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

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FORM 10-K

Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended December 31, 2001

Commission file number 000-26887

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Silicon Image, Inc.(Exact name of registrant as specified in its charter)

Delaware(State of incorporation)

77-0396307(IRS employer identification number)


1060 East Arques Avenue
Sunnyvale, CA 94085(Address of principal executive offices and zip code)

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

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

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

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

The
aggregate market value of common shares held by non-affiliates at February 28, 2002 was approximately $396,016,465, based on the last reported sale price of our
common shares on the Nasdaq Stock Market on that date of $6.68 per share. We had 64,605,018 common shares outstanding at February 28, 2002.

Part III
incorporates by reference information from our proxy statement for our annual meeting of stockholders' to be held on May 21, 2002.

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TABLE OF CONTENTS

|PART I                                                   |  |                                                                                       |  |   
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|Item 1                                                   |  | Business                                                                              |  | 1 
|Item 2                                                   |  | Properties                                                                            |  | 13
|Item 3                                                   |  | Legal Proceedings                                                                     |  | 13
|Item 4                                                   |  | Submission of Matters to a Vote of Securities Holders                                 |  | 13
|PART II                                                  |  |                                                                                       |  |   
|Item 5                                                   |  | Market for the Registrant's Common Stock and Related Stockholder Matters              |  | 14
|Item 6                                                   |  | Selected Financial Data                                                               |  | 16
|Item 7                                                   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 17
|Item 7A                                                  |  | Quantitative and Qualitative Disclosure of Market Risk                                |  | 45
|Item 8                                                   |  | Financial Statements and Supplementary Data                                           |  | 46
|Item 9                                                   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 46
|PART III                                                 |  |                                                                                       |  |   
|Item 10                                                  |  | Directors and Executive Officers of the Registrant                                    |  | 46
|Item 11                                                  |  | Executive Compensation                                                                |  | 46
|Item 12                                                  |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 46
|Item 13                                                  |  | Certain Relationships and Related Transactions                                        |  | 46
|PART IV                                                  |  |                                                                                       |  |   
|Item 14                                                  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 47
|Signatures                                               |  | 76                                                                                   
|Power of Attorney                                        |  | 76                                                                                   
|Index to Exhibits Filed Together with this Annual Report |  | 77                                                                                   

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

PART I

Item 1. Business

Silicon Image develops and markets products that move all forms of digital data in a serial manner at high speeds. Our objective is to be a leading provider of
semiconductors that enable high-speed digital communications and optimize cost-per-bandwidth across targeted communications markets. Key elements of our strategy
are to target the personal computing (PC), digital display and consumer electronics (CE) markets, promote open industry standards, drive broad adoption of digital
host-to-display interconnects, increase the intelligence of interconnect displays through highly-integrated transmitters and receivers, and leverage our technology across new
markets such as storage.

Our
point-to-point interfaces, or links, are highly-complex, multi-layered proprietary digital cores that are integrated with application specific features or
functions. Historically, we have either developed application specific features internally or have acquired them through acquisitions. As our products have evolved, we have had to develop new
interface technologies for different applications within our various target markets. These interfaces are the languages that are used to transfer data from device to
device. The most common interfaces in our target markets are analog, DVI (Digital Visual Interface), Parallel ATA, Serial ATA, Fibre Channel, and USB.

We
offer a variety of products for each of these interfaces, including transmitters, receivers, controllers, video processors, serializer/deserializers (SerDes), storage semiconductors,
and a series of redundant array of independent disks, or RAID, controller boards and storage subsystems. RAID controller boards are storage or disk controller cards that provide a very high degree of
reliability and performance in mission critical storage applications and storage subsystems package RAID controller boards with other storage devices.

All
of our products are designed for applications that require high-bandwidth, cost-effective solutions for high-speed data communications. Our
semiconductors provide multi-gigabit data transfer rates that we believe can be applied to multiple mass markets. To date, our primary focus has been on supplying solutions to address the local
interconnect between host systems, such as PCs, set-top boxes and DVD and D-VHS players, and digital displays, such as flat panel displays in the personal computing (PC) market
and digital TVs (DTVs) in the CE market. Our host products enable the transmission of digital video data and our display products enable receipt and manipulation of digital video data. We also offer
digital video processor integrated circuits (ICs) and systems capable of high-quality digital video format conversions for near high-definition viewing.

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In
2001, we applied our high-speed serial link technology to the storage market with the introduction of a 2 gigabits per second (Gbps) Fibre Channel SerDes for application
in Host Bus Adapters (HBA), which connect the PC to the storage device, and storage area network (SAN) switches. Shortly thereafter, through our acquisition of CMD Technology, we significantly
expanded our storage offering to include a full line of Parallel ATA, USB, and RAID controller boards and storage subsystems. Our RAID products are supplemented and supported by controllers and bridge
solutions, which translate data between different interface technologies, for the emerging Serial ATA (SATA) array market and by storage interconnect (Fibre Channel, Serial ATA) semiconductors. In
February 2002, we launched our initial storage product linethe SATALink product familyto address the emerging SATA market. We were the first, and believe that we are
currently the only, company to publicly introduce a fully integrated PCI-to-Serial ATA host controller. One of our SATALink products was included in Intel's motherboard
reference design released in March 2002. We believe that the Serial ATA interface offers a number of benefits over the existing Parallel ATA interface, including higher bandwidth and
scalability and lower voltage. In addition, Serial ATA uses narrower cabling, which reduces the required number of pins, improves system cooling and increases manufacturability. We believe that for a
number of applications, Serial ATA will become a successor to Parallel ATA technology, which is a current standard for communication between PC motherboards and hard disks.

As
of December 31, 2001, we had shipped over 25 million units of our products. We incorporated in California on January 1, 1995 and reincorporated in Delaware in
September 1999.

Markets and Customers

We currently offer products in three markets: personal computing (PC), consumer electronics (CE) and storage. The PC market consists of two host platforms and
four display devices. Host platform devices are PCs and notebook computers. Display devices are CRTs, flat panel monitors, flat panels and projectors. The CE market consists of three host platforms
and a video peripheral. Host platform devices are set-top boxes and DVD and D-VHS players and the video peripheral is a television. The storage market includes Fibre Channel
(Host Bus Adapters (HBA), Switches and RAID controllers) and Serial ATA (PCs and RAID controllers) products along with legacy products for the Parallel ATA and SCSI RAID markets.

We
focus our sales and marketing efforts on achieving design wins with leading original equipment manufacturers (OEMs) of PC and CE products, Fibre Channel SAN switches and HBAs. In most
cases, these OEMs outsource manufacturing functions to third parties. Therefore, once we win a design, we typically work with these third party manufacturers to ready the design for production.
Once the design is complete, we sell our products to these third party manufacturers either directly or indirectly through distributors. In 2001, shipments to Samsung, a Korean customer, and Compaq, a
global customer, each generated 12% of our revenue, and shipments to World Peace International, an Asian distributor, generated 11% of our revenue. In 2000, sales to World Peace International
generated 18% of our total revenue, and sales to Kanematsu, a Japanese distributor, generated 16% of our total revenue. In 1999, sales to Kanematsu generated 17% of our total revenue, sales to World
Peace generated 16% of our total revenue and sales to Microtek, a Japanese distributor, generated 11% of our total revenue. Due to the fact that many OEMs rely on distributors to provide
inventory management and purchasing functions, a substantial portion of our revenue is generated through distributors.

Products

Our industry is characterized by rapid technological advancement. We constantly strive for innovation and to introduce products that address markets or
applications that we previously have not addressed, as well as replacement products that are extensions of existing products and utilize more advanced technology and incorporate new or enhanced
features. When we introduce replacement

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products, we notify our customers in advance, work with them to qualify and migrate to our newer products and place final orders for replaced products, which allows us to eventually discontinue
production and support for our older, less advanced products. We introduced 12 new products in 2001, and expect to introduce 16 to 20 new products in 2002. We may decide to phase out products for
reasons other than new product introductions. Such reasons could include failure of products to achieve market acceptance, changing market conditions and changes in business strategy.

Our
PC and CE products include discrete transmitters for host systems, and discrete and integrated receivers, controllers and processors for displays. Our storage products include
discrete storage ICs, and storage subsystems that incorporate RAID controllers. In 2001, 32% of our revenue was from transmitter products, 38% was from receiver products, 17% was from storage
sub-systems, 8% was from CE products, and 5% was from storage ICs.

In
April 1999, the Digital Display Working Group (DDWG), of which we are a promoter, published the digital visual interface (DVI) specification, which we authored in large part
and which defines a high-speed serial data communication link between computers and digital displays. Our key products are based on our PanelLink® technology and our
highly-integrated PanelLink controller architecture. PanelLink is our proprietary implementation of the DVI specification to provide a high-speed serial digital link between hosts and
displays. PanelLink architecture is our platform for developing controllers that integrate PanelLink receiver technology with additional functionality to enable intelligent displays. Key features of
our solution include a high-speed interface, low cost of system implementation, system-level integration and scalability. Our solution enables customers to introduce digital display
products, thereby eliminating the need for analog technology in both the host system and display. We believe this provides a number of benefits to our customers, including lower component costs, easy
to use "plug and play" products for the end user, better image quality than analog systems, the ability to customize features to differentiate products and shorter design cycles.

