiconductor
    products is complex and costly.



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| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | accurate prediction of market requirements and evolving
    standards, including enhancements or modifications to existing
    standards such as DVI, HDCP, SATA I and SATA II, and HDMI;                                                       
|
| |  | identification of customer needs where we can apply our
    innovation and skills to create new standards or areas for
    product differentiation that improve our overall competitiveness
    either in an existing market or in a new market;
|
| |  | development of advanced technologies and capabilities, and new
    products that satisfy customer requirements;                                                                                                                                 
|
| |  | competitors and customers integration of the
    functionality of our products into their products, which puts
    pressure on us to continue to develop and introduce new products
    with new functionality;                               
|
| |  | timely completion and introduction of new product designs;                                                                                                                                                                                      
|
| |  | management of product life cycles;                                                                                                                                                                                                              
|
| |  | use of leading-edge foundry processes and achievement of high
    manufacturing yields and low cost testing; and                                                                                                                                
|
| |  | market acceptance of new products.                                                                                                                                                                                                              





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





| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty and increased costs in assimilating employees,
    including our possible inability to keep and retain key
    employees of the acquired business;
|
| |  | disruption of our ongoing business;                                                                                                                          

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| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | discovery of undisclosed liabilities of the acquired companies
    and legal disputes with founders or shareholders of acquired
    companies;                       
|
| |  | inability to successfully incorporate acquired technology and
    operations into our business and maintain uniform standards,
    controls, policies and procedures;
|
| |  | inability to commercialize acquired technology; and                                                                                                                  
|
| |  | the need to take impairment charges or write-downs with respect
    to acquired assets.                                                                              





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





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





| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | reduced control over delivery schedules, quality assurance,
    manufacturing yields and production costs;
|
| |  | lack of guaranteed production capacity or product supply;                                                 
|
| |  | lack of availability of, or delayed access to, next-generation
    or key process technologies; and       
|
| |  | our ability to transition to alternate sources if services are
    unavailable from primary suppliers.    



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| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The complex nature of our production process, which can
    reduce yields and prevent identification of problems until well
    into the production cycle or, in some cases, after the product
    has been shipped.









| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face foreign business, political and economic risks
    because a majority of our products and our customers
    products are manufactured and sold outside of the United
    States.





| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in managing from afar;                                                                                                                                                                                                                                                                                                         
|
| |  | political and economic instability, including international
    tension in Iraq, Korea and the China Strait and lack of normal
    diplomatic relationships between the United States and Taiwan;                                                                                                                                           
|
| |  | less developed infrastructures in newly industrializing
    countries;                                                                                                                                                                                                                                                                      
|
| |  | susceptibility of foreign areas to terrorist attacks;                                                                                                                                                                                                                                                                                       
|
| |  | susceptibility to interruptions of travel, including those due
    to international tensions (including the war in and occupation
    of Iraq), medical issues such as the SARS and Avian Flu
    epidemics (particularly affecting the Asian markets we serve),
    and the financial instability and bankruptcy of major air
    carriers;
|
| |  | bias against foreign, especially American, companies;                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in collecting accounts receivable;                                                                                                                                                                     
|
| |  | expense and difficulties in protecting our intellectual property
    in foreign jurisdictions;                                                                                                                      
|
| |  | difficulties in complying with multiple, conflicting and
    changing laws and regulations, including export requirements,
    tariffs, import duties, visa restrictions, environmental laws
    and other barriers;
|
| |  | exposure to possible litigation or claims in foreign
    jurisdictions; and                                                                                                                                         
|
| |  | competition from foreign-based suppliers and the existence of
    protectionist laws and business practices that favor these
    suppliers, such as withholding taxes on payments made to us.                       





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





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





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | we must license for free specific elements of our intellectual
    property to others for use in implementing the DVI
    specification; and
|
| |  | we may license additional intellectual property for free as the
    DDWG promotes enhancements to the DVI specification.                    



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








| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | we must license specific elements of our intellectual property
    to others for use in implementing the HDMI
    specification; and
|
| |  | we may license additional intellectual property as the HDMI
    founders group promotes enhancements to the HDMI specification.     





| |                                                                 
| | ----------------------------------------------------------------
| | Our success depends on managing our relationship with
    Intel.





| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Intel has been an investor of ours;                                                                                                                                                                                  
|
| |  | Intel and we have been parties to a business cooperation
    agreement;                                                                                                                                              
|
| |  | Intel and we are parties to a patent cross-license;                                                                                                                                                                  
|
| |  | Intel and we worked together to develop HDCP;                                                                                                                                                                        
|
| |  | an Intel subsidiary has the exclusive right to license HDCP, of
    which we are a licensee;                                                                                                                         
|
| |  | Intel and we were two of the original founders of the Digital
    Display Working Group (DDWG);                                                                                                                      
|
| |  | Intel is a promoter of the serial ATA working group, of which we
    are a contributor;                                                                                                                              
|
| |  | Intel is a supplier to us and a customer for our products;                                                                                                                                                           
|
| |  | we believe that Intel has the market presence to drive adoption
    of DVI and serial ATA by making them widely available in its
    chipsets and motherboards, which could affect demand for our
    products;      
|
| |  | we believe that Intel has the market presence to affect adoption
    of HDMI by either endorsing the technology or promulgating a
    competing standard, which could affect demand for our products;                
|
| |  | Intel may potentially integrate the functionality of our
    products, including Fibre Channel, serial ATA, DVI, or HDMI into
    its own chips and chipsets, thereby displacing demand for some
    of our products;

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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Intel may design new technologies that would require us to
    re-design our products for compatibility, thus increasing our
    R&D expense and reducing our revenue;
|
| |  | Intels technology, including its 845G chipset, may lower
    barriers to entry for other parties who may enter the market and
    compete with us; and               
|
| |  | Intel may enter into or continue relationships with our
    competitors that can put us at a relative disadvantage.                                                   





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





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





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





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| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | stop selling products or using technology that contains the
    allegedly infringing intellectual property;                                     
|
| |  | attempt to obtain a license to the relevant intellectual
    property, which license may not be available on reasonable terms
    or at all; and
|
| |  | attempt to redesign products that contain the allegedly
    infringing intellectual property.                                                   





| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face additional risks and costs as a result of the
    delayed filing of our quarterly report on Form 10-Q for the
    quarter ended September 30, 2003 and our recent Audit
    Committee examination.





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





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





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| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We have experienced management transitions in the past and
    may continue to do so in the future.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In April 2004, Steve Tirado moved from the position of president
    to division president of storage group, Jaime Garcia-Meza moved
    from the position of vice president of worldwide sales to vice
    president of sales and marketing for storage platforms, Rob
    Valiton was appointed as vice president of worldwide sales, and
    Chris Paisley was appointed to the board of directors
|
| |  | In August 2004, the company announced that Robert Gargus planned
    to retire from the position of chief financial officer and Dale
    Brown, the controller of the company, was appointed as chief
    accounting officer. Although an executive search is underway,
    the timing of appointment of a successor to Mr. Gargus is
    uncertain.                                                 
|
| |  | In September 2004, Parviz Khodi, the vice president, PC/display
    products of the company, passed away unexpectedly and his duties
    were subsequently assumed by John LeMoncheck, the vice
    president, CE products and Patrick Reutens was appointed as
    chief legal officer of the company.                                                                                              
|
| |  | In November 2004, David Lee resigned from the positions of chief
    executive officer and president, Steve Laub was appointed as
    chief executive officer and president and to the board of
    directors as well, and Andrew Rappaport and Douglas Spreng
    resigned from the board of directors.                                                                                             
|
| |  | In January 2005, Steve Laub resigned from the positions of chief
    executive officer and president and from the board of directors,
    Steve Tirado was appointed as chief executive officer and
    president and to the board as well, and Chris Paisley was
    appointed chairman of the board of directors.                                                                                  
|
| |  | In February 2005, Jaime Garcia-Meza was appointed as vice
    president of our storage business.                                                                                                                                                                                                                                                                                                     





| |                                                             
| | ------------------------------------------------------------
| | Industry cycles may strain our management and
    resources.





| |   |                                           
| | - | ------------------------------------------
| |  | improve operational and financial systems;
|
| |  | train and manage our employee base;       

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| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | successfully integrate operations and employees of businesses we
    acquire or have acquired;
|
| |  | attract, develop, motivate and retain qualified personnel with
    relevant experience; and   
|
| |  | adjust spending levels according to prevailing market conditions.                             





| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operations and the operations of our significant
    customers, third-party wafer foundries and third-party assembly
    and test subcontractors are located in areas susceptible to
    natural disasters.







| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an earthquake or other disaster in the San Francisco Bay
    Area or the Los Angeles area damaged our facilities or disrupted
    the supply of water or electricity to our headquarters or our
    Irvine facility;                                                                                                                                     
|
| |  | an earthquake, typhoon or other disaster in Taiwan or Japan
    resulted in shortages of water, electricity or transportation,
    limiting the production capacity of our outside foundries or the
    ability of ASE to provide assembly and test services;                                                                                            
|
| |  | an earthquake, typhoon or other disaster in Taiwan or Japan
    damaged the facilities or equipment of our customers and
    distributors, resulting in reduced purchases of our
    products; or                                                                                                                                                        
|
| |  | an earthquake, typhoon or other disaster in Taiwan or Japan
    disrupted the operations of suppliers to our Taiwanese or
    Japanese customers, outside foundries or ASE, which in turn
    disrupted the operations of these customers, foundries or ASE
    and resulted in reduced purchases of our products or shortages
    in our product supply.



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



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| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our charter documents and Delaware law could
    prevent or delay a change in control, and may reduce the market
    price of our common stock.





| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | authorizing the issuance of preferred stock without stockholder
    approval;                                         
|
| |  | providing for a classified board of directors with staggered,
    three-year terms;                                   
|
| |  | requiring advance notice of stockholder nominations for the
    board of directors;                                   
|
| |  | providing the board of directors the opportunity to expand the
    number of directors without notice to stockholders;
|
| |  | prohibiting cumulative voting in the election of directors;                                                           
|
| |  | requiring super-majority voting to amend some provisions of our
    certificate of incorporation and bylaws;          
|
| |  | limiting the persons who may call special meetings of
    stockholders; and                                           
|
| |  | prohibiting stockholder actions by written consent.                                                                   





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





| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated changes in our operating results;                                                                            
|
| |  | changes in expectations of our future financial performance;                                                                       
|
| |  | changes in market valuations of comparable companies in our
    markets;                                                           
|
| |  | changes in market valuations or expectations of future financial
    performance of our vendors or customers;                      
|
| |  | changes in our key executives and technical personnel; and                                                                         
|
| |  | announcements by us or our competitors of significant technical
    innovations, design wins, contracts, standards or acquisitions.





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



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| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | We have recently established offices in Japan, Republic of
    Korea (South Korea), and the United Kingdom





| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | being subject to Japanese, South Korean, and United Kingdom tax
    laws and potentially liable for paying taxes in Japan, South
    Korea, and the United Kingdom;                                                                             
|
| |  | profits, if any, earned in Japan, South Korea , and the United
    Kingdom will be subject to local tax laws and may not be
    repatriable to the United States;                                                                               
|
| |  | we have and will enter into employment agreements in connection
    with hiring personnel for the Japanese and South Korean offices
    and are governed by the provisions of the Japanese, South
    Korean, and United Kingdom labor laws; and
|
| |  | the operations of the local office are and will be subject to
    the provisions of other local laws and regulations.                                                                                                                           



| |                                                                          
| | -------------------------------------------------------------------------
| | We indemnify certain of our licensing customers against
    infringement.








|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures of Market
    Risk

Equity Investments




Fixed Income Investments




65



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|     |     |      |  |      |     |  |  |   |     | 
|---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|0.5% |     | 1.0% |  | 1.5%
|     |     |      |  |     
|$    | 288 |      |  | $    | 576 |  |  | $ | 863 | 



Market Price




Foreign Currency Exchange Risk









|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








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








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures




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Changes in Internal Control Over Financial
Reporting.


Definition of Disclosure Controls




Managements Report on Internal Control over Financial
Reporting


Internal Control  Integrated Framework











|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



67



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








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








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







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





| |                         
| | ------------------------
| | 1. Financial Statements:

|                                                                                                    |  |      |     | 
|--------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                    |  | Page |    
|                                                                                                    |  |      |    
|Consolidated Statements of Operations for
    the three years ended December 31, 2004               |  |      | 70  | 
|Consolidated Balance Sheets at
    December 31, 2004 and December 31, 2003                          |  |      | 71  | 
|Consolidated Statements of
    Stockholders Equity for the three years ended
    December 31, 2004 |  |      | 72  | 
|Consolidated Statements of Cash Flows for
    the three years ended December 31, 2004               |  |      | 73  | 
|Notes to Consolidated Financial
    Statements                                                      |  |      | 74  | 
|Report of Independent Registered Public
    Accounting Firm                                         |  |      | 101 | 



| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Financial Statement Schedules                                                                                                                                                                                                                                                                                   
|
| | 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.
|
| | 3. Exhibits.                                                                                                                                                                                                                                                                                                       
|
| | The exhibits listed in the Index to Exhibits are filed as a part
    of this Report on Form 10-K.                                                                                                                                                                                                                  

68



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|             |                   |  |          |  |                     |             |  |                                                                                                                                                                                                                                                        
|------------ | ----------------- |  | -------- |  | ------------------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date Filed   |                   |  |          |  |                    
|or Furnished |                   |  | Item No. |  |                     | Description
|             |                   |  |          |  |                     |            
|             | October 1, 2004   |  |          |  | Items 1.01 and 9.01 |             |  | On October 1, 2004, we reported the unexpected death of an
    executive officer and the related payment arrangement and
    amendment of vesting terms authorized by our compensation
    committee for the benefit of the executive officers estate.
|            
|             | October 25, 2004  |  |          |  | Items 2.02 and 9.01 |             |  | On October 25, 2004, we reported our earnings release and
    conference call transcript for the quarter ended
    September 30, 2004 (Consolidated Financial Statements for
    this period were furnished with this report).                         
|            
|             | October 28, 2004  |  |          |  | Item 1.01           |             |  | On October 28, 2004, we announced the appointment of a new
    executive officer effective October 22, 2004.                                                                                                                                           
|            
|             | November 10, 2004 |  |          |  | Item 8.01           |             |  | On November 10, 2004, we filed a current report on Form 8-K
    regarding planned stock sales by one of our executives.                                                                                                                                
|            
|             | November 15, 2004 |  |          |  | Items 1.01 and 5.02 |             |  | On November 15, 2004, we announced the appointment of a new
    board member and chief executive officer effective
    November 11, 2004.                                                                                                              
|            
|             | November 18, 2004 |  |          |  | Item 5.02           |             |  | On November 17, 2004, we reported the resignation of two of
    our board members on November 16, 2004.                                                                                                                                                

69



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SILICON IMAGE, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                |                                                    |                                 |         |         |      |   |         |        |   |   |         |        |  
|----------------------------------------------- | -------------------------------------------------- | ------------------------------- | ------- | ------- | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                |                                                    | Year Ended December 31,         |        
|                                                |                                                    |                                 |        
|                                                |                                                    | 2004                            |         |         | 2003 |   |         | 2002   |  
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|                                                |                                                    | (In thousands, except per share |        
|                                                |                                                    | amounts)                        |        
|Revenue:                                        |                                                    |                                 |         |         |      |   |         |        |   |   |         |       
|                                                | Product                                            |                                 | $       | 152,350 |      |   | $       | 89,335 |   |   | $       | 74,884 |  
|                                                | Development, licensing and royalties               |                                 |         | 20,809  |      |   |         | 14,190 |   |   |         | 6,655  |  
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|Total revenue                                   |                                                    |                                 | 173,159 |         |      |   | 103,525 |        |   |   | 81,539  |       
|Cost of revenue and operating expenses:         |                                                    |                                 |         |         |      |   |         |        |   |   |         |       
|                                                | Cost of revenue(1)                                 |                                 |         | 68,614  |      |   |         | 47,192 |   |   |         | 39,299 |  
|                                                | Research and development(2)                        |                                 |         | 61,459  |      |   |         | 43,386 |   |   |         | 40,205 |  
|                                                | Selling, general and administrative(3)             |                                 |         | 42,183  |      |   |         | 20,943 |   |   |         | 19,976 |  
|                                                | Amortization of intangible assets                  |                                 |         | 1,345   |      |   |         | 1,103  |   |   |         | 3,482  |  
|                                                | In-process research and development                |                                 |         |        |      |   |         | 5,482  |   |   |         |       |  
|                                                | Impairment of goodwill and intangible assets       |                                 |         |        |      |   |         |       |   |   |         | 5,200  |  
|                                                | Restructuring                                      |                                 |         |        |      |   |         | 986    |   |   |         | 7,193  |  
|                                                | Patent assertion and acquisition integration costs |                                 |         | 519     |      |   |         | 2,152  |   |   |         | 7,034  |  
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|Total cost of revenue and operating expenses    |                                                    |                                 | 174,120 |         |      |   | 121,244 |        |   |   | 122,389 |       
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|Loss from operations                            |                                                    |                                 | (961    | )       |      |   | (17,719 | )      |   |   | (40,850 | )     
|Gain on escrow settlement, net                  |                                                    |                                 |        |         |      |   | 4,618   |        |   |   |        |       
|Interest income                                 |                                                    |                                 | 945     |         |      |   | 498     |        |   |   | 998     |       
|Interest expense and other, net                 |                                                    |                                 | (227    | )       |      |   | (207    | )      |   |   | (240    | )     
|Gain on derivative investment security          |                                                    |                                 | 926     |         |      |   |        |        |   |   |        |       
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|Income (loss) before provision for income taxes |                                                    |                                 | 683     |         |      |   | (12,810 | )      |   |   | (40,092 | )     
|Provision for income taxes                      |                                                    |                                 | 1,007   |         |      |   |        |        |   |   |        |       
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|Net loss                                        |                                                    | $                               | (324    | )       |      | $ | (12,810 | )      |   | $ | (40,092 | )     
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|Net loss per share:                             |                                                    |                                 |         |         |      |   |         |        |   |   |         |       
|                                                | Basic and diluted                                  |                                 | $       | (0.00   | )    |   | $       | (0.18  | ) |   | $       | (0.62  | )
|                                                |                                                    |                                 |         |         |      |   |         |        |  
|                                                | Weighted average shares                            |                                 |         | 75,081  |      |   |         | 69,412 |   |   |         | 64,283 |  
|                                                |                                                    |                                 |         |         |      |   |         |        |  






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes non-cash stock compensation expense of
    $2.8 million, $583,000, and $1.2 million for 2004,
    2003 and 2002, respectively.      
|   
|(2) | Includes non-cash stock compensation expense of
    $16.6 million, $6.9 million, and $7.4 million for
    2004, 2003, and 2002, respectively.
|   
|(3) | Includes non-cash stock compensation expense of
    $13.4 million, $2.5 million, and $2.5 million for
    2004, 2003 and 2002, respectively. 



70



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SILICON IMAGE, INC.





CONSOLIDATED BALANCE SHEETS


|                                               |                                                                                                                                               |                                            |        |          |         |  |        |          |        | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- |  | ------ | -------- | ------ | 
|                                               |                                                                                                                                               | December 31,                               |       
|                                               |                                                                                                                                               |                                            |       
|                                               |                                                                                                                                               | 2004                                       |        |          | 2003    | 
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                               |                                                                                                                                               | (In thousands, except share                |       
|                                               |                                                                                                                                               | and per share amounts)                     |       
|ASSETS                                        
|Current Assets:                                |                                                                                                                                               |                                            |        |          |         |  |        |         
|                                               | Cash and cash equivalents                                                                                                                     |                                            | $      | 23,280   |         |  | $      | 17,934   |       
|                                               | Short-term investments                                                                                                                        |                                            |        | 70,240   |         |  |        | 19,320   |       
|                                               | Accounts receivable, net of allowances for doubtful accounts of
    $745 in 2004 and $670 in 2003                                             |                                            |        | 19,417   |         |  |        | 12,754   |       
|                                               | Inventories                                                                                                                                   |                                            |        | 13,926   |         |  |        | 10,312   |       
|                                               | Prepaid expenses and other current assets                                                                                                     |                                            |        | 3,073    |         |  |        | 2,703    |       
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                               |                                                                                                                                               | Total current assets                       |        |          | 129,936 |  |        |          | 63,023 | 
|Property and equipment, net                    |                                                                                                                                               |                                            | 9,494  |          |         |  | 7,411  |         
|Goodwill                                       |                                                                                                                                               |                                            | 13,021 |          |         |  | 13,021 |         
|Intangible assets, net                         |                                                                                                                                               |                                            | 1,683  |          |         |  | 3,028  |         
|Other assets                                   |                                                                                                                                               |                                            | 774    |          |         |  | 1,259  |         
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                               |                                                                                                                                               | Total assets                               |        | $        | 154,908 |  |        | $        | 87,742 | 
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                              
|LIABILITIES AND STOCKHOLDERS EQUITY          
|                                              
|Current Liabilities:                           |                                                                                                                                               |                                            |        |          |         |  |        |         
|                                               | Accounts payable                                                                                                                              |                                            | $      | 6,833    |         |  | $      | 6,442    |       
|                                               | Accrued liabilities                                                                                                                           |                                            |        | 13,418   |         |  |        | 8,726    |       
|                                               | Deferred license revenue                                                                                                                      |                                            |        | 2,127    |         |  |        | 1,175    |       
|                                               | Debt obligations and capital leases                                                                                                           |                                            |        | 489      |         |  |        | 1,732    |       
|                                               | Deferred margin on sales to distributors                                                                                                      |                                            |        | 9,962    |         |  |        | 7,274    |       
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                               |                                                                                                                                               | Total current liabilities                  |        |          | 32,829  |  |        |          | 25,349 | 
|Commitments and contingencies (Notes 7 and 11) |                                                                                                                                               |                                            |        |          |         |  |        |         
|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:
    78,131,604  2004 and 72,367,129  2003 |                                            |        | 78       |         |  |        | 72       |       
|                                               | Additional paid-in capital                                                                                                                    |                                            |        | 299,744  |         |  |        | 243,171  |       
|                                               | Unearned compensation                                                                                                                         |                                            |        | (7,632   | )       |  |        | (8,196   | )     
|                                               | Accumulated deficit                                                                                                                           |                                            |        | (172,978 | )       |  |        | (172,654 | )     
|                                               | Accumulated other comprehensive income                                                                                                        |                                            |        | 2,867    |         |  |        |         |       
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                               |                                                                                                                                               | Total stockholders equity                 |        |          | 122,079 |  |        |          | 62,393 | 
|                                               |                                                                                                                                               |                                            |        |          |         | 
|                                               |                                                                                                                                               | Total liabilities and stockholders equity |        | $        | 154,908 |  |        | $        | 87,742 | 
|                                               |                                                                                                                                               |                                            |        |          |         | 