PanelLink TransmittersOur PanelLink transmitter products are suitable for host systems, such as PC motherboards, graphics
add-in boards, notebook PCs, set-top boxes, A/V receivers, DVD and D-VHS players. Our PanelLink transmitter products are (* denotes product is being phased out):

|PanelLink Transmitters       
|-----------------------------
|
|SiI 140A*                    
|SiI 150A*                    
|SiI 154*                     
|SiI 160*,
SiI 164 and
SiI 168

Display ProductsWe have three families of display products: PanelLink receivers, PanelLink controllers and Intelligent Panel
Controllers. Our PanelLink receiver products are suitable for display

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systems such as flat panel displays, projectors and digital TVs. Our PanelLink receiver products are (* denotes product is being phased out):

|PanelLink Receivers
|-------------------
|
|SiI 141A* and
141B 
|SiI 151A*          
|SiI 153B           
|SiI 161A* and
161B 

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

|PanelLink Controllers
|---------------------
|
|SiI 861              
|SiI 859              
|SiI 905
and SiI 907B 

Intelligent Panel ControllersOur Intelligent Panel controller products are programmable controllers with integrated timing
controllers that interface directly to the LCD module. These products are suitable for desktop or notebook LCD panels. Our Intelligent Panel controller products are (* denotes product is being
phased out):

|Intelligent Panel Controllers
|-----------------------------
|
|SiI 201*                     
|SiI 211                      
|SiI 221, 223
and 223A        
|SiI 243                      

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

|Digital Video Processors and Processing Systems
|-----------------------------------------------
|
|SiI 503* and 
504                              
|iScan Pro*                                     
|iScan Plus V2*                                 

Fibre Channel SerDesOur Fibre Channel SerDes product, introduced in the third quarter of 2001, is a low-power,
high-quality (low-jitter), cost-effective solution for applications such as HBAs and switches that connect PCs and servers to large storage banks. Our Fibre Channel
product is:

|Fibre Channel SerDes
|--------------------
|
|SiI 2020            

Serial ATA Controllers and BridgesIn February 2002, we announced the first three products from our SATALink product
family. Several customers are currently evaluating these new products and we expect to begin generating revenue from these products in the second half of 2002. We believe that interest is high in our
SATALink products, but to date we have not achieved any design wins, or completed final product development for volume production. The products in our SATALink family include a host controller and two
bridge ICs that are intended to enable customers to begin to incorporate Serial ATA while they transition from Parallel ATA. Our Serial ATA controller and bridge devices are based on the SATA 1.0
specification, which is used to transmit and receive data at a rate of 1.5 Gbps and are:

|Serial ATA Controllers and Bridges
|----------------------------------
|
|SiI 3112                          
|SiI 3610                          
|SiI 3611                          

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Parallel ATA and USB ControllersOur Parallel ATA and USB Controllers serve products incorporating Parallel ATA and USB
interfaces such as motherboards, add-in cards and embedded systems. Our Parallel ATA and USB controller products are:

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

RAID ControllersThese storage boards and subsystems transfer data to and from storage systems at a very high speed while
protecting its integrity based on redundant array of independent disks (RAID). Viper is our second generation product line and Titan is our third generation. These single or dual redundant modules
enable the creation of external storage solutions for storage area networks (SANs) and clustering, a method of combining individual systems for improved processing power and storage capacity. Most
models are available in board level modules for OEMs, as well as canisters and rackmount enclosures for Value Added Resellers (VARs) and Integrators.

Our
RAID controller products are (* denotes product is being phased out):

|RAID Controllers
|----------------
|
|Titan 7400*     
|Titan 7280*     
|Titan 7240*     
|Titan 7220*     
|Titan 7040*     
|Viper II 5330*  
|Viper II 5440*  
|Viper II 5640*  

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Promotion of Industry Standards

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



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



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



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



Silicon Image is working with leading CE OEMs and content providers and distributors to define a digital specification for the CE market. This new
specification will be based on Silicon Image's TMDS technology, the underlying technology for DVI 1.0, and is expected to carry digital audio and video over a single cable. It is expected
that this specification would employ a content protection technology for both video and audio, and include other advanced features necessary for CE applications. We anticipate the new specification to
become a standard digital interface for consumer electronics carrying DTV signals.



During the second quarter of 2000, we acquired Zillion Technologies, a developer of high-speed transmission technology for data storage applications.
Zillion contributed in drafting the preliminary Serial ATA specification (SATA 1.0), which was published in August 2001 and is being promoted as a successor to parallel bus technology. We are a
contributor to the SATA working group, which includes APT, Dell, IBM, Intel, Maxtor, Quantum, Seagate and Western Digital among its promoters. In February 2002, we joined the SATA II Working
Group as a contributor. The SATA II working group is developing a Serial ATA II specification that enhances the existing SATA 1.0 specification for the server and network storage markets and delivers
increased processing speed. The SATA II working group includes many of the same members as the SATA working group.

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

Silicon Image Technology



We invented technology upon which the DVI specification is based and have substantial experience in the design, manufacture and deployment of semiconductor
products incorporating this high-speed data communications technology. We have been shipping our seventh generation of transmitter and receiver products, including
high-bandwidth digital content protection (HDCP) enabled transmitters and receivers, and believe that our experience is a competitive advantage. We are currently developing our eighth
generation transmitter and receiver products. The advanced nature of our high-speed digital design allows us to integrate significant functionality with multiple high-speed
communication channels using industry-standard, low-cost complementary metal oxide semiconductor (CMOS) manufacturing processes. At the core of our innovation is a multi-layered approach
to providing multigigabit semiconductor solutions.

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

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

We
believe our multi-layered design approach affords us the opportunity to create solutions, and potentially standards, in other markets in which complete, cost-effective
high-bandwidth solutions are required. We have developed Multi-layer Serial Link Physical layer (MSL Phy) SerDes technology for this markets. We believe our MSL Phy SerDes technology is
capable of satisfying the requirements of multiple interfaces in the storage market, including Fibre Channel and Serial ATA.



Our PanelLink A/V technology sends high-fidelity digital audio and protected video across the DVI link for use in the PC display and consumer
electronic markets. Combining digital video and digital audio transmissions in a single interconnect system simplifies and reduces the cost of the connection between consumer electronics devices,
while maintaining high-quality and proper protection. PanelLink A/V technology is fully compliant with the DVI 1.0 specification.

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Research and Development

We have assembled a team of engineers and technologists with extensive experience in the areas of high-speed interconnect architecture, circuit
design, digital imaging processor architecture, LCD panels and storage interconnect, software and systems.

From
our inception until 1998, our internal research and development efforts focused primarily on the development of our core PanelLink technology, our initial transmitter and receiver
products, and our first intelligent panel controller product. In 1999, we improved our PanelLink technology and developed
new transmitter and receiver products, focusing on providing both higher speeds and improved ease of use. We also began development of our PanelLink architecture for digital displays. In 2000, we
focused our internal research and development efforts on integrating our PanelLink receiver technology with additional functionality, such as PanelLink A/V and HDCP, for flat panel displays, digital
CRTs and the consumer electronics industry. In 2001, we diversified our research and development efforts by increasing our investment in storage semiconductors and by adding storage system
architecture and software development expertise through our acquisition of CMD.

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

We
have invested, and expect that we will continue to invest, significant funds for research and development activities. Excluding non-cash charges, our research and
development expenses were approximately $25.5 million in 2001, $12.8 million in 2000, and $7.2 million in 1999.

Sales and Marketing

We sell our semiconductor and consumer electronics products to distributors and OEMs throughout the world using a direct sales force, with field offices
located in North America, Taiwan and Europe, and indirectly through a network of distributors and manufacturer's representatives located throughout North America, Asia and Europe. We sell our storage
subsystem products to value-added resellers, systems integrators and OEMs throughout the world using a direct sales force with field offices located in North America, Taiwan and Europe.

Our
sales strategy for all products is to achieve design wins with key industry leaders in order to grow the markets in which we participate and to promote and accelerate the adoption
rate for industry standards we support or are developing, such as DVI and Serial ATA and the digital specification for CE, for our semiconductor and CE products and Enterprise Serial ATA and the
emerging Serial-Attached-SCSI disk interface for our storage subsystems products. Our sales personnel and applications engineers provide a high-level of technical support to
our customers. Our marketing efforts focus primarily on promoting adoption of the DVI specification, participating in industry trade shows and forums, entering into branding relationships to build
awareness of the PanelLink brand and on bringing new solutions to markets involving digital solutions such as digital CRTs, set-top boxes, DVD players, and LCD and plasma digital TVs.

Manufacturing



Our semiconductor products are fabricated using standard CMOS processes, which permit us to engage independent wafer foundries to fabricate our semiconductors. By
outsourcing our manufacturing requirements, we are able to avoid the high cost of owning and operating a semiconductor wafer fabrication facility. This allows us to focus our resources on the design
and quality of our products. Our

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devices are currently fabricated using 0.5 micron, 0.35 micron and 0.18 micron processes. We continuously evaluate the benefits, primarily improved performance, and feasibility of migrating our
products to smaller geometry process technologies. We rely almost entirely on Taiwan Semiconductor Manufacturing Company (TSMC), an outside foundry, to produce all of our host and display-related
semiconductor products. We also rely on other outside foundries such as Kawasaki and Atmel, to produce our storage semiconductor products. We do not have long-term supply agreements with
any of these foundries and therefore cannot be assured of sufficient capacity availability or future prices. Because of the cyclical nature of the semiconductor industry, capacity availability can
change quickly and significantly. We attempt to optimize wafer availability by continuing to use less advanced wafer geometries, such as 0.5 and 0.35 micron, which generally have more available
capacity. Production capacity for semiconductors fabricated using 0.18 micron technology, currently the most advanced technology used in mass production, is somewhat limited. This may affect our
ability to meet demand and could also increase our production costs. We expect that less than 5% of our 2002 revenue will be generated by products that are manufactured using 0.18 micron technology.



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

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



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

Intellectual Property

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our proprietary technologies. As of December 31, 2001, we have been issued 22 United States
patents and have in excess of 120 United States patent applications pending. Our issued patents expire in 2016 or later, subject to our payment of periodic maintenance fees. We cannot assure you that
any valid patent will be issued as a result of any applications or, if issued, that any claims allowed will be sufficiently broad to protect our

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technology. We also generally control access to and distribution of our documentation and other proprietary information. Despite our precautions, it may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents.

Our
participation in the DDWG requires that we grant others the right to use specific elements of our intellectual property in implementing the DVI specification in their products at no
cost, in exchange for an identical right to use specific elements of their intellectual property for this purpose. This reciprocal free license covers the connection between a computer and digital
display. It does not, however, extend to the internal methods by which such performance is created. Although the DVI specification is an open industry standard, we have developed proprietary methods
of implementing the DVI specification. The intellectual property that we have agreed to license defines the logical structure of the interface, such as the number of signal wires, the signaling types,
and the data encoding method for serial communication. Our implementation of this logical structure in integrated circuits remains proprietary, and includes our techniques to convert data to and from
a serial stream, our signal recovery algorithms
and our circuits to reduce electromagnetic interference (EMI). Third parties may develop equivalent or superior implementations of the DVI specification and we cannot guarantee that we will succeed in
protecting our intellectual property rights in our proprietary implementation. Third parties may have infringed or be infringing our intellectual property rights, or may do so in the future, and we
may not discover that fact in a timely or cost-effective manner. Moreover, the cost of pursuing an intellectual property infringement may be greater than any benefit we would realize. We
agreed to grant rights to the adopters of the DVI specification in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual
property law to prevent the adopters of the DVI specification from using certain specific elements of our intellectual property for free.

We
entered into a patent cross-license agreement with Intel in which each of us granted the other a license to use the grantor's patents, including certain future patents, with specific
exclusions related to the grantor's current and anticipated future products, and network devices. This cross-license agreement expires when the last licensed patent expires (anticipated to be no
earlier than 2016), subject to the right of either party to terminate the agreement earlier upon material breach by the other party, or a bankruptcy, insolvency or change of control of the other
party. We have forfeited, however, our ability to rely on intellectual property law to prevent Intel from using our patents within the scope of this license.

The
semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which can result in significant, protracted litigation.

Competition

The markets in which we compete are intensely competitive and are characterized by rapid technological change, evolving standards, short product life cycles and
decreasing prices. We believe that some of the key factors affecting competition in our markets are levels of product integration, compliance with industry standards,
time-to-market, cost, product capabilities, system design costs, intellectual property, customer support and reputation. Our current display products face competition from a
number of sources including analog solutions, DVI-compliant solutions, dual-interface solutions and other digital interface solutions.



11

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

In
the consumer electronics market, our video processor products face competition from products sold by Focus Enhancements, Genesis Microchip, Micronas Semiconductor, Oplus, Phillips
Semiconductor, Pixelworks, and Trident. We also compete in some instances against in-house processing solutions designed by large OEMs.

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

We
expect that our Serial ATA products will compete with similar products from Marvell. In addition, other companies have developed or announced intentions to develop SATA controllers
such as Adaptec, APT, Intel, LSI Logic, Promise and Vitesse. We also may compete against Intel and other motherboard chip-set makers that may integrate SATA functionality into their
chipsets.

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

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

Employees

As of December 31, 2001, we had a total of 266 employees, including 8 located outside of the United States. None of our employees are represented by a
collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. We depend on the continued service of our key technical, sales and
senior management personnel, and our

12

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ability to attract and retain additional qualified personnel. If we are unable to hire and retain qualified personnel, our business would be seriously harmed.

Item 2. Properties

Our principal operating facility, consisting of approximately 50,000 square feet of space in Sunnyvale, California, is leased through July 31, 2003 and
should be adequate to meet our requirements through at least 2002. We also lease approximately 91,000 square feet of space in Irvine, California. We have subleased approximately 8,000 square feet of
space in Irvine, California through July 2003 on conventional terms and are looking to sublease additional space at this facility.

Item 3. Legal Proceedings

On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis
Microchip, Inc. (collectively, Genesis) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the Federal
Suit). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the
importation of articles infringing our patent (the ITC investigation). The actions seek injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our
patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on
February 7, 2002. We filed an amended complaint for the Federal Suit as of February 28, 2002, which Genesis answered and made
counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. We expect that jury selection for trial will begin on
November 15, 2002. Prior to then, we anticipate that discovery and litigation will continue in the Federal Suit, and we intend to defend ourselves vigorously against the counterclaims asserted.

Silicon
Image, certain officers and directors, and Silicon Image's underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et al.,
No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New
York. The lawsuit alleges that all Defendants were part of a scheme to manipulate the price of Silicon Image's stock in the aftermarket following Silicon Image's initial public offering. Response to
the complaint and discovery in this action on behalf of the Company and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over
300 such cases brought by plaintiffs in the Southern District of New York. At this time, Silicon Image cannot opine as to the outcome of this lawsuit, however, Silicon Image intends to defend itself
vigorously.

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

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

None.

13

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PART II

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

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

High

Low2001First Quarter

$
9.25

$
2.53Second Quarter


5.39


2.97Third Quarter


4.85


2.08Fourth Quarter


4.60


1.122000First Quarter


63.06


30.88Second Quarter


38.38


15.06Third Quarter


38.50


21.22Fourth Quarter


21.00


5.061999Fourth Quarter (from October 6, 1999)


37.75


11.69


As
of February 28, 2002, we had approximately 310 holders of record of our common shares and a substantially greater number of beneficial owners.

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

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

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

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Equity Compensation Plans

The following table summarizes our equity compensation plans as of December 31, 2001:

|Plan category                                                 |  | (a)
Number of
securities to be
issued upon
exercise of
outstanding options,
warrants and rights |  | (b)
Weighted-average
exercise price of
outstanding
options, warrants
and rights |      | (c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders(1)     |  | 10,961,000                                                                                      |  | $                                                                               | 4.85 |                                                                                                                                                
|Equity compensation plans not approved by security holders(2) |  | 9,544,000                                                                                       |  |                                                                                 | 2.08 |                                                                                                                                                
|                                                              |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                
|Total                                                         |  | 20,505,000                                                                                      |  | $                                                                               | 3.56 |                                                                                                                                                
|                                                              |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                

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15

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Item 6. Selected Financial Data

The following selected financial data should be read in connection with our consolidated financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. Historical results of operations are not necessarily indicative of future results.

|                                                  |                         | Year Ended December 31, |        
|------------------------------------------------- | ----------------------- | ----------------------- | -------
|
|
|Statement of Operations Data:                     |                         |                         |        
|Revenue                                           |                         | $                       | 51,966 
|Cost of revenue:                                  |                         |                         |        
|                                                  | Absolute dollars(1)     |                         | $      
|                                                  | % of revenue            |                         |        
|Research and development:                         |                         |                         |        
|                                                  | Absolute dollars(2)     |                         | $      
|                                                  | % of revenue            |                         |        
|Selling, general and administrative:              |                         |                         |        
|                                                  | Absolute dollars(3)     |                         | $      
|                                                  | % of revenue            |                         |        
|Net loss from operations                          |                         | $                       | (78,530
|Net loss                                          |                         | $                       | (76,108
|Net loss per share:                               |                         |                         |        
|                                                  | Basic and diluted       |                         | $      
|                                                  | Weighted average shares |                         |        
|Balance Sheet and Other Data:                     |                         |                         |        
|Cash, cash equivalents and short-term investments |                         | $                       | 41,218 
|Working capital                                   |                         | $                       | 36,179 
|Total assets                                      |                         | $                       | 90,162 
|Tangible assets                                   |                         | $                       | 68,534 
|Long-term debt obligations                        |                         | $                       | 819    
|Total stockholders' equity                        |                         | $                       | 67,324 
|Tangible net book value                           |                         | $                       | 45,696 
|Regular full-time employees                       |                         |                         | 266    

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

Overview

Silicon Image designs, develops and markets semiconductors, including transmitters, receivers, controllers and video processors, for applications that require
high-bandwidth, cost-effective solutions for high-speed data communications. Sales of our transmitters, which are used in graphic cards or motherboards, and of our
receivers, which are used in flat panel and other digital displays, generated over 70% of our 2001 revenue and substantially all of our revenue in 2000 and 1999. We saw our market share for receivers
erode during the latter half of 2000 and throughout 2001, as many OEMs began using an integrated dual mode monitor controller, which is a chip that incorporates a digital receiver, a video
scaler, and an analog to digital converter. This dual mode chip has become popular in flat panel displays that are designed to accept both an analog and digital signal. We believe this dual mode
design represents a transitional technology and do not offer an integrated dual mode monitor controller. We continue to sell to flat panel display manufacturers by partnering with other companies to
supply a three chip discrete solution that we believe is cost-effective as compared to the integrated chip solution. We expect to see continued growth in this market, although analyst
projections are that the discrete solution will grow at about half the rate of the integrated controller market. We also remain fully committed to the pure digital solution that is popular in markets
like Japan and currently used in Apple Computer's iMac.