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SILICON IMAGE, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |   |  |   |       |  |  |   |         |  
|----------------------------------------------------- |  | -------------- | ------ | - | ---------- | ----- | -- | ---------- |  | - | ------------ | - | ----------- | ------------ | ----- | - | ------------- | - | ------ | ------ |  | - | -------- | - |  | - | ----- |  |  | - | ------- | -
|                                                      |  |                |        |   |            | Notes |    |            |  |   |              |   | Accumulated |              |       |  
|                                                      |  | Common Stock   |        |   | Additional |       |    | Receivable |  |   |              |   |             |              | Other |   |               |  
|                                                      |  |                |        |   | Paid-In    |       |    | from       |  |   | Unearned     |   |             | Accumulated  |       |   | Comprehensive |   |        |       
|                                                      |  | Shares         |        |   | Amount     |       |    | Capital    |  |   | Stockholders |   |             | Compensation |       |   | Deficit       |   |        | Income |  |   | Total    |  
|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |  
|                                                      |  | (In thousands) |       
|Balance at December 31, 2001                          |  |                | 63,516 |   |            | $     | 64 |            |  | $ | 194,280      |   |             | $            | (167  | ) |               | $ | (7,101 | )      |  | $ | (119,752 | ) |  | $ |      |  |  | $ | 67,324  |  
|Net loss                                              |  |                |       |   |            |       |   |            |  |   |             |   |             |              |      |   |               |   |       |        |  |   | (40,092  | ) |  |   |      |  |  |   | (40,092 | )
|Net issuances of common stock                         |  |                | 2,456  |   |            |       | 2  |            |  |   | 5,693        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 5,695   |  
|Common stock issued for ESPP                          |  |                | 593    |   |            |       | 1  |            |  |   | 2,125        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 2,126   |  
|Common stock issued for acquisitions (Note 2)         |  |                | 75     |   |            |       |   |            |  |   |             |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   |        |  
|Compensation expense for option modification          |  |                |       |   |            |       |   |            |  |   | 1,952        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 1,952   |  
|Repayments of note receivable                         |  |                |       |   |            |       |   |            |  |   |             |   |             |              | 70    |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 70      |  
|Interest on notes receivable                          |  |                |       |   |            |       |   |            |  |   |             |   |             |              | (12   | ) |               |   |       |        |  |   |         |   |  |   |      |  |  |   | (12     | )
|Unearned compensation                                 |  |                |       |   |            |       |   |            |  |   | (459         | ) |             |              |      |   |               |   | 459    |        |  |   |         |   |  |   |      |  |  |   |        |  
|Stock compensation expense                            |  |                |       |   |            |       |   |            |  |   | 10,868       |   |             |              |      |   |               |   | 239    |        |  |   |         |   |  |   |      |  |  |   | 11,107  |  
|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |  
|Balance at December 31, 2002                          |  |                | 66,640 |   |            |       | 67 |            |  |   | 214,459      |   |             |              | (109  | ) |               |   | (6,403 | )      |  |   | (159,844 | ) |  |   |      |  |  |   | 48,170  |  
|Net loss                                              |  |                |       |   |            |       |   |            |  |   |              |   |             |              |      |   |               |   |       |        |  |   | (12,810  | ) |  |   |      |  |  |   | (12,810 | )
|Net issuances of common stock                         |  |                | 3,488  |   |            |       | 3  |            |  |   | 9,223        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 9,226   |  
|Common stock issued for ESPP                          |  |                | 613    |   |            |       |   |            |  |   | 2,263        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 2,263   |  
|Common stock issued for acquisitions (Note 2)         |  |                | 2,576  |   |            |       | 2  |            |  |   | 9,491        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 9,493   |  
|Stock reacquired pursuant to settlement (Note 2)      |  |                | (950   | ) |            |       |   |            |  |   | (4,692       | ) |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | (4,692  | )
|Compensation expense for option modification          |  |                |       |   |            |       |   |            |  |   | 646          |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 646     |  
|Repayments of note receivable                         |  |                |       |   |            |       |   |            |  |   |             |   |             |              | 109   |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 109     |  
|Unearned compensation                                 |  |                |       |   |            |       |   |            |  |   | 4,606        |   |             |              |      |   |               |   | (4,606 | )      |  |   |         |   |  |   |      |  |  |   |        |  
|Stock compensation expense                            |  |                |       |   |            |       |   |            |  |   | 7,175        |   |             |              |      |   |               |   | 2,813  |        |  |   |         |   |  |   |      |  |  |   | 9,988   |  
|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |  
|Balance at December 31, 2003                          |  |                | 72,367 |   |            |       | 72 |            |  |   | 243,171      |   |             |              |      |   |               |   | (8,196 | )      |  |   | (172,654 | ) |  |   |      |  |  |   | 62,393  |  
|Net loss                                              |  |                |       |   |            |       |   |            |  |   |             |   |             |              |      |   |               |   |       |        |  |   | (324     | ) |  |   |      |  |  |   | (324    | )
|Unrealized net gain on available-for-sale investments |  |                |       |   |            |       |   |            |  |   |             |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   | 2,867 |  |  |   | 2,867   |  
|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |  
|Total comprehensive income                            |  |                |       |   |            |       |   |            |  |   |             |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  | $ | 2,543   |  
|Net issuances of common stock                         |  |                | 5,140  |   |            |       | 5  |            |  |   | 20,998       |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 21,003  |  
|Common stock issued for ESPP                          |  |                | 616    |   |            |       | 1  |            |  |   | 2,720        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 2,721   |  
|Common stock issued for acquisitions                  |  |                | 9      |   |            |       |   |            |  |   |             |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   |        |  
|Compensation expense for option modification          |  |                |       |   |            |       |   |            |  |   | 1,527        |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 1,527   |  
|Tax benefit from employee stock transactions          |  |                |       |   |            |       |   |            |  |   | 636          |   |             |              |      |   |               |   |       |        |  |   |         |   |  |   |      |  |  |   | 636     |  
|Stock compensation expense                            |  |                |       |   |            |       |   |            |  |   | 30,692       |   |             |              |      |   |               |   | 564    |        |  |   |         |   |  |   |      |  |  |   | 31,256  |  
|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |  
|Balance at December 31, 2004                          |  |                | 78,132 |   |            | $     | 78 |            |  | $ | 299,744      |   |             | $            |      |   |               | $ | (7,632 | )      |  | $ | (172,978 | ) |  | $ | 2,867 |  |  | $ | 122,079 |  
|                                                      |  |                |        |   |            |       |    |            |  |   |              |   |             |              |       |   |               |   |        |        |  |   |          |  



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SILICON IMAGE, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |        |   |         |         |        |  
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------ | ------ | ------- | ------- | - | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                                                          |                                                                             | Year Ended December 31,                          |       
|                                                                                          |                                                                             |                                                  |       
|                                                                                          |                                                                             | 2004                                             |        |         | 2003    |   |         | 2002    |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          |                                                                             | (In thousands)                                   |       
|Cash flows from operating activities:                                                     |                                                                             |                                                  |        |         |         |   |         |         |        |   |         |        
|Net loss                                                                                  |                                                                             | $                                                | (324   | )       |         | $ | (12,810 | )       |        | $ | (40,092 | )      
|Adjustments to reconcile net loss to cash provided by (used in)
    operating activities: |                                                                             |                                                  |        |         |         |   |         |         |        |   |         |        
|                                                                                          | Depreciation and amortization                                               |                                                  |        | 4,903   |         |   |         | 4,734   |        |   |         | 3,731   |       
|                                                                                          | Provision for doubtful accounts                                             |                                                  |        | 75      |         |   |         | 151     |        |   |         | 69      |       
|                                                                                          | Stock compensation expense                                                  |                                                  |        | 32,783  |         |   |         | 9,988   |        |   |         | 11,107  |       
|                                                                                          | Amortization of intangible assets                                           |                                                  |        | 1,345   |         |   |         | 1,103   |        |   |         | 3,482   |       
|                                                                                          | In-process research and development                                         |                                                  |        |        |         |   |         | 5,482   |        |   |         |        |       
|                                                                                          | Impairment of goodwill and intangible assets                                |                                                  |        |        |         |   |         |        |        |   |         | 5,200   |       
|                                                                                          | Non-cash restructuring                                                      |                                                  |        |        |         |   |         | 646     |        |   |         | 3,965   |       
|                                                                                          | Non-cash gain on escrow settlement, before cash costs                       |                                                  |        |        |         |   |         | (4,692  | )      |   |         |        |       
|                                                                                          | Gain on derivative investment security                                      |                                                  |        | (926    | )       |   |         |        |        |   |         |        |       
|                                                                                          | Tax benefit from employee stock plans                                       |                                                  |        | 636     |         |   |         |        |        |   |         |        |       
|                                                                                          | Changes in assets and liabilities, net of amounts acquired:                 |                                                  |        |         |         |   |         |         |        |   |         |         |       
|                                                                                          |                                                                             | Accounts receivable                              |        |         | (6,738  | ) |         |         | (1,316 | ) |         |         | (4,183 | )
|                                                                                          |                                                                             | Inventories                                      |        |         | (3,614  | ) |         |         | (3,011 | ) |         |         | (765   | )
|                                                                                          |                                                                             | Prepaid expenses and other assets                |        |         | 115     |   |         |         | (851   | ) |         |         | 382    |  
|                                                                                          |                                                                             | Accounts payable                                 |        |         | 391     |   |         |         | (3,904 | ) |         |         | 5,149  |  
|                                                                                          |                                                                             | Accrued liabilities and deferred license revenue |        |         | 5,112   |   |         |         | (1,554 | ) |         |         | 2,346  |  
|                                                                                          |                                                                             | Deferred margin on sales to distributors         |        |         | 2,688   |   |         |         | 3,141  |   |         |         | 731    |  
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          |                                                                             | Cash provided by (used in) operating activities  |        |         | 36,446  |   |         |         | (2,893 | ) |         |         | (8,878 | )
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|Cash flows from investing activities:                                                     |                                                                             |                                                  |        |         |         |   |         |         |        |   |         |        
|                                                                                          | Purchases of short-term investments                                         |                                                  |        | (75,109 | )       |   |         | (23,000 | )      |   |         | (15,815 | )     
|                                                                                          | Proceeds from sales of short-term investments                               |                                                  |        | 27,932  |         |   |         | 24,600  |        |   |         | 24,067  |       
|                                                                                          | Purchases of property and equipment                                         |                                                  |        | (5,963  | )       |   |         | (5,096  | )      |   |         | (3,703  | )     
|                                                                                          | Cash acquired in business combination, net of acquisition costs             |                                                  |        |        |         |   |         | 149     |        |   |         |        |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          |                                                                             | Cash provided by (used in) investing activities  |        |         | (53,140 | ) |         |         | (3,347 | ) |         |         | 4,549  |  
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|Cash flows from financing activities:                                                     |                                                                             |                                                  |        |         |         |   |         |         |        |   |         |        
|                                                                                          | Proceeds from issuances of common stock                                     |                                                  |        | 23,724  |         |   |         | 11,489  |        |   |         | 7,821   |       
|                                                                                          | Net repayments of stockholders notes receivable                            |                                                  |        |        |         |   |         | 109     |        |   |         | 58      |       
|                                                                                          | Borrowings                                                                  |                                                  |        |        |         |   |         |        |        |   |         | 3,596   |       
|                                                                                          | Repayments of debt and capital lease obligations                            |                                                  |        | (1,684  | )       |   |         | (2,467  | )      |   |         | (5,289  | )     
|                                                                                          | Refund of security deposits on leasing arrangements                         |                                                  |        |        |         |   |         | 130     |        |   |         | 1,010   |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          |                                                                             | Cash provided by financing activities            |        |         | 22,040  |   |         |         | 9,261  |   |         |         | 7,196  |  
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|Net increase (decrease) in cash and cash equivalents                                      |                                                                             |                                                  | 5,346  |         |         |   | 3,021   |         |        |   | 2,867   |        
|Cash and cash equivalents  beginning of period                                           |                                                                             |                                                  | 17,934 |         |         |   | 14,913  |         |        |   | 12,046  |        
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|Cash and cash equivalents  end of period                                                 |                                                                             | $                                                | 23,280 |         |         | $ | 17,934  |         |        | $ | 14,913  |        
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|Supplemental cash flow information:                                                       |                                                                             |                                                  |        |         |         |   |         |         |        |   |         |        
|                                                                                          | Acquisitions of property and equipment under capital lease
    arrangements |                                                  | $      | 441     |         |   | $       | 383     |        |   | $       |        |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          | Cash payments for interest                                                  |                                                  | $      | 54      |         |   | $       | 140     |        |   | $       | 208     |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          | Stock and options issued with the TransWarp acquisition                     |                                                  | $      |        |         |   | $       | 14,371  |        |   | $       |        |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          | Cash payments for taxes                                                     |                                                  | $      | 310     |         |   | $       |        |        |   | $       |        |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          | Unrealized net gain on available-for-sale securities                        |                                                  | $      | 3,743   |         |   | $       |        |        |   | $       |        |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       
|                                                                                          | Reimbursable tenant improvements                                            |                                                  | $      | 582     |         |   | $       |        |        |   | $       |        |       
|                                                                                          |                                                                             |                                                  |        |         |         |   |         |         |       



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SILICON IMAGE, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|         |                                                    
|-------- | ---------------------------------------------------
|NOTE 1  | THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES



| |            
| | -----------
| | The Company







| |                      
| | ---------------------
| | Basis of presentation





| |                  
| | -----------------
| | Reclassifications





| |                    
| | -------------------
| | Revenue recognition





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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |            
| | -----------
| | Inventories







| |                  
| | -----------------
| | Long-lived assets









| |                               
| | ------------------------------
| | Goodwill and intangible assets



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                                               |                       |                   |       |        |                   |   |        |                |   |   |              |        |  |   |        |      |  
|---------------------------------------------- | --------------------- | ----------------- | ----- | ------ | ----------------- | - | ------ | -------------- | - | - | ------------ | ------ |  | - | ------ | ---- | -
|                                               |                       | December 31, 2004 |       |        | December 31, 2003 |  
|                                               |                       |                   |       |        |                   |  
|                                               |                       | Gross Carrying    |       |        | Accumulated       |   |        | Gross Carrying |   |   | Accumulated  |       
|                                               |                       | Amount            |       |        | Amortization      |   |        | Amount         |   |   | Amortization |       
|                                               |                       |                   |       |        |                   |   |        |                |   |   |              |       
|Intangible assets subject to amortization:     |                       |                   |       |        |                   |   |        |                |   |   |              |        |  |   |        |     
|                                               | Acquired technology   |                   | $     | 1,780  |                   |   | $      | (863           | ) |   | $            | 1,780  |  |   | $      | (375 | )
|                                               | Non-compete agreement |                   |       | 1,849  |                   |   |        | (1,083         | ) |   |              | 1,849  |  |   |        | (472 | )
|                                               | Assembled workforce   |                   |       | 502    |                   |   |        | (502           | ) |   |              | 502    |  |   |        | (256 | )
|                                               |                       |                   |       |        |                   |   |        |                |   |   |              |       
|                                               |                       | $                 | 4,131 |        |                   | $ | (2,448 | )              |   | $ | 4,131        |        |  | $ | (1,103 | )   
|                                               |                       |                   |       |        |                   |   |        |                |   |   |              |       
|Intangible assets not subject to amortization: |                       |                   |       |        |                   |   |        |                |   |   |              |        |  |   |        |     
|                                               | Goodwill              |                   | $     | 13,021 |                   |   | $      |               |   |   | $            | 13,021 |  |   | $      |     |  
|                                               |                       |                   |       |        |                   |   |        |                |   |   |              |       





|     |  |              |       | 
|---- |  | ------------ | ----- | 
|     |  | Amortization |      
|     |  | Expense      |      
|     |  |              |      
|2005 |  | $            | 1,097 | 
|2006 |  |              | 508   | 
|2007 |  |              | 78    | 
|     |  |              |      
|     |  | $            | 1,683 | 
|     |  |              |      



| |             
| | ------------
| | Income taxes



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                    
| | -------------------
| | Accrued liabilities





| |                                                          
| | ---------------------------------------------------------
| | Guarantees, Indemnifications and Warranty
    Liabilities





|                                                  |  |                |      |   |      |   |      |  
|------------------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | -
|                                                  |  | Year Ended     |     
|                                                  |  | December 31,   |     
|                                                  |  |                |     
|                                                  |  | 2004           |      |   | 2003 |  
|                                                  |  |                |      |   |      |  
|                                                  |  | (In thousands) |     
|Balance at January 1                              |  | $              | 271  |   |      | $ | 223  |  
|Provision for warranties issued during the period |  |                | 300  |   |      |   | 630  |  
|Reduction to pre-existing warranties              |  |                |     |   |      |   |     |  
|Cash and other settlements made during the period |  |                | (220 | ) |      |   | (582 | )
|                                                  |  |                |      |   |      |  
|Balance at December 31                            |  | $              | 351  |   |      | $ | 271  |  
|                                                  |  |                |      |   |      |  



| |                         
| | ------------------------
| | Stock-based compensation





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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                            
| | ---------------------------
| | Pro forma Net Income (Loss)



|                                                                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                      |  | Year Ended December 31, |        
|                                                                                                      |  |                         |        
|                                                                                                      |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|                                                                                                      |  |                         |         |   |      |   |         |      | 
|Net loss-as reported                                                                                  |  | $                       | (324    | ) |      | $ | (12,810 | )    |  | $ | (40,092 | )
|Less: Stock-based employee compensation expense determined using
    fair value method                |  |                         | (22,769 | ) |      |   | (21,019 | )    |  |   | (24,766 | )
|Add: Stock-based employee compensation cost included in the
    determination of net loss as reported |  |                         | 27,218  |   |      |   | 7,078   |      |  |   | 8,803   |  
|                                                                                                      |  |                         |         |   |      |   |         |      | 
|Pro forma net income (loss)                                                                           |  | $                       | 4,125   |   |      | $ | (26,751 | )    |  | $ | (56,055 | )
|                                                                                                      |  |                         |         |   |      |   |         |      | 
|Basic and diluted net income (loss) per share  pro
    forma                                         |  | $                       | 0.05    |   |      | $ | (0.39   | )    |  | $ | (0.87   | )
|Basic and diluted net loss per share  as reported                                                    |  | $                       | (0.00   | ) |      | $ | (0.18   | )    |  | $ | (0.62   | )



| |                                                         
| | --------------------------------------------------------
| | Cash and cash equivalents and short-term
    investments



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |   |      |      |        |        |        |        | 
|---------------------------------------------------------- | ------------------------------- | --------------------------------- | ---------------------------- | ------ | ---------- | ------ | ----- | ---------- | ----- | ----- | ---------- | - | ---- | ---- | ------ | ------ | ------ | ------ | 
|                                                           |                                 |                                   |                              | Gross  |            |        | Gross |            |       |      
|                                                           |                                 | Carrying                          |                              |        | Unrealized |        |       | Unrealized |       |       | Estimated  |  
|                                                           |                                 | Value                             |                              |        | Gains      |        |       | Losses     |       |       | Fair Value |  
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  
|Classified as current assets:                              |                                 |                                   |                              |        |            |        |       |            |       |       |            |   |      |      |        |       
|                                                           | Cash                            |                                   | $                            | 9,592  |            |        | $     |           |       |       | $          |  |      |      | $      | 9,592  |       
|                                                           | Cash equivalents:               |                                   |                              |        |            |        |       |            |       |       |            |   |      |      |        |        |       
|                                                           |                                 | Money market funds                |                              |        | 6,201      |        |       |            |      |       |            |   |     |      |        |        | 6,201  |       
|                                                           |                                 | Commercial paper                  |                              |        | 7,486      |        |       |            | 1     |       |            |   |     |      |        |        | 7,487  |       
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  
|                                                           |                                 |                                   | Total cash equivalents       |        |            | 13,687 |       |            |       | 1     |            |   |      |     |        |        |        | 13,688 | 
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  
|                                                           | Total cash and cash equivalents |                                   |                              | 23,279 |            |        |       | 1          |       |       |            |  |      |      |        | 23,280 |       
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  
|                                                           | Short-term investments:         |                                   |                              |        |            |        |       |            |       |       |            |   |      |      |        |        |       
|                                                           |                                 | Corporate notes and bonds         |                              |        | 29,824     |        |       |            |      |       |            |   | (106 | )    |        |        | 29,718 |       
|                                                           |                                 | Asset-backed securities           |                              |        | 5,250      |        |       |            |      |       |            |   | (11  | )    |        |        | 5,239  |       
|                                                           |                                 | United States government agencies |                              |        | 31,374     |        |       |            | 1     |       |            |   | (79  | )    |        |        | 31,296 |       
|                                                           |                                 | Marketable equity securities *    |                              |        |           |        |       |            | 3,987 |       |            |   |     |      |        |        | 3,987  |       
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  
|                                                           |                                 |                                   | Total short-term investments |        |            | 66,448 |       |            |       | 3,988 |            |   |      | (196 | )      |        |        | 70,240 | 
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  
|Total cash and cash equivalents and short-term investments |                                 | $                                 | 89,727                       |        |            | $      | 3,989 |            |       | $     | (196       | ) |      | $    | 93,520 |       
|                                                           |                                 |                                   |                              |        |            |        |       |            |       |       |            |  






|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Unrealized gain on marketable equity security represents our
    investment in Leadis, Inc. as more fully described in
    Note 12. This unrealized gain includes approximately
    $926,000 that was recorded through the consolidated statement of
    operations as it relates to a derivative financial instrument,
    and the remainder in the amount of approximately $3,061,000 is
    included in accumulated other comprehensive income.