With
respect to transmitters, we have seen additional competition from Thine and Texas Instruments in 2001, but continue to maintain our leading position in the market for discrete
transmitters. We believe that potentially the biggest risk to our market position in this area is the ability of graphic card manufacturers, like ATI, nVidia, and Matrox, to integrate a transmitter
into their graphic chips, thus eliminating the need for our discrete transmitters. We believe this will happen to some degree and that for the next year or two, it will likely be limited to frequency
rates associated with lower resolutions like SGA and XGA. We believe higher resolutions like SXGA and UXGA, particularly associated with larger displays, will continue to require discrete transmitters
during this period because of their ability to deliver the extremely high level of quality required for high resolutions.

The
DVI adoption rate in the computing market reached 6% during the third quarter of 2001, and is expected to increase significantly over the next two years, according to Display Search,
an independent
research firm. This increase, combined with growth in personal computers in general, could result in growth rates for overall sales in the market for DVI-compliant ICs that are in excess
of semiconductor industry averages.

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

In
the third quarter of 1997, we began volume shipments of our first generation PanelLink digital transmitter and receiver products. Since that time, we have derived most of our revenue
from the sale of PanelLink products and we have introduced several new generations of transmitter and receiver products providing higher speed and increased functionality. In 1999, we began shipping
our first generation digital display controller product. Our digital display controller products integrate our receiver with digital image processing and display controller technology, providing a
solution to enable intelligent displays for the mass-market.

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In
October 1999, we raised approximately $48 million in our initial public offering. We have incurred losses in each year since our inception and at December 31,
2001, we had an accumulated deficit of $119.8 million.

In
2000, we began focusing our resources on entering two new marketsstorage and consumer electronics. These are emerging markets that play well to our core competencies of
high-speed intelligent serial interfaces and are projected to experience significant growth rates over the next three years.

Acquisitions

In 2001 and 2000, we made four strategic acquisitions that were directed at diversifying our product offerings and accelerating our entrance into the storage and
consumer electronics markets. In 2000, we acquired Zillion, a developer of high-speed transmission technology for data storage applications, and DVDO, a provider of digital video
processing systems for the consumer electronics industry. In 2001, we acquired CMD Technology (CMD), a provider of storage subsystems and semiconductors designed for storage area networks, and Silicon
Communication Lab (SCL), a provider of mixed-signal and
high-speed circuit designs, including analog-to-digital converters. We will continue to consider acquisitions that we believe can strengthen our business.

Year 2001

2001 was a transition year for Silicon Image as evidenced by the following:

First,
we have refocused by clearly delineating those products and markets we wish to pursue. We have decided not to enter less promising markets like the integrated dual mode monitor
controller market. Instead, we chose to accelerate our entry into the storage and consumer electronics markets, where we believe there is a greater growth opportunity. In the storage market, we are
concentrating on product offerings for 2 Gigabit Fibre Channel, Serial ATA, and Serial-Attached SCSI interfaces and in February 2002, we announced our initial product for the storage market,
becoming the first, and currently the only, company to offer a fully integrated PCI-to-Serial ATA host controller. In the consumer electronics market, we are leading the
development of and hope to gain adoption of a new standard for the high-speed serial connection of DVD players, digital TVs, set-top boxes and other consumer devices.

Second,
we completed a restructuring to improve our profitability. In October 2001, we announced a program to refocus on products and technology in which we believe we can achieve
a leadership position. In particular, we intend to concentrate on our discrete transmitter and receiver products for personal computers and flat panel displays, developing products and establishing an
industry standard for the consumer electronics market, and developing new products for the storage market. In connection with this restructuring, certain products will be phased out or
de-emphasized and certain R&D projects, including certain digital video processing projects, will no longer be funded. As a result of these actions, the prevailing economic and industry
conditions, and the departure of certain key DVDO employees, we recorded an intangible asset impairment expense of $13.9 million, and reversed $1.2 million of unearned compensation, a
component of stockholders' equity, during the third quarter. In connection with this program, and as a result of the planned integration of recently acquired companies, we announced that we would be
reducing our workforce by approximately 60 people. We incurred cash and non-cash expenses of $1.1 million and $353,000, respectively, related to this workforce reduction. The
purpose of this downsizing was to better balance our spending and projected revenue, but we also took into account the resources that will be required in 2002 to increase our presence in the storage
and consumer electronics markets. We believe our operating expenses will continue to remain high as a percentage of revenue, but expect to lower this percentage over the next several years. Our plan
is to control operating expenses, excluding stock compensation and warrant

18

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expense, amortization and impairment of goodwill and intangible assets, in-process research and development, restructuring and patent defense and acquisition integration costs, with a
goal of reaching 36% of revenue over the next several years.

In
June 2001, we completed our acquisition of CMD, which added several key ingredients to our storage strategy. CMD provided us with sales channels, board manufacturing
capability, drivers and basic input/output services (BIOS) capability, RAID software, and storage system architecture expertise to add to our own high-speed intelligent serial interface
technologies. During 2002, we will place less emphasis on the storage subsystems and board business by phasing out older products and focusing on products only if they facilitate or accelerate the use
of our core IC technology. This strategic decision was made in the fourth quarter due to reduced revenue expectations for the storage subsystem and board products. As a result, the projected revenue
associated with CMD products was lowered from our initial projections and an intangible asset impairment expense of $16.0 million was recorded.

We
have also decided to leverage our intellectual property portfolio by licensing our technology to companies that participate in markets we have chosen not to pursue. We signed our
first two license deals during the first quarter of 2002 and expect to sign several others over time.

These
measures are all part of a clear focus to drive to profitability, and late in 2001, we began to see the benefit of these actions. Our product introductions increased to 4 for each
of the third and fourth quarters, from a total of 4 during the first six months of 2001. Fourth quarter revenue grew 10% sequentially, transmitter revenue increased 16%, display and receiver revenue
increased 24%, and we entered the first quarter of 2002 with much better revenue visibility. Our improved operational performance, combined with design wins for our new Fibre Channel products and an
increased number of new products, gives us a lot of optimism for 2002.

Outlook

We expect double-digit revenue growth in 2002 compared to 2001 and believe our revenue in the first quarter of 2002 will be approximately $16.5 million,
which would be 7% growth from the fourth quarter of 2001 and 58% growth from revenue of $10.5 million in the year ago quarter. We anticipate overall increased unit volume as we focus on
high-growth markets and introduce new products throughout the year. Due to a shift in product mix and the competition faced by our existing products, we expect decreases in our average
selling prices to partially offset this anticipated increase in unit volume. Also contributing to this anticipated increase in revenue is our new strategy of licensing our technology to companies
competing in markets that we do not address. We expect that licensing may contribute up to $3.0 million of revenue in 2002. We signed our first two license deals during the first quarter of
2002; however, there can be no assurance that additional companies will be interested in licensing our PanelLink core on commercially favorable terms or at all.

Our
expectation of revenue growth in 2002 is based on four assumptions. First, a projected increase in the adoption rate of DVI in the PC market. Display Search, an independent research
firm, forecasts the adoption rate to increase from approximately 6% in the third quarter of 2001 to around 10% by the fourth quarter of 2002. Second, we achieved several design wins in the Fibre
Channel market late in 2001. While it is difficult to predict exactly when and how aggressively revenue from these products will ramp during 2002, our expectation is that we will begin to generate
revenue from these products in the first half of 2002 and that this revenue will grow quarter-over-quarter throughout the remainder of 2002. Third, the release of our SATALink
product family should allow us to win several motherboard
designs that could begin to ship in the second half of 2002. We believe that interest is high in our recently announced SATALink products. Several potential customers are currently evaluating these
products, but to date we have not achieved any design wins. Fourth, DVI is beginning to be utilized in various CE products like DVD players, TVs, and set-top boxes. We have won some
designs already and expect to win more throughout the year.

19

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Factors
that may cause our actual results to differ materially from those anticipated by our assumptions include the rate at which OEMs adopt DVI, consumer demand in the PC and CE
markets, whether and how quickly OEMs use integrated transmitters rather than our discrete transmitters, and our ability to achieve design wins in the CE and storage markets and the rate at
which new interfaces, such as Serial ATA and Fibre Channel, are adopted by OEMs. In addition, the amount and timing of any revenue from new products for the CE and storage markets, including
our recently announced SATALink products, will depend on our ability to achieve design wins with OEMs for these new products, and will be affected by any delays in our completion of product
development and by the ability of a semiconductor foundry to manufacture these products in commercial volumes at an acceptable yield and cost. In addition, our future revenue remains dependent on
general economic and market conditions and will be affected by competition, including competition from integrated transmitter and storage products. We cannot predict the duration or severity of the
current downturn in the PC and display market, or in the general economy, or their effect on our revenue and operating results.

We
expect that our gross margin may decrease somewhat from 2001 levels as a result of increased competition and shifts in product mix, offset somewhat by higher margins on new products
and licensing.