|                                                           |                                 |                                     |                              |        |       |        | 
|---------------------------------------------------------- | ------------------------------- | ----------------------------------- | ---------------------------- | ------ | ----- | ------ | 
|Cash and cash equivalents:                                 |                                 |                                     |                              |       
|                                                           | Cash                            |                                     | $                            | 2,741  |      
|                                                           | Cash equivalents:               |                                     |                              |        |      
|                                                           |                                 | Money market funds                  |                              |        | 8,225 |       
|                                                           |                                 | Commercial paper                    |                              |        | 6,968 |       
|                                                           |                                 |                                     |                             
|                                                           |                                 |                                     | Total cash equivalents       |        |       | 15,193 | 
|                                                           |                                 |                                     |                             
|                                                           | Total cash and cash equivalents |                                     |                              | 17,934 |      
|                                                           |                                 |                                     |                             
|                                                           | Short-term investments:         |                                     |                              |        |      
|                                                           |                                 | Corporate notes and bonds           |                              |        | 4,987 |       
|                                                           |                                 | United States government agencies   |                              |        | 3,317 |       
|                                                           |                                 | Market auction preferred securities |                              |        | 6,125 |       
|                                                           |                                 | Commercial paper                    |                              |        | 4,891 |       
|                                                           |                                 |                                     |                             
|                                                           |                                 |                                     | Total short-term investments |        |       | 19,320 | 
|                                                           |                                 |                                     |                             
|Total cash and cash equivalents and short-term investments |                                 | $                                   | 37,254                       |       
|                                                           |                                 |                                     |                             

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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                  |  |           |        |  |            |   |     |  
|--------------------------------- |  | --------- | ------ |  | ---------- | - | --- | -
|                                  |  | Estimated |        |  | Gross      |  
|                                  |  | Fair      |        |  | Unrealized |  
|                                  |  | Value     |        |  | Losses     |  
|                                  |  |           |        |  |            |  
|United States government agencies |  | $         | 8,775  |  |            | $ | (38 | )
|Corporate notes and bonds         |  |           | 3,129  |  |            |   | (7  | )
|                                  |  |           |        |  |            |  
|Total                             |  | $         | 11,904 |  |            | $ | (45 | )
|                                  |  |           |        |  |            |  







| |                             
| | ----------------------------
| | Concentration of credit risk







| |                                         
| | ----------------------------------------
| | Advertising and Research and Development



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                     
| | --------------------
| | Comprehensive income



|                                                       |  |   |       |  
|------------------------------------------------------ |  | - | ----- | -
|Net loss for the year                                  |  | $ | (324  | )
|Other comprehensive income:                            |  |   |       |  
|Unrealized net gains on available-for-sale investments |  |   | 2,867 |  
|                                                       |  |   |      
|Comprehensive income                                   |  | $ | 2,543 |  
|                                                       |  |   |      





| |                   
| | ------------------
| | Net loss per share



|                    |                                                    |                         |        |        |      |  |        |         |   |  |        |         |  
|------------------- | -------------------------------------------------- | ----------------------- | ------ | ------ | ---- |  | ------ | ------- | - |  | ------ | ------- | -
|                    |                                                    | Year Ended December 31, |       
|                    |                                                    |                         |       
|                    |                                                    | 2004                    |        |        | 2003 |  |        | 2002    |  
|                    |                                                    |                         |        |        |      |  |        |         |  
|Numerator:          |                                                    |                         |        |        |      |  |        |         |   |  |        |        
|                    | Net loss                                           |                         | $      | (324   | )    |  | $      | (12,810 | ) |  | $      | (40,092 | )
|Denominator:        |                                                    |                         |        |        |      |  |        |         |   |  |        |        
|                    | Weighted average shares                            |                         |        | 75,733 |      |  |        | 70,042  |   |  |        | 64,758  |  
|                    | Less: unvested common shares subject to repurchase |                         |        | (652   | )    |  |        | (630    | ) |  |        | (475    | )
|                    |                                                    |                         |        |        |      |  |        |         |  
|                    |                                                    |                         | 75,081 |        |      |  | 69,412 |         |   |  | 64,283 |        
|                    |                                                    |                         |        |        |      |  |        |         |  
|Net loss per share: |                                                    |                         |        |        |      |  |        |         |   |  |        |        
|                    | Basic and diluted net loss per share               |                         | $      | (0.00  | )    |  | $      | (0.18   | ) |  | $      | (0.62   | )
|                    |                                                    |                         |        |        |      |  |        |         |  



|                                                       |  |                         |        |  |      |  |       |      |  |  |       | 
|------------------------------------------------------ |  | ----------------------- | ------ |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                       |  | Year Ended December 31, |       
|                                                       |  |                         |       
|                                                       |  | 2004                    |        |  | 2003 |  |       | 2002 | 
|                                                       |  |                         |        |  |      |  |       |      | 
|Unvested common shares subject to repurchase           |  |                         | 671    |  |      |  | 609   |      |  |  | 414   | 
|Dilutive stock options under the treasury stock method |  |                         | 10,205 |  |      |  | 6,533 |      |  |  | 8,687 | 
|                                                       |  |                         |        |  |      |  |       |      | 
|                                                       |  |                         | 10,876 |  |      |  | 7,142 |      |  |  | 9,101 | 
|                                                       |  |                         |        |  |      |  |       |      | 



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                 
| | --------------------------------
| | Recent accounting pronouncements











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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|         |                      
|-------- | ---------------------
|NOTE 2  | BUSINESS COMBINATIONS



| |                              
| | -----------------------------
| | Transwarp Networks, Inc (TWN)





|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|Assembled workforce                 |  | $ | 502    | 
|Core technology                     |  |   | 1,251  | 
|Developed technology                |  |   | 529    | 
|In-process research and development |  |   | 5,482  | 
|Non-compete agreement               |  |   | 1,849  | 
|Net tangible assets acquired        |  |   | 93     | 
|Unearned compensation               |  |   | 4,819  | 
|                                    |  |   |       
|Total                               |  | $ | 14,525 | 
|                                    |  |   |       



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














| |                     
| | --------------------
| | CMD Technology (CMD)





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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|         |                                              
|-------- | ---------------------------------------------
|NOTE 3  | ASSET IMPAIRMENT AND RESTRUCTURING ACTIVITIES











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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                      |  |              |        |   |            |   |       |              |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------------ | ------ | - | ---------- | - | ----- | ------------ |  | - | ------ | - |  | - | ------ | -
|                                                                      |  | Severance    |        |   | Leased     |   |       |              |  |  
|                                                                      |  | and Benefits |        |   | Facilities |   |       | Fixed Assets |  |   | Total  |  
|                                                                      |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2001                                       |  | $            | 408    |   |            | $ | 385   |              |  | $ | 50     |   |  | $ | 843    |  
|2002 provision                                                        |  |              | 2,547  |   |            |   | 2,633 |              |  |   | 2,013  |   |  |   | 7,193  |  
|Cash payments                                                         |  |              | (865   | ) |            |   | (420  | )            |  |   |       |   |  |   | (1,285 | )
|Non-cash activity                                                     |  |              | (1,952 | ) |            |   |      |              |  |   | (2,063 | ) |  |   | (4,015 | )
|                                                                      |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2002                                       |  |              | 138    |   |            |   | 2,598 |              |  |   |       |   |  |   | 2,736  |  
|2003 provision                                                        |  |              | 986    |   |            |   |      |              |  |   |       |   |  |   | 986    |  
|Cash payments                                                         |  |              | (441   | ) |            |   | (760  | )            |  |   |       |   |  |   | (1,201 | )
|Non-cash activity                                                     |  |              | (646   | ) |            |   |      |              |  |   |       |   |  |   | (646   | )
|                                                                      |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2003                                       |  |              | 37     |   |            |   | 1,838 |              |  |   |       |   |  |   | 1,875  |  
|Cash payments                                                         |  |              | (5     | ) |            |   | (834  | )            |  |   |       |   |  |   | (839   | )
|                                                                      |  |              |        |   |            |   |       |              |  |   |        |  
|Balance as of December 31, 2004 (included in accrued
    liabilities) |  | $            | 32     |   |            | $ | 1,004 |              |  | $ |       |   |  | $ | 1,036  |  
|                                                                      |  |              |        |   |            |   |       |              |  |   |        |  



|         |                           
|-------- | --------------------------
|NOTE 4  | RELATED PARTY TRANSACTIONS





|         |                                      
|-------- | -------------------------------------
|NOTE 5  | CONSOLIDATED BALANCE SHEET COMPONENTS

|                        |                        |                                |        |        |         |   |        |        |         |  
|----------------------- | ---------------------- | ------------------------------ | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                        |                        | December 31,                   |       
|                        |                        |                                |       
|                        |                        | 2004                           |        |        | 2003    |  
|                        |                        |                                |        |        |         |  
|                        |                        | (In thousands)                 |       
|Inventories:            |                        |                                |        |        |         |   |        |       
|                        | Raw materials          |                                | $      | 3,089  |         |   | $      | 3,128  |        
|                        | Work in process        |                                |        | 2,372  |         |   |        | 2,532  |        
|                        | Finished goods         |                                |        | 8,465  |         |   |        | 4,652  |        
|                        |                        |                                |        |        |         |  
|                        |                        | $                              | 13,926 |        |         | $ | 10,312 |       
|                        |                        |                                |        |        |         |  
|Property and equipment: |                        |                                |        |        |         |   |        |       
|                        | Computers and software |                                | $      | 14,641 |         |   | $      | 12,829 |        
|                        | Equipment              |                                |        | 12,820 |         |   |        | 8,574  |        
|                        | Furniture and fixtures |                                |        | 2,178  |         |   |        | 1,250  |        
|                        |                        |                                |        |        |         |  
|                        |                        |                                | 29,639 |        |         |   | 22,653 |       
|                        |                        | Less: accumulated depreciation |        |        | (20,145 | ) |        |        | (15,242 | )
|                        |                        |                                |        |        |         |  
|                        |                        | $                              | 9,494  |        |         | $ | 7,411  |       
|                        |                        |                                |        |        |         |  

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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                     |                                      |                |        |       |      |   |       |       | 
|-------------------- | ------------------------------------ | -------------- | ------ | ----- | ---- | - | ----- | ----- | 
|                     |                                      | December 31,   |       
|                     |                                      |                |       
|                     |                                      | 2004           |        |       | 2003 |  
|                     |                                      |                |        |       |      |  
|                     |                                      | (In thousands) |       
|Accrued liabilities: |                                      |                |        |       |      |   |       |      
|                     | Accrued payroll and related expenses |                | $      | 6,473 |      |   | $     | 2,533 | 
|                     | Restructuring accrual (see Note 3)   |                |        | 1,036 |      |   |       | 1,875 | 
|                     | Accrued legal fees                   |                |        | 910   |      |   |       | 1,137 | 
|                     | Warranty accrual                     |                |        | 351   |      |   |       | 271   | 
|                     | Bonus accrual                        |                |        | 3,122 |      |   |       |      | 
|                     | Other accrued liabilities            |                |        | 1,526 |      |   |       | 2,910 | 
|                     |                                      |                |        |       |      |  
|                     |                                      | $              | 13,418 |       |      | $ | 8,726 |      
|                     |                                      |                |        |       |      |  



|         |             
|-------- | ------------
|NOTE 6  | INCOME TAXES



|                                                  |  |                          |       |   |      |   |        |      |  |   |         |  
|------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                  |  | Years Ended December 31, |      
|                                                  |  |                          |      
|                                                  |  | 2004                     |       |   | 2003 |   |        | 2002 | 
|                                                  |  |                          |       |   |      |   |        |      | 
|Tax provision (benefit) at federal statutory rate |  | $                        | 239   |   |      | $ | (4,355 | )    |  | $ | (14,032 | )
|Nondeductible expenses                            |  |                          | 471   |   |      |   | 3,690  |      |  |   | 6,926   |  
|Tax losses not benefited                          |  |                          | (710  | ) |      |   | 665    |      |  |   | 7,106   |  
|Alternative minimum taxes                         |  |                          | 636   |   |      |   |       |      |  |   |        |  
|Foreign taxes                                     |  |                          | 371   |   |      |   |       |      |  |   |        |  
|                                                  |  |                          |       |   |      |   |        |      | 
|Tax provision                                     |  | $                        | 1,007 |   |      | $ |       |      |  | $ |        |  
|                                                  |  |                          |       |   |      |   |        |      | 

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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |  |              |         |   |      |   |         |  
|------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                     |  | December 31, |        
|                                     |  |              |        
|                                     |  | 2004         |         |   | 2003 |  
|                                     |  |              |         |   |      |  
|Net operating loss carryforwards     |  | $            | 35,099  |   |      | $ | 29,129  |  
|Stock based compensation             |  |              | 13,386  |   |      |   |        |  
|Tax credits                          |  |              | 11,482  |   |      |   | 7,976   |  
|Inventory valuation                  |  |              | 2,833   |   |      |   | 4,301   |  
|Capitalized research and development |  |              | 5,117   |   |      |   | 3,651   |  
|Other items not currently deductible |  |              | 3,687   |   |      |   | 2,274   |  
|                                     |  |              |         |   |      |  
|                                     |  |              | 71,604  |   |      |   | 47,331  |  
|Less: valuation allowance            |  |              | (71,604 | ) |      |   | (47,331 | )
|                                     |  |              |         |   |      |  
|                                     |  | $            |        |   |      | $ |        |  
|                                     |  |              |         |   |      |  











|         |                                  
|-------- | ---------------------------------
|NOTE 7  | DEBT, LEASE AND OTHER OBLIGATIONS





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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |       |  |  |   |     | 
|---------------------------------- |  | ----- | ------ | --------------- | ------ | - | ----- | --------- | --------- | - | --------- |  |  | ------- | ----- |  |  | - | --- | 
|                                   |  |       |        | Payments Due in |       
|                                   |  |       |        |                 |       
|                                   |  |       |        | Less Than       |        |   |       |           | More Than |  
|Contractual Obligations            |  | Total |        |                 | 1 Year |   |       | 1-3 Years |           |   | 3-5 Years |  |  | 5 Years |      
|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |      
|Debt and capital lease obligations |  | $     | 528    |                 |        | $ | 288   |           |           | $ | 240       |  |  | $       |      |  |  | $ |    | 
|Operating lease obligations        |  |       | 9,746  |                 |        |   | 3,155 |           |           |   | 2,818     |  |  |         | 2,900 |  |  |   | 873 | 
|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |      
|Total                              |  | $     | 10,274 |                 |        | $ | 3,443 |           |           | $ | 3,058     |  |  | $       | 2,900 |  |  | $ | 873 | 
|                                   |  |       |        |                 |        |   |       |           |           |   |           |  |  |         |      

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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                     
|-------- | --------------------
|NOTE 8  | STOCKHOLDERS EQUITY



| |               
| | --------------
| | Stock warrants





| |                                                 
| | ------------------------------------------------
| | 1999 Equity Incentive Plan (the 1999
    Plan)











| |                 
| | ----------------
| | Non-plan options



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |            
| | -----------
| | Option Data



|                     |            |                                       |       |                     |                                     |  |     |             |                 |  |      |          |   |          |    |     |              |  |        |        |   |  |           |        |   |  |       |       |   |   |      |       | 
|-------------------- | ---------- | ------------------------------------- | ----- | ------------------- | ----------------------------------- |  | --- | ----------- | --------------- |  | ---- | -------- | - | -------- | -- | --- | ------------ |  | ------ | ------ | - |  | --------- | ------ | - |  | ----- | ----- | - | - | ---- | ----- | 
|                     |            | Options Available for Future Issuance |       |                     | Number of Option Shares Outstanding | 
|                     |            |                                       |       |                     |                                     | 
|                     |            |                                       |       | Non-Stockholder     |                                     |  |     |             |                 |  |     
|                     |            |                                       |       | Approved Plans From |                                     |  |     |             | Non-Stockholder |  |      | Weighted |  
|                     |            |                                       |       | Acquisitions        |                                     |  |     |             | Approved        |  |      | Average  |  
|                     |            | 1995 and                              |       |                     |                                     |  |     | Stockholder |                 |  |      |          |   | Exercise |   
|                     |            | 1999                                  |       |                     | CMD                                 |  |     | SCL         |                 |  | TWN  |          |   | Approved |    |     | Plans From   |  |        | Non-   |   |  | Price per |       
|                     |            | Plans                                 |       |                     | Plan                                |  |     | Plan        |                 |  | Plan |          |   | Plan     |    |     | Acquisitions |  |        | Plan*  |   |  | Share     |       
|                     |            |                                       |       |                     |                                     |  |     |             |                 |  |      |          |   |          |    |     |              |  |        |        |   |  |           |       
|At December 31, 2001 |            |                                       | 63    |                     |                                     |  | 216 |             |                 |  | 105  |          |   |          |   |     |              |  | 10,961 |        |   |  | 7,541     |        |   |  | 2,003 |       |   | $ | 3.56 |      
|                     | Authorized |                                       |       | 3,176               |                                     |  |     |            |                 |  |      |         |   |          |    |    |              |  |        |       |   |  |           |       |   |  |       |      |   |   |      |      | 
|                     | Granted    |                                       |       | (3,053              | )                                   |  |     | (580        | )               |  |      | (101     | ) |          |    |    |              |  |        | 3,053  |   |  |           | 681    |   |  |       |      |   |   |      | 5.15  | 
|                     | Canceled   |                                       |       | 1,000               |                                     |  |     | 632         |                 |  |      | 73       |   |          |    |    |              |  |        | (1,032 | ) |  |           | (710   | ) |  |       | (27   | ) |   |      | 2.26  | 
|                     | Exercised  |                                       |       |                    |                                     |  |     |            |                 |  |      |         |   |          |    |    |              |  |        | (898   | ) |  |           | (1,599 | ) |  |       | (72   | ) |   |      | 4.33  | 
|                     |            |                                       |       |                     |                                     |  |     |             |                 |  |      |          |   |          |    |     |              |  |        |        |   |  |           |       
|At December 31, 2002 |            |                                       | 1,186 |                     |                                     |  | 268 |             |                 |  | 77   |          |   |          |   |     |              |  | 12,084 |        |   |  | 5,913     |        |   |  | 1,904 |       |   |   | 3.96 |      
|                     | Authorized |                                       |       | 3,332               |                                     |  |     |            |                 |  |      |         |   |          |    |    |              |  |        |       |   |  |           |       |   |  |       |      |   |   |      |      | 
|                     | Assumed    |                                       |       |                    |                                     |  |     |            |                 |  |      |         |   |          |    | 162 |              |  |        |       |   |  |           | 632    |   |  |       |      |   |   |      | 1.27  | 
|                     | Granted    |                                       |       | (3,596              | )                                   |  |     | (787        | )               |  |      | (167     | ) |          |    | (64 | )            |  |        | 3,596  |   |  |           | 1,147  |   |  |       | 625   |   |   |      | 5.86  | 
|                     | Canceled   |                                       |       | 1,058               |                                     |  |     | 670         |                 |  |      | 239      |   |          |    |    |              |  |        | (1,058 | ) |  |           | (957   | ) |  |       | (234  | ) |   |      | 3.73  | 
|                     | Exercised  |                                       |       |                    |                                     |  |     |            |                 |  |      |         |   |          |    |    |              |  |        | (1,399 | ) |  |           | (1,752 | ) |  |       | (340  | ) |   |      | 2.64  | 
|                     |            |                                       |       |                     |                                     |  |     |             |                 |  |      |          |   |          |    |     |              |  |        |        |   |  |           |       
|At December 31, 2003 |            |                                       | 1,980 |                     |                                     |  | 151 |             |                 |  | 149  |          |   |          | 98 |     |              |  | 13,223 |        |   |  | 4,983     |        |   |  | 1,955 |       |   |   | 4.63 |      
|                     | Authorized |                                       |       | 3,618               |                                     |  |     |            |                 |  |      |         |   |          |    |    |              |  |        |       |   |  |           |       |   |  |       |      |   |   |      |      | 
|                     | Granted    |                                       |       | (5,264              | )                                   |  |     | (189        | )               |  |      | (264     | ) |          |    | (43 | )            |  |        | 5,264  |   |  |           | 496    |   |  |       | 1,700 |   |   |      | 12.85 | 
|                     | Canceled   |                                       |       | 1,145               |                                     |  |     | 124         |                 |  |      | 169      |   |          |    |    |              |  |        | (1,145 | ) |  |           | (293   | ) |  |       |      |   |   |      | 5.67  | 
|                     | Exercised  |                                       |       |                    |                                     |  |     |            |                 |  |      |         |   |          |    |    |              |  |        | (3,255 | ) |  |           | (1,162 | ) |  |       | (719  | ) |   |      | 4.09  | 
|                     |            |                                       |       |                     |                                     |  |     |             |                 |  |      |          |   |          |    |     |              |  |        |        |   |  |           |       
|At December 31, 2004 |            |                                       | 1,479 |                     |                                     |  | 86  |             |                 |  | 54   |          |   |          | 55 |     |              |  | 14,087 |        |   |  | 4,024     |        |   |  | 2,936 |       |   | $ | 7.61 |      
|                     |            |                                       |       |                     |                                     |  |     |             |                 |  |      |          |   |          |    |     |              |  |        |        |   |  |           |       






|  |                                               
|- | ----------------------------------------------
|* | primarily used as inducements for new officers