Excluding
non-cash charges for stock compensation and warrant expense, we expect the dollar amount of our R&D expense to increase by approximately 15% in 2002. R&D expense
will be incurred for further enhancements to existing products and for development of technology related to consumer electronics and storage applications. Excluding non-cash charges for
stock compensation and warrant expense, we expect SG&A expense for 2002 to approximate 2001 SG&A expense. Our plan is to control operating expenses, excluding stock compensation and warrant expense,
amortization and impairment of goodwill and intangible assets, in-process research and development, restructuring and patent defense and acquisition integration costs, with a goal of
reaching 36% of revenue over the next several years.

Based
on these expectations and assumptions, we anticipate achieving breakeven results on a quarterly basis, excluding charges for amortization and possible impairment of goodwill and
intangible assets, stock compensation and warrant expense, in-process research and development expense, patent defense costs, restructuring costs, and acquisition integration costs, before
the end of the 2002. This optimism is tempered by market conditions that remain volatile, the increasing level of competition in our markets, our dependence on market acceptance of planned new
products and the fact that an economic recovery is not assured.

Commitments, Contingencies and Concentrations

We will incur substantial non-cash stock compensation expense in future periods as a result of the issuance of, or modifications to, restricted stock
awards and stock option grants to employees and consultants, as well as the stock option exchange program we implemented in 2000 and 2001. We may also incur non-cash stock compensation
expense in connection with future acquisitions. The amount of stock compensation expense in each period will fluctuate with changes in our stock price and volatility. We will also incur
non-cash expenses in future periods for the amortization of intangible assets and may also incur non-cash expenses for the impairment of intangible assets.

In
September 1998, we entered into an agreement with Intel to develop and promote the adoption of a digital display interface specification. In connection with this agreement, we
granted Intel a warrant to purchase 285,714 shares of our common stock at $1.75 per share. Under the same agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $0.18
per share upon achievement of a specified milestone that was reached during the first quarter of 1999. Both of these warrants were exercised in May 2001. We recorded expense of $346,000 in 1998
and

20

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$595,000 in 1999 associated with these warrants. Additionally, if a second specified milestone is achieved, which we do not believe is likely, we would be required to grant Intel a third warrant to
purchase 285,714 shares of our common stock at $0.18 per share. Upon issuance of the third warrant, we would record an expense equal to its fair value, which was estimated to be $1.0 million at
December 31, 2001.

Historically,
a relatively small number of customers and distributors have generated a significant portion of our revenue. Our top five customers, including distributors, generated 51%,
57%, and 59% of our revenue in 2001, 2000, and 1999, respectively. The percentage of revenue generated through distributors tends to be significant, since many OEM's rely upon third party
manufacturers or distributors to provide inventory management and purchasing functions, and was 40% of revenue in 2001, compared to 66% in 2000 and 61% in 1999. We expect the percentage of revenue
generated through distributors to return to levels consistent with prior years in 2002 as our IC business grows.

A
significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, generated 64%, 71%, and 84% of our revenue in 2001,
2000, and 1999, respectively. The reason for our geographical concentration in Asia is that our products are part of flat panel displays, graphic cards and mother boards, the majority of which are
produced in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our geographic
revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has been
denominated in U.S. dollars.

Substantially
all of our sales are made on the basis of purchase orders, rather than long-term agreements. The sales cycle for our products is long, which may cause a delay
between the time we incur expenses and the time we generate revenue from these expenditures. The rate of product orders can vary significantly from quarter to quarter. Consequently, if anticipated
sales and shipments in any quarter do not occur when expected, expenses could be disproportionately high, seriously harming our operating results for that quarter and, potentially, future quarters.

Subsequent Events

During the fourth quarter of 2001, we decided to place less emphasis on our storage subsystems and board business. As a result, we will phase out our older
products and develop new board products only if we believe it will facilitate or accelerate the use of our ICs in the storage market. Additionally, we decided to outsource all manufacturing of board
products. As a result of these decisions, and in order to better align our cost structure with our anticipated revenue, we implemented a plan to reduce our workforce by approximately 35 people, or 13%
of our total workforce, in February 2002. We will record a restructuring expense in the first quarter of 2002 for the costs associated with this workforce reduction. We are still finalizing the
details of the restructuring actions and cannot estimate the amount of the expense at this time.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are
relevant. Actual results may differ materially from our estimates. We believe the following accounting policies are critical, either because

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they relate to financial statement line items that are key indicators of our financial performance (e.g., revenue) and/or because their application requires significant management judgment:



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

For
sales to distributors with agreements allowing for price concessions and product returns, we recognize revenue at the time we estimate the distributor sells the product to its end
customer. Revenue is not recognized upon shipment since, due to various forms of price concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these
distributors have contractual rights to return products, up to a specified amount for a given period of time. Revenue is recognized when the distributor sells the product to an end-user,
at which time the sales price becomes fixed. Pursuant to these agreements, older or end-of-life products are sold with no right of return and are not eligible for price
concessions. In these cases, revenue is recognized upon shipment.

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

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



We review accounts receivable and provide a reserve for amounts we estimate will not be collectible. During our review, we consider our historical experience, the
age of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency. Write-offs to date have been minimal. At December 31, 2001, we had
$7.9 million of accounts receivable and an allowance for doubtful accounts of $450,000.



We record inventories at the lower of standard cost, determined on a first-in first-out basis, or market. Standard cost is our estimate of
actual cost. Standard costs are determined based on our estimate of material costs, manufacturing yields and costs to assemble, test and package our products. We review differences between standard
and actual costs, and, based on the nature of the difference,

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determine whether to record the amount on our balance sheet or in our statement of operations. Standard costs are revised at least twice each year.

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



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

For
certain long-lived assets, primarily fixed assets and goodwill and intangible assets, we are required to estimate the useful life of the asset and recognize its cost as
an expense over the useful life. We use the straight-line method to expense long-lived assets, which results in an equal amount of expense in each period. Additionally,
pursuant to applicable accounting rules, we periodically assess whether long-lived assets have been impaired. We deem an asset to be impaired if its estimated fair value is less than the
cost at which it is recorded on our balance sheet. Our estimate of fair value is based on the net present value of expected future cash flows attributable to the asset. Predicting future cash flows
attributable to a particular asset is difficult, and requires the use of significant judgment. At December 31, 2001, we had $30.3 million of long-lived assets recorded on our
balance sheet.



We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to
their estimated realizable value. Therefore, we provide a valuation allowance to the extent we do not believe it is likely that we will generate sufficient taxable income in future periods to realize
the benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. At December 31, 2001, we had net operating loss
carryforwards for federal and state income tax purposes of approximately $31.3 million and $10.4 million, respectively, that were fully reserved and therefore are not recorded on our
balance sheet as an asset.



Certain of our accrued liabilities are based largely on estimates. For instance, we record a liability on our balance sheet each period for the estimated cost of
goods and services rendered to us, for which we have not received an invoice. Additionally, a component of our restructuring reserve related to a loss we expect to incur for excess leased facility
space is based on numerous assumptions and estimates, such as the market value of the space and the time it will take to sublease the space. Our estimates are

23

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based on historical experience, input from sources outside the company, and other relevant facts and circumstances.



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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141 (SFAS No. 141), Business Combinations, and Statement
No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the
purchase method and establishes criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 142 requires goodwill and certain intangible assets to no
longer be amortized to expense, but instead be subject to periodic testing for impairment. SFAS No. 142 is effective for our fiscal year beginning on January 1, 2002, except for the
amortization and non-amortization provisions, which apply to all acquisitions subsequent to June 30, 2001. In accordance with SFAS No. 142, beginning January 1, 2002,
we will no longer amortize goodwill or the value of previously acquired assembled workforces. At December 31, 2001, we had $21.6 million of goodwill and intangible assets recorded on our
balance sheet, $17.3 million of which is goodwill and assembled workforces. For 2001 and 2000, we recorded goodwill and intangible asset amortization expense of $14.1 million and
$4.4 million, respectively, representing 13.4% and 7.5% of our total operating expenses. We expect to record intangible asset amortization expense of approximately $3.3 million in 2002,
assuming such assets do not become impaired and no other acquisitions are made.

In
October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of Accounting Principles Board
("APB") No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including amortizable and non-amortizable
intangible assets, and is effective for our fiscal year beginning on January 1, 2002, as well as for interim periods within 2002. We do not expect the adoption of SFAS No. 144 to have a
material effect on our results of operations or financial position.

In
November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products." This EITF requires us to record certain consideration paid to distributors of our products as a reduction of revenue, whereas we previously recorded this
consideration as a sales and marketing expense. Since application of this EITF results in a reclassification of costs, it will not have a material effect on our results of operations or financial
position. Furthermore, we do not consider past consideration to be material and will therefore not reclassify the amount for financial reporting purposes.

24

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Annual Results of Operations

Revenue.Revenue was $52.0 million for 2001, an increase of 3.9% from $50.0 million for 2000. This increase was
primarily the result of our acquisition of CMD, which contributed $10.6 million of our 2001 revenue. Without CMD, our revenue would have been $41.4 million, a decrease of 17.4% from
2000. This decrease was primarily the result of a 7% decrease in unit demand and to a lesser extent, lower average selling prices. Weaker demand was largely attributable to a semiconductor industry
downturn that began in the fourth quarter of 2000. To a lesser extent, increased competition, including competition from some customers incorporating dual-mode controllers, a device we do
not sell, has reduced demand for our digital receiver products and led to decreases in our average selling prices.

Revenue
was $50.0 million for 2000, an increase of 135.5% from $21.2 million for 1999. This increase was driven primarily by strong demand for digitally enabled host
systems and displays, as evidenced by a 121% increase in unit shipments. New product introductions and slightly higher average selling prices, resulting primarily from a shift in product mix, also
contributed to our higher revenue level in 2000.

Cost of revenue.Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well
as related overhead costs. Gross margin (revenue minus cost of revenue, as a percentage of revenue), excluding non-cash charges, decreased to 51.8% for 2001 from 62.4% for 2000. The
decrease in gross margin from 2000 to 2001 was primarily due to the effect of lower volume and average selling prices during 2001 and to a lesser extent, the acquisition of CMD which has lower margin
board products. Excluding $575,000 of revenue from licensing in 1999, which has no associated cost, gross margin increased from 61.4% to 62.4% in 2000. This increase from 1999 to 2000 was due
primarily to higher revenue, resulting in lower overhead costs as a percentage of revenue, and slightly higher average selling prices, partially offset by higher unit product costs resulting from a
shift in product mix. Cost of revenue excludes non-cash stock compensation and warrant expense of $279,000, $593,000 and $609,000 for 2001, 2000 and 1999, respectively. Including stock
compensation and warrant expense, our product gross margin would have been 51.2%, 61.2% and 59.5% for 2001, 2000 and 1999, respectively.

Research and Development.R&D consists primarily of compensation and related costs for employees, fees for independent
contractors and prototypes. R&D, excluding non-cash stock compensation and warrant expense, was $25.5 million, or 49.0% of revenue, for 2001, $12.8 million, or 25.6% of
revenue, for 2000, and $7.2 million, or 33.7% of revenue, for 1999. The increase in absolute dollars in 2001 was primarily due to additional personnel and acquisitions of CMD and SCL. These
acquisitions accounted for $5.1 million of the $12.7 million expense increase from 2000. Increased R&D expense as a percentage of revenue in 2001 reflected our intentional investment to
gain initial penetration into the storage and consumer electronics markets. The increase in absolute dollars in 2000 was primarily due to increasing the number of our research and development
employees by 52%, and to a lesser extent, increased costs associated with integrating our receiver technology with additional functionality and developing DVI with HDCP, PanelLink A/V and technology
related to consumer electronics and storage applications. R&D excludes non-cash stock compensation and warrant expense of $9.3 million, $10.2 million, and $2.5 million
for 2001, 2000, and 1999, respectively. Including stock compensation and
warrant expense, R&D would have been $34.8 million, $23.0 million, and $9.7 million, or 67.0%, 46.0%, and 45.5%, of revenue for 2001, 2000, and 1999, respectively.

Selling, General and Administrative.SG&A consists primarily of employee compensation and benefits, sales commissions, and
marketing and promotional expenses. Excluding non-cash stock compensation and warrant expense, SG&A was $18.8 million, or 36.1% of revenue for 2001, $18.9 million, or 37.8%
of revenue, for 2000, and $8.1 million, or 38.2% of revenue, for 1999. The CMD and SCL acquisitions contributed $3.3 million of additional SG&A expense in 2001, which was

25

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offset by the effects of our headcount reduction and lower advertising expenses. Increased SG&A expense as a percentage of revenue in 2001 was a reflection of our intentional investment to gain
initial penetration into the storage and consumer electronics markets. A substantial portion of the increase in SG&A from 1999 to 2000 was due to an increase in staffing levels of 83% and to a lesser
extent, expanded sales and marketing activities to support new product introductions, the broadening of our customer and product base, and increased sales commissions resulting from higher revenue and
more sales personnel. SG&A excludes non-cash stock compensation and warrant expense of $2.8 million for both 2001 and 2000, and $3.5 million for 1999. Including stock
compensation and warrant expense, SG&A expense would have been $21.6 million, $21.7 million, and $11.6 million, or 41.5%, 43.4%, and 54.7% of revenue for 2001, 2000, and 1999,
respectively.

Stock Compensation and Warrant Expense.Stock compensation and warrant expense was $12.4 million, or 23.8% of revenue
for 2001, $13.6 million, or 27.2% of revenue, for 2000, and $6.7 million, or 31.4% of revenue, for 1999. The decrease in expense from 2000 to 2001 can be attributed primarily to our use
of the accelerated method for recognizing expense for certain grants to employees, which results in a higher proportion of the expense being recognized in the initial year of grant. Additionally, our
average stock price was lower during 2001, which also affects the amount of expense we recognized for certain options. Those decreases were partially offset by expense of $4.2 million
associated with our acquisitions of CMD and SCL. The increase in 2000 was due to our acquisitions of DVDO and Zillion, and our higher stock price. In 1999, an expense of $595,000 associated with the
achievement of a milestone on a warrant issued to Intel was recorded. The following table summarizes the components of our stock compensation and warrant expense for 2001, 2000 and 1999 (in
thousands).

Year Ended December 31,2001

2000

1999Options granted prior to our initial public offering

$
2,643

$
4,394

$
5,332Options granted to consultants


2,322


4,693


751Option repricing








Options assumed in connection with acquisitions


7,425


4,529


Warrant issuance








595$
12,390

$
13,616

$
6,678


Our
unearned compensation balance of $7.1 million at December 31, 2001 will be amortized to expense over the next two yearsapproximately $5.6 million in
2002 and $1.5 million in 2003. This amortization will be one component of our stock compensation and warrant expense.

We
will incur substantial non-cash stock compensation expense in future periods as a result of (1) the issuance of, or modifications to, restricted stock awards and
stock option grants to employees and consultants, (2) the repricing programs we implemented in 2000 and 2001, and (3) amortization of our existing unearned compensation balance. Since
the expense associated with our option repricing and grants to consultants is tied to our stock price and volatility, stock compensation expense will fluctuate from period to period and may increase
significantly. Although we have not recognized any expense in connection with the option repricing to date, this may become a significant component of our stock compensation expense in future periods
if our weighted average stock price exceeds the exercise price of these repriced options ($5.63). Approximately 4.5 million of the 20.5 million options outstanding as of
December 31, 2001 were repriced options.

Amortization of Goodwill and Intangible Assets.For 2001, we recorded $14.1 million of expense for the amortization of
goodwill and intangible assets recorded in connection with our acquisitions. This compares to expense of $4.4 million for 2000. The increase in 2001 can be attributed to additional acquisitions
in 2001, and to a full year of expense recorded in 2001, versus a partial year in 2000, for

26

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the acquisitions we completed in 2000. Due to our adoption of SFAS No. 142 on January 1, 2002, we expect intangible asset amortization expense to decrease to approximately
$3.3 million in 2002, assuming such assets do not become impaired and no other acquisitions are made.

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



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

Revenue
for Titan 2U was expected to commence in the fourth quarter of 2001 and to extend through 2003. Revenue for IDE Ultra-680 was expected to commence in the fourth
quarter of 2001 and extend through 2004, and revenue for both Titan.next and SANBox was expected to commence in 2002 and extend through 2005.We based
our revenue projections on estimates of market size and growth, expected trends in technology and the expected timing of new product introductions by our competitors and us. The discount rate used for
all projects was 25%, a rate that is consistent with the estimated rates of return on our intangible assets. This rate is higher than the industry weighted average cost of capital because of the risks
associated with the inherent uncertainties of the successful development of the in-process research and development, market acceptance of the technology, the useful life of the technology,
the profitability level of such technology and the uncertainty of technological advances.

The
percentage of completion for each project was determined based on research and development expenses incurred immediately prior to the acquisition as a percentage of total estimated
research and development expenses to bring each project to technological feasibility. As of June 30, 2001, we estimated that Titan 2U was 25% complete with total projected costs of
$164,000,that Titan.next was 15% complete with total projected costs of $200,000, that SANBox was 10% complete with total projected costs of $150,000
and that IDE Ultra-680 was 85% complete with total projected costs of $500,000. Consistent with our projections, revenue related to Titan 2U and IDE Ultra-680 commenced
in the fourth of quarter of 2001 and revenue for Titan.next and SANBox is expected to commence in 2002.



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

27

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

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

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

Impairment of Goodwill and Intangible Assets.For 2001, we recorded $29.9 million of expense for the impairment of
goodwill and intangible assets recorded in connection with the acquisitions of DVDO and CMD. DVDO goodwill and intangible assets became impaired primarily as a result of our decision to phase out or
de-emphasize certain existing digital video processing products and to cease funding of certain digital video processing development projects. Additionally, prevailing economic and
industry conditions and the departure of certain key DVDO employees during the quarter ended September 30, 2001 also contributed to the impairment expense of $13.9 million. We recorded
impairment expense of $16.0 million in the fourth quarter of 2001 related to goodwill and intangible assets recorded in connection with our CMD acquisition. This impairment resulted primarily
from a decrease in our initial estimate of future revenue from CMD's products.