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |                     |        |          |                     |   |            |                  |  |                |           |          |  |          |       |  |  |   |       | 
|------------------------ |  | ------------------- | ------ | -------- | ------------------- | - | ---------- | ---------------- |  | -------------- | --------- | -------- |  | -------- | ----- |  |  | - | ----- | 
|                         |  | Options Outstanding |        |          | Options Exercisable |  
|                         |  |                     |        |          |                     |  
|                         |  |                     |        | Weighted |                     |   | Weighted   |                  |  |                |           | Weighted | 
|                         |  |                     |        | Average  |                     |   | Average    |                  |  |                |           | Average  | 
|                         |  | Number of           |        |          | Exercise            |   |            | Remaining        |  |                | Number of |          |  | Exercise |      
|Range of Exercise Prices |  | Shares              |        |          | Price               |   |            | Contractual Life |  |                | Shares    |          |  | Price    |      
|                         |  |                     |        |          |                     |   |            |                  |  |                |           |          |  |          |      
|                         |  | (In thousands)      |        |          |                     |   | (In Years) |                  |  | (In thousands) |           |          | 
|$ 0.06  $ 2.63          |  |                     | 3,173  |          |                     | $ | 1.24       |                  |  |                | 6.65      |          |  |          | 2,083 |  |  | $ | 1.23  | 
|$ 2.73  $ 4.44          |  |                     | 3,445  |          |                     |   | 3.80       |                  |  |                | 6.74      |          |  |          | 1,691 |  |  |   | 3.47  | 
|$ 4.45  $ 5.90          |  |                     | 3,007  |          |                     |   | 5.51       |                  |  |                | 4.28      |          |  |          | 2,188 |  |  |   | 5.55  | 
|$ 5.93  $ 6.58          |  |                     | 3,167  |          |                     |   | 6.21       |                  |  |                | 8.11      |          |  |          | 890   |  |  |   | 6.22  | 
|$ 6.68  $11.69          |  |                     | 3,034  |          |                     |   | 9.65       |                  |  |                | 8.69      |          |  |          | 525   |  |  |   | 9.44  | 
|$11.75  $15.20          |  |                     | 3,544  |          |                     |   | 13.87      |                  |  |                | 9.75      |          |  |          | 63    |  |  |   | 12.77 | 
|$15.91  $26.50          |  |                     | 1,677  |          |                     |   | 16.99      |                  |  |                | 8.14      |          |  |          | 607   |  |  |   | 17.08 | 
|                         |  |                     |        |          |                     |   |            |                  |  |                |           |          |  |          |      
|                         |  |                     | 21,047 |          |                     | $ | 7.61       |                  |  |                | 7.48      |          |  |          | 8,047 |  |  | $ | 5.25  | 
|                         |  |                     |        |          |                     |   |            |                  |  |                |           |          |  |          |      



|                        |  |              |     |   |      |  |     |      |  |  |     |  
|----------------------- |  | ------------ | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                        |  | Year Ended   |    
|                        |  | December 31, |    
|                        |  |              |    
|                        |  | 2004         |     |   | 2003 |  |     | 2002 | 
|                        |  |              |     |   |      |  |     |      | 
|Expected life (years)   |  |              | 5.0 |   |      |  | 5.0 |      |  |  | 5.0 |  
|Risk-free interest rate |  |              | 3.4 | % |      |  | 3.3 | %    |  |  | 3.5 | %
|Dividend yield          |  |              |    |   |      |  |    |      |  |  |    |  
|Expected volatility     |  |              | 90  | % |      |  | 90  | %    |  |  | 90  | %



| |                                  
| | ---------------------------------
| | Stock Option Exchange (Repricing)





| |                             
| | ----------------------------
| | Employee Stock Purchase Plan



94



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                        |  |              |      |   |      |  |      |      |  |  |      |  
|----------------------- |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                        |  | Year Ended   |     
|                        |  | December 31, |     
|                        |  |              |     
|                        |  | 2004         |      |   | 2003 |  |      | 2002 | 
|                        |  |              |      |   |      |  |      |      | 
|Expected life (years)   |  |              | 1.32 |   |      |  | 1.42 |      |  |  | 1.49 |  
|Risk-free interest rate |  |              | 1.2  | % |      |  | 1.5  | %    |  |  | 1.7  | %
|Dividend yield          |  |              |     |   |      |  |     |      |  |  |     |  
|Expected volatility     |  |              | 85   | % |      |  | 90   | %    |  |  | 90   | %



| |                               
| | ------------------------------
| | Option Grants to Non-employees





|         |              
|-------- | -------------
|NOTE 9  | BENEFIT PLANS









|          |                                   
|--------- | ----------------------------------
|NOTE 10  | SEGMENT AND GEOGRAPHIC INFORMATION



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|              |  |                         |         |  |      |   |         |      |  |   |        | 
|------------- |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|              |  | Year Ended December 31, |        
|              |  |                         |        
|              |  | 2004                    |         |  | 2003 |   |         | 2002 | 
|              |  |                         |         |  |      |   |         |      | 
|Taiwan        |  | $                       | 42,715  |  |      | $ | 35,534  |      |  | $ | 27,540 | 
|Japan         |  |                         | 34,620  |  |      |   | 15,980  |      |  |   | 9,585  | 
|United States |  |                         | 48,391  |  |      |   | 27,259  |      |  |   | 22,992 | 
|Hong Kong     |  |                         | 5,243   |  |      |   | 6,025   |      |  |   | 8,853  | 
|Korea         |  |                         | 8,015   |  |      |   | 4,871   |      |  |   | 6,386  | 
|Other         |  |                         | 34,175  |  |      |   | 13,856  |      |  |   | 6,183  | 
|              |  |                         |         |  |      |   |         |      | 
|              |  | $                       | 173,159 |  |      | $ | 103,525 |      |  | $ | 81,539 | 
|              |  |                         |         |  |      |   |         |      | 



|                                     |  |                         |         |  |      |   |         |      |  |   |        | 
|------------------------------------ |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|                                     |  | Year Ended December 31, |        
|                                     |  |                         |        
|                                     |  | 2004                    |         |  | 2003 |   |         | 2002 | 
|                                     |  |                         |         |  |      |   |         |      | 
|PC                                   |  | $                       | 41,223  |  |      | $ | 33,163  |      |  | $ | 47,405 | 
|Consumer Electronics                 |  |                         | 71,377  |  |      |   | 25,762  |      |  |   | 8,993  | 
|Storage products                     |  |                         | 39,750  |  |      |   | 30,410  |      |  |   | 18,486 | 
|Development, licensing and royalties |  |                         | 20,809  |  |      |   | 14,190  |      |  |   | 6,655  | 
|                                     |  |                         |         |  |      |   |         |      | 
|                                     |  | $                       | 173,159 |  |      | $ | 103,525 |      |  | $ | 81,539 | 
|                                     |  |                         |         |  |      |   |         |      | 



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Revenue by product line, including development, licensing and
    royalties, was as follows (in thousands):

|                     |  |                         |         |  |      |   |         |      |  |   |        | 
|-------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|                     |  | Year Ended December 31, |        
|                     |  |                         |        
|                     |  | 2004                    |         |  | 2003 |   |         | 2002 | 
|                     |  |                         |         |  |      |   |         |      | 
|PC                   |  | $                       | 41,585  |  |      | $ | 36,108  |      |  | $ | 51,017 | 
|Consumer Electronics |  |                         | 84,604  |  |      |   | 33,326  |      |  |   | 9,061  | 
|Storage products     |  |                         | 46,970  |  |      |   | 34,091  |      |  |   | 21,461 | 
|                     |  |                         |         |  |      |   |         |      | 
|                     |  | $                       | 173,159 |  |      | $ | 103,525 |      |  | $ | 81,539 | 
|                     |  |                         |         |  |      |   |         |      | 







|          |                  
|--------- | -----------------
|NOTE 11  | LEGAL PROCEEDINGS



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|          |                                      
|--------- | -------------------------------------
|NOTE 12  | UNREALIZED GAIN ON EQUITY INVESTMENTS







|          |                 
|--------- | ----------------
|NOTE 13  | SUBSEQUENT EVENT



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SILICON IMAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




UNAUDITED QUARTERLY FINANCIAL DATA


|                                      |  |                                               |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|------------------------------------- |  | --------------------------------------------- | ------ | - | ------ | - | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|                                      |  | Three Months Ended                            |       
|                                      |  |                                               |       
|                                      |  | Mar 31                                        |        |   | Jun 30 |   |        | Sep 30 |  |   | Dec 31 |  
|                                      |  |                                               |        |   |        |   |        |        |  |   |        |  
|                                      |  | (In thousands, except footnotes and per share |       
|                                      |  | amounts)                                      |       
|2004                                  |  |                                               |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|Total revenue                         |  | $                                             | 35,858 |   |        | $ | 43,361 |        |  | $ | 47,868 |   |  | $ | 46,072 |  
|Gross margin(1)                       |  |                                               | 21,343 |   |        |   | 25,666 |        |  |   | 29,664 |   |  |   | 27,872 |  
|Income (loss) from operations         |  |                                               | (7,627 | ) |        |   | (1,101 | )      |  |   | 8,099  |   |  |   | (332   | )
|Net income (loss)                     |  |                                               | (7,860 | ) |        |   | (262   | )      |  |   | 7,877  |   |  |   | (79    | )
|Net income (loss) per share  basic   |  | $                                             | (0.11  | ) |        | $ | (0.00  | )      |  | $ | 0.11   |   |  | $ | (0.00  | )
|Net income (loss) per share  diluted |  | $                                             | (0.11  | ) |        | $ | (0.00  | )      |  | $ | 0.09   |   |  | $ | (0.00  | )
|Weighted average shares  basic       |  |                                               | 72,328 |   |        |   | 73,352 |        |  |   | 74,976 |   |  |   | 76,774 |  
|Weighted average shares  diluted     |  |                                               | 72,328 |   |        |   | 73,352 |        |  |   | 85,890 |   |  |   | 76,774 |  
|2003                                  |  |                                               |        |   |        |   |        |        |  |   |        |   |  |   |        |  
|Total revenue                         |  | $                                             | 24,676 |   |        | $ | 24,332 |        |  | $ | 24,190 |   |  | $ | 30,327 |  
|Gross margin(2)                       |  |                                               | 13,621 |   |        |   | 13,603 |        |  |   | 12,703 |   |  |   | 16,406 |  
|Loss from operations(3)               |  |                                               | (1,496 | ) |        |   | (8,733 | )      |  |   | (2,135 | ) |  |   | (5,355 | )
|Net income (loss)(4)                  |  |                                               | 3,231  |   |        |   | (8,666 | )      |  |   | (2,095 | ) |  |   | (5,280 | )
|Net income (loss) per share  basic   |  | $                                             | 0.05   |   |        | $ | (0.13  | )      |  | $ | (0.03  | ) |  | $ | (0.07  | )
|Net income (loss) per share  diluted |  | $                                             | 0.04   |   |        | $ | (0.13  | )      |  | $ | (0.03  | ) |  | $ | (0.07  | )
|Weighted average shares  basic       |  |                                               | 66,828 |   |        |   | 69,012 |        |  |   | 69,803 |   |  |   | 70,638 |  
|Weighted average shares  diluted     |  |                                               | 73,696 |   |        |   | 69,012 |        |  |   | 69,803 |   |  |   | 70,638 |  