Restructuring.During the quarter ended December 31, 2001, we reduced our workforce by approximately 60 people in
connection with our plan to focus on products and technology in which we have, or believe we can achieve, a leadership position, and as a result of the continued integration of recently acquired
companies. In connection with these actions, we recorded a restructuring expense of $1.5 million, consisting of severance related costs of $902,000, including $303,000 for the intrinsic value
of modified stock options, an expected loss on leased facilities of $500,000, and a fixed asset write-down of $50,000. We estimate that this restructuring will eliminate approximately
$5.5 million of annual operating expenses. We operate in a cyclical industry and have acquired a number of companies, each of which can necessitate workforce reductions and create excess
building capacity. We do not consider restructuring actions to be one-time events, but do expect them to occur infrequently. The following table sets forth the restructuring reserves as of
October 9, 2001, the effective date of the restructuring, and activity against the reserve through December 31, 2001 (in thousands). All cash payments are expected to be complete by the
fourth quarter of 2002.

Balance
Oct 9, 2001

Utilized

Balance
Dec 31, 2001Severance costs

$
599

$
(191
)
$
408Non-cash intrinsic value of modified stock options


303


(303
)

Estimated loss on building sublease


500


(115
)

385Non-cash fixed asset write-down


50





50$
1,452

$
(609
)
$
843


28

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Patent defense and acquisition integration costs.Patent defense and acquisition integration costs were $1.8 million
for 2001. Patent defense costs are related to the lawsuit we filed against Genesis Microchip in April 2001, and acquisition integration costs represent costs incurred to integrate CMD and SCL.
We do not expect to incur additional integration costs for CMD and SCL, but do expect to incur patent defense costs at least until the middle of 2003.

Interest Income.Interest income decreased to $2.7 million for 2001, from $4.1 million for 2000, and increased
from $1.3 million for 1999. These changes were primarily due to changes in interest rates and average cash and investment balances.

Interest Expense and Other Net.Interest expense and other, net increased to $309,000 for 2001 from $112,000 for 2000, and
from $174,000 for 1999. The increase from 2000 to 2001 resulted from the assumption of a bank loan in the acquisition of CMD. The decrease from 1999 to 2000 resulted from repayment of our line of
credit borrowings in the fourth quarter of 1999.

Provision for Income Taxes.No provision for income taxes was recorded for 2001 or 1999. Our provision for income taxes for
2000 was equal to 10.5% of our net income before taxes and non-cash charges, including in-process research and development, amortization of goodwill and intangible assets and
stock compensation and warrant expense.

At
December 31, 2001, we had net operating loss carryforwards for federal and state income tax purposes of approximately $31.3 million and $10.4 million,
respectively, that expire through 2021. These future tax benefits have not been recognized as an asset on our balance sheet due to uncertainties surrounding our ability to generate sufficient taxable
income in future periods to realize the benefits. Under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating loss carryforwards may be restricted or limited in certain
circumstances. We do not expect to be subject to these restrictions or limitations.

Liquidity and Capital Resources

Since our inception, we have financed our operations through a combination of private sales of convertible preferred stock, our initial public offering, lines of
credit and capital lease financing. At December 31, 2001, we had $36.2 million in working capital and $41.2 million in cash, cash equivalents and short-term
investments.

Operating
activities used $14.2 million of cash during 2001, generated $3.4 million of cash during 2000, and used $491,000 of cash during 1999. During 2001, net loss
excluding depreciation, stock compensation and warrant expense, amortization and impairment of goodwill and intangible assets, in-process research and development and non-cash
restructuring charges was $15.1 million. Inventories and accounts receivable increased from the prior year solely as a result of our acquisitions of CMD and SCL. However, decreases in both
inventories and accounts receivable from operating activities provided $5.4 million of cash in 2001. Inventory levels at our distributors also decreased in 2001, causing our deferred margin on
sales to distributors to decrease by $1.4 million. Additionally, we reduced accounts payable and accrued liabilities through operations by $3.1 million during 2001, which used cash.
During 2000, net income excluding depreciation, stock compensation and warrant expense, amortization of goodwill and intangible assets and in-process research and development was
$4.2 million and our deferred margin on sales to distributors increased $1.6 million. These sources of cash were partially offset by increases in accounts receivable and inventories of
$2.4 million and $1.9 million, respectively.
Accounts receivable and inventories increased as a result of our increased business volume. Deferred margin on sales to distributors increased as a result of higher inventory levels at our
distributors, as demand for our products strengthened from the prior year. The use of cash for operations in 1999 was primarily the result of our net loss before non-cash expenses and
increases in accounts receivable and

29

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inventories, offset by increases in accounts payable, accrued expenses and deferred margin on sales to distributors.

We
generated $12.6 million of cash from investing activities during 2001, and used $15.6 million and $24.3 million of cash for investing activities in 2000 and 1999,
respectively. The source of cash in 2001 was net proceeds from sales of short-term investments, partially offset by acquisition costs and purchases of property and equipment. The primary
uses of cash in 2000 were for net purchases of short-term investments and purchases of property and equipment. In 1999, the most significant use of cash was the investment of our initial
public offering proceeds in short-term investments, partially offset by sales of the same investments.

We
used $2.7 million of cash for financing activities in 2001, generated $1.8 million in 2000, and $48.3 million in 1999. Cash used by financing activities in 2001
was from security deposits on lease financing and debt payments, partially offset by cash provided by issuances of common stock for stock option exercises or stock purchase plan sales. Cash provided
by financing activities in 2000 was from issuances of common stock and repayments of stockholder notes, partially offset by a security deposit requirement for leased equipment. Primarily all cash
generated from financing activities in 1999 was from our initial public offering.

Debt and Lease Obligations

In November 2001, we financed a $382,000 insurance premium with monthly payments of $44,000. This agreement bears interest at a rate of 7% and will be paid
in full by the end of July 2002.

In
June 2001, upon closing of the CMD acquisition, we assumed a $3.1 million loan. This loan, which matures in April 2002, is secured by a certificate of deposit
totaling $3.1 million, and bears interest at 2% above the rate in effect under this certificate of deposit (2.05% at December 31, 2001). We intend to refinance this note over a longer
term.

In
May 2001, we financed a $423,000 insurance premium with monthly payments of $32,000. This agreement bears interest at a rate of 7.5% and will be paid in full by the end of
June 2002.

In
October 2000, we entered into an equipment financing agreement with monthly payments of approximately $42,000 due through October 2003. This agreement is secured by a
certificate of deposit totaling $860,000 at December 31, 2001, the current and non-current portions of which are included prepaid expenses and other current assets and other assets,
respectively, and bears interest at 2% above the rate in effect under this certificate of deposit (1.9% at December 31, 2001).

We
lease certain software and equipment under lease agreements accounted for as capital leases. These leases mature from February 2002 to September 2003, currently require
monthly payments of $115,000 and bear interest at rates ranging from 7.5% to 9.1%. Many of these leases include end of lease bargain purchase options, which we intend to exercise. Our obligations
under these leasing arrangements are secured by the leased equipment and, in some cases, cash.

In
October 1999, we entered into a noncancelable operating lease for our principal operating facility that expires in July 2003 and requires average monthly rental payments
of approximately $135,000. The lease is secured by a certificate of deposit in the amount of $583,000, the current and non-current portions of which are included in prepaid expenses and
other current assets and other assets, respectively. This security requirement will be reduced to zero by July 2003. In June 2001, in connection with our acquisition of CMD, we acquired
the lease of an operating facility in Irvine, California, that expires in November 2005 and requires average monthly rental payments of approximately $105,000. A portion of this facility has
been subleased through July 2003, generating monthly sublease income of approximately $15,000.

30

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In October 1999, the balance due under our line of credit was repaid in full and the line of credit expired in April 2000. Future minimum payments for operating lease
commitments, debt obligations, and capital leases, including interest, outstanding at December 31, 2001 are as follows (in thousands):

Year Ending December 31,

Debt

Capital Leases

Operating Leases2002

$
3,682

$
1,145

$
4,0322003


183


636


2,8392004








1,5132005








1,5142006








18Total minimum payments

$
3,865

$
1,781

$
9,916


We
plan to spend approximately $2 million during the next 12 months for equipment, furniture and software.

Based
on our expected cash usage in 2002, we believe our existing cash balance is sufficient to meet our capital and operating requirements for at least the next 12 months.
Operating and capital requirements depend on many factors, including the levels at which we generate revenue and maintain margins, inventory and accounts receivable, the cost of securing access to
adequate manufacturing capacity and our operating expenses. To the extent existing resources and cash from operations are insufficient to support our activities, we may need to raise additional funds
through public or private equity or debt financing. These funds may not be available, or if available, we may not be able to obtain them on terms favorable to our stockholders or us.