|    |                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes stock compensation expense (benefit) of
    $1.2 million, $849,000, $(110,000) and $886,000 for the
    three months ended March 31, June 30,
    September 30 and December 31, 2004, respectively.
|   
|(2) | Includes stock compensation expense (benefit) of $(135,000),
    $78,000, $(14,000) and $654,000, for the three months ended
    March 31, June 30, September 30 and
    December 31, 2003, respectively.   
|   
|(3) | Includes restructuring expense of $986,000 in the first quarter
    of 2003, and In-process research and development expense of
    $5.5 million in the second quarter of 2003.                             
|   
|(4) | Includes gain on escrow settlement of $4.6 million in the
    first quarter of 2003.                                                                                                                        

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REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING
FIRM


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




Consolidated financial statements




Internal control over financial reporting


Internal Control  Integrated Framework Internal Control 
Integrated Framework




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SIGNATURES






| |                    
| | -------------------
| | Silicon Image, Inc.



| |     |                 
| | --- | ----------------
| | By: | /s/ Steve Tirado

| |                                                     
| | ----------------------------------------------------
| |                                                     
| | Steve Tirado                                        
| | Chief Executive Officer(Principal Executive Officer)





|                                               |  |                                                                                                          |  |                |  | 
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                      |  | Title                                                                                                    |  | Date          
|                                               |  |                                                                                                          |  |               
|                                              
|/s/ Christopher PaisleyChristopher
    Paisley |  | Chairman of the Board of Directors                                                                       |  | March 15, 2005
|                                              
|/s/ Steve TiradoSteve
    Tirado               |  | Director, President and Chief Executive Officer (Principal
    Executive Officer)                        |  | March 15, 2005
|                                              
|/s/ Robert G. GargusRobert
    G. Gargus       |  | Vice President, Finance and Administration and Chief Financial
    Officer (Principal Financial Officer) |  | March 15, 2005
|                                              
|/s/ Dale BrownDale
    Brown                   |  | Chief Accounting Officer
    (Principal Accounting Officer)                                              |  | March 15, 2005
|                                              
|/s/ David LeeDavid
    Lee                     |  | Director                                                                                                 |  | March 15, 2005
|                                              
|/s/ David A. HodgesDavid
    A. Hodges         |  | Director                                                                                                 |  | March 15, 2005
|                                              
|/s/ Keith McAuliffeKeith
    McAuliffe         |  | Director                                                                                                 |  | March 15, 2005
|                                              
|/s/ David CourtneyDavid
    Courtney           |  | Director                                                                                                 |  | March 15, 2005

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INDEX TO EXHIBITS


|       |    |       |  |                                                                                                                                                                                                                                                                                                                                        
|------ | -- | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Title
|       |    |      
|       | 3  | .01   |  | Second Amended and Restated Certificate of Incorporation of the
    Registrant (Incorporated by reference from Exhibit 3.03 of
    the Registrants Registration Statement on Form S-1
    (File No. 333-83665), as amended, declared effective by the
    Securities and Exchange Commission on October 5, 1999 (the
    Form S-1)).
|       | 3  | .02   |  | Restated Bylaws of the Registrant (Incorporated by reference
    from Exhibit 3.01 of the Form 8-K filed by the
    Registrant on February  4, 2005).                                                                                                                                                                                  
|       | 3  | .03   |  | Certificate of Amendment of Second Amended and Restated
    Certificate of Incorporation of the Registrant (Incorporated by
    reference from Exhibit 3.04 of the Form 10-Q filed by
    Registrant on August 14, 2001).                                                                                                              
|       | 4  | .01   |  | Form of Specimen Certificate for Registrants common stock
    (Incorporated by reference from Exhibit 4.01 of the
    Form S-1).                                                                                                                                                                                                      
|       | 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 certain of its directors and officers. (Incorporated by
    reference from Exhibit 10.01 of the Form 10-K filed by
    the Registrant on March 15, 2004).                                                                                                      
|       | 10 | .02** |  | 1995 Equity Incentive Plan, as amended through July 20,
    1999, and related forms of stock option agreements and stock
    option exercise agreements (Incorporated by reference from
    Exhibit 10.02 of the Form S-1).                                                                                                            
|       | 10 | .03** |  | 1999 Equity Incentive Plan, as amended, and related forms of
    stock option agreements and stock option exercise agreements
    (Incorporated by reference from Exhibit 10.03 of the
    Form 10-K filed by the Registrant on March 15, 2004).                                                                                       
|       | 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).                                                                                                                                                   
|       | 10 | .05** |  | Employment Agreement with Parviz Khodi dated June 10, 1999
    (Incorporated by reference from Exhibit 10.06 of the
    Form S-1).                                                                                                                                                                                                     
|       | 10 | .06** |  | 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 | .07*  |  | 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 | .08*  |  | 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 | .09   |  | 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 | .10** |  | 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 | .11** |  | 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 | .12** |  | 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 | .13** |  | 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 | .14** |  | 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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|       |    |       |       |                                                                                                                                                                                                                                             
|------ | -- | ----- | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |       | Title
|       |    |       |      
|       | 10 | .15** |       | 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 | .16** |       | 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 | .17** |       | 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 | .18** |       | 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 | .19   |       | 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 | .20   |       | Lease Agreement dated December 12, 2002 between iSTAR
    Sunnyvale Partners, L.P. and the Registrant. (Incorporated by
    reference from Exhibit 10.44 of the Form 10-K filed by
    the Registrant on March 27, 2003).                   
|       | 10 | .21** |       | 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 | .22** |       | Letter Agreement between John LeMoncheck and the Registrant
    dated December 3, 2002 (Incorporated by reference from
    Exhibit 10.46 of the Form 10-K filed by the Registrant
    on March 27, 2003).                                   
|       | 10 | .23** |       | Non-Plan Stock Option Agreement between Robert Bagheri and the
    Registrant dated February 20, 2003 (Incorporated by
    reference from Exhibit 10.47 of the Form 10-K filed by
    the Registrant on March 27, 2003).                    
|       | 10 | .24** |       | Letter Agreement between Robert Bagheri and the Registrant dated
    February 11, 2003 (Incorporated by reference from
    Exhibit 10.48 of the Form 10-K filed by the Registrant
    on March 27, 2003).                                   
|       | 10 | .25** |       | TransWarp Networks, Inc. 2002 Stock Option/ Stock Issuance Plan
    (Incorporated by reference from Exhibit 4.06 of the
    Form S-8 filed by the Registrant on May 23, 2003).                                                              
|       | 10 | .26** |       | Bonus Plan for Fiscal Year 2004 (Incorporated by reference from
    Exhibit 10.35 of the Form 10-Q filed by the Registrant
    on May 10, 2004).                                                                                            
|       | 10 | .27** |       | Employment Offer Letter between J. Duane Northcutt and the
    Registrant dated February 19, 2002.                                                                                                                                          
|       | 10 | .28** |       | Employment Offer Letter between Robert Valiton and the
    Registrant dated April 17, 2004 (Incorporated by reference
    from Exhibit 10.01 of the Form 10-Q filed by the
    Registrant on August 9, 2004).                               
|       | 10 | .29** |       | Employment Offer Letter between Dale Brown and the Registrant
    dated April 30, 2004.                                                                                                                                                     
|       | 10 | .30** |       | Amended and Restated Employment Agreement between Robert Gargus
    and the Registrant dated August 17, 2004.                                                                                                                               
|       | 10 | .31** |       | Consulting Agreement between Robert Gargus and the Registrant
    dated August 17, 2004.                                                                                                                                                    
|       | 10 | .32** |       | Employment Offer Letter between Patrick Reutens and the
    Registrant dated September 20, 2004 (Incorporated by
    reference from Exhibit 10.2 of the Form 10-Q filed by
    the Registrant on November 8, 2004).                         
|       | 10 | .33** |       | Letter to Kathy Khodi dated October 6, 2004.                                                                                                                                                                                                
|       | 10 | .34** |       | Employment Offer Letter between Steve Laub and the Registrant
    dated November 11, 2004.                                                                                                                                                  
|       | 10 | .35** |       | Non-Plan Stock Option Agreement between Steve Laub and the
    Registrant dated November 11, 2004.                                                                                                                                          
|       | 10 | .36** |       | Employment Offer Letter between Steve Tirado and the Registrant
    dated January 24, 2005.                                                                                                                                                 
|       | 10 | .37** |       | Employment Offer Letter between Jaime Garcia-Meza and the
    Registrant dated February 8, 2005.                                                                                                                                            

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|       |    |     |       |                                                                                                                                   
|------ | -- | --- | ----- | ----------------------------------------------------------------------------------------------------------------------------------
|Number |    |     | Title
|       |    |     |      
|       | 23 | .01 |       | Consent of Independent Registered Public Accounting Firm.                                                                         
|       | 24 | .01 |       | Power of Attorney (included on signature page).                                                                                   
|       | 31 | .01 |       | Certification under Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                            
|       | 31 | .02 |       | Certification under Section 302 of the Sarbanes-Oxley Act
    of 2002.                                                            
|       | 32 | .01 |       | Certification by pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.
|       | 32 | .02 |       | Certification by pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.






|  |                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Confidential treatment has been requested with respect to
    certain portions of this exhibit. Omitted portions have been
    filed separately with the Securities and Exchange Commission.



|   |                                                                               
|-- | ------------------------------------------------------------------------------
|** | This exhibit is a management contract or compensatory plan or
    arrangement.

106