Pro forma discussion

In addition to our financial statements prepared in accordance with GAAP, we provide our stockholders with pro forma financial information. We believe our
presentation of pro forma results provides useful and meaningful information to investors. Our presentation of pro forma information excludes non-cash expenses resulting from acquisitions
or the issuance of stock options, as well as unusual or infrequent expenses that are not directly attributable to our ongoing operations and are expected to be incurred over a limited period of time.
Because of these exclusions, our presentation is not in accordance with GAAP. Additionally, our presentation of pro forma information may not be consistent with that of other companies. Pro forma
information is not, and should not be considered, a substitute for financial information prepared in accordance with GAAP. We recognize that we must be consistent in our identification and
presentation of unusual or infrequent items, including both favorable and unfavorable items, that meet these criteria. The following table is a reconciliation of our

31

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net loss prepared in accordance with GAAP to pro forma net income (loss) reported by management (in thousands):

|                                                    |  | Year Ended December 31, |        
|--------------------------------------------------- |  | ----------------------- | -------
|
|
|GAAP net loss                                       |  | $                       | (76,108
|Pro forma adjustments:                              |  |                         |        
|Stock compensation and warrant expense(1)           |  |                         | 12,390 
|Amortization of goodwill and intangible assets(2)   |  |                         | 14,124 
|In-process research and development(3)              |  |                         | 1,500  
|Impairment of goodwill and intangible assets(4)     |  |                         | 29,880 
|Restructuring (5)                                   |  |                         | 1,452  
|Patent defense and acquisition integration costs(6) |  |                         | 1,841  
|                                                    |  |                         |        
|Pro forma net income (loss)                         |  | $                       | (14,921
|                                                    |  |                         |        

---

Since
management does not evaluate items such as amortization of goodwill and intangible assets, stock-based compensation, impairment charges and other non-cash or infrequent
or unusual items when assessing the performance of our ongoing operations or when allocating resources, our presentation of pro forma information provides investors with a presentation of our
operating results as they are viewed and assessed by our management. In addition, we believe that the exclusion of intangible charges helps the investor better understand the use of tangible resources
in our operations, as well as our liquidity position, and the exclusion of unusual or infrequent items helps the investor evaluate our underlying performance. This information should be read in
conjunction with our audited financial statements and notes thereto prepared in accordance with GAAP and included in Item 14 of this report.

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

32

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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 have a limited operating history and operate in rapidly evolving markets, which make it difficult to evaluate our future prospects.

We were founded in 1995 and have a limited operating history, which makes an evaluation of our future success difficult. In addition, the revenue and income
potential of our business and the markets we serve is unproven. We began volume shipments of our first display products in the third quarter of 1997. The Digital Visual Interface, or DVI,
specification, which is based on technology developed by us and used in many of our products, was first published in April 1999. The DVI specification defines a high-speed data
communication link between computers and digital displays, such as flat panel displays, projectors and cathode ray tubes. We have only recently completed our first generation of consumer electronics
and storage IC products. Accordingly, we face risks and difficulties frequently encountered by early-stage companies in new and rapidly-evolving markets. If we do not successfully address these risks
and difficulties, our results of operations could be negatively affected.

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

We have incurred net losses in each quarter since our inception, including losses of $76.1 million in 2001, $23.2 million in 2000, and
$7.6 million in 1999. We expect to continue to incur net losses for the foreseeable future. Accordingly, we may not achieve and sustain profitability.

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

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



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

Our future quarterly operating results are highly dependent upon achieving success in targeted new markets of storage and consumer electronics.

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



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

Our strategic restructuring program may not be successful.

In October 2001, we announced a program to refocus our resources on products and markets in which we have, or believe we can establish, a leadership
position. In particular, we intend to concentrate on our discrete transmitter and receiver products for PCs and displays, and on developing products and establishing industry standards for the
consumer electronics and storage markets, as well as developing new products for storage markets. We will be phasing out or de-emphasizing some products and development projects for
certain digital video processors and integrated monitor controllers, although we intend to license our PanelLink core for integrated monitor controller products.

There
is no guarantee that our strategic restructuring program will be successful. The consumer electronics market and storage market for devices using a Fibre Channel or Serial ATA
interface are still developing and evolving and we are still developing our first generation of products for these markets. We have only recently begun to achieve design wins in both CE devices, such
as set-top boxes and digital televisions, and storage devices using the Fibre Channel interface, such as Fibre Channel Host Bus Adapters and Switches, and have yet to achieve a design win
for storage devices using the Serial ATA interface. Consequently, we may not achieve a leadership position in these markets. We may face customer dissatisfaction and negative publicity due to our
decision to phase out or de-emphasize certain existing products and to cancel development projects. This could increase our costs, damage our reputation and distract our management. We
have limited experience marketing and selling our technology on a licensing basis. We signed our first two license deals during the first quarter of 2002; however, there can be no assurance that
additional companies will be interested in licensing our PanelLink core on commercially favorable terms or at all. We also cannot ensure that companies who license our technology will pay agreed upon
royalties, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information. If we are ineffective at implementing or managing
our strategic restructuring program, our business could be harmed.

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

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

In
the consumer electronics market, our video processing products face competition from products sold by AV Science, Focus Enhancements, Genesis, nDSP, N/S Mediamatics, Micronas
Semiconductor,

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Phillips Semiconductor, Pixelworks, Sage and Trident. We also compete, in some instances, against in-house processing solutions designed by large original equipment manufacturers.

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

We
expect that our Serial ATA products will compete with similar products from Marvell. In addition, other companies have developed or announced intentions to develop SATA controllers
such as Adaptec, APT, Intel, LSI Logic, Promise and Vitesse. We also may compete against Intel and other motherboard chip-set makers that may integrate SATA functionality into their
chipsets.

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

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

Growth of the market for our products for both computers and digital displays depends on the widespread adoption and use of the DVI specification.

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

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

Our success depends on increasing sales of our receiver products to display manufacturers. To increase sales of our receiver products, we need computer
manufacturers to incorporate DVI-compliant transmitters in their systems, making these systems digital-ready. If computers are not digital-ready, they will not operate with their digital
displays, which will limit and may reduce the demand for our digital receiver products.

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Our success depends on the growth of the new and emerging digital display market.

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



In
addition, in order for the digital display market to grow, digital displays must be widely available and affordable to consumers. In the past, the supply of digital displays, such as
flat panels, has been cyclical and consumers have been very price sensitive. In addition, although there has been initial interest in cathode ray tubes with a digital interface, to date only a few
manufacturers have announced intentions to manufacture digital cathode ray tubes and very few manufacturers have made such displays available for purchase. Our ability to sustain or increase our
revenue may be limited should there not be an adequate supply of, or demand for, affordable digital displays.

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

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



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

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Any delay in acceptance of new interface technologies, or a reduction in the growth or size of the market for systems based on Serial ATA or Fibre Channel technologies would limit sales
of our storage products and reduce our revenue.

To
date, we have not achieved any design wins for our recently announced Serial ATA products, and only a limited number of design wins for our Fibre Channel storage products. Even after
we have achieved a design win from an OEM, we may not realize any revenue, or significant revenue, from that OEM since a design win is not a binding commitment to purchase our products and the OEM may
not achieve market acceptance for their product.

A substantial amount of our revenue is generated by products for the PC industry, which is an industry that has slowed in growth.

Since inception, we have derived substantially all of our revenue from our products for PCs and PC-related displays. Accordingly, we are highly
dependent on the PC industry, which experienced a slowdown in growth during the second half of 2000 that continued throughout 2001. We cannot predict the duration or severity of the this downturn in
the PC and display market, or in the general economy, or its effect on our revenue and operating results. If the market for PCs and PC-related displays continues to grow at a slow rate or
contracts whether due to reduced demand from end users, macroeconomic conditions or other factors, our business and results of operations could be negatively affected.

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

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

Because our products, including our Serial ATA products announced in February 2002, are based on new technology and standards, a lengthy sales process,
typically requiring several months or more, is often required before potential customers begin the technical evaluation of our products. This technical evaluation can exceed nine months, and it can
then be an additional nine months before a customer commences volume shipments of systems incorporating our products, if at all. Given our lengthy sales cycle, we may experience a delay between the
time we incur expenditures and the time we generate revenue, if any. As a result, our operating results could be seriously harmed if a significant customer reduces or delays orders, or chooses not to
release products incorporating our products.

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

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For 2001, shipments to Samsung, a
Korean customer, and Compaq, a global customer, each generated 12% of our revenue, and shipments to World Peace International, an Asian distributor, generated 11% of our revenue. For 2000, shipments
to World Peace generated 18% of our revenue and shipments to Kanematsu, a Japanese distributor, generated 16% of our revenue. For 1999, shipments to Kanematsu generated 17% of our revenue, shipments
to World Peace generated 16% of our revenue, and shipments to Microtek, a Japanese distributor, generated 11% of our revenue. We cannot be certain that customers and key distributors that have
accounted for significant revenue in past periods, individually or as a group, will continue to sell our products and generate revenue. As a

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result of this concentration of our customers, our results of operations could be negatively affected if any of the following occurs:



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

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

Many original equipment manufacturers rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors
generated 40% of our revenue for 2001, 66% of our revenue for 2000 and 61% of our revenue for 1999. We expect the percentage of revenue generated through distributors in 2002 to return to levels
consistent with prior years as our IC business grows at a faster rate than our storage sub-systems business. Selling through distributors reduces our ability to forecast sales and
increases the complexity of our business, requiring us to:



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

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

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

The development of new products is highly complex, and we have experienced delays, some of which exceeded one year, in the development and introduction of new
products on several occasions in the past. In February 2002, we announced our SATALink product family and we expect to introduce new
consumer electronics, storage, transmitter and receiver products in the future. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design

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and debug. Successful product development and introduction depends on a number of factors, including, but not limited to:



Accomplishing
all of this is extremely challenging, time-consuming and expensive. We cannot assure you that we will succeed. Product development delays may result from
unanticipated engineering complexities, changing market or competitive product requirements or specifications, difficulties in overcoming resource limitations, the inability to license third party
technology or other factors. If we are not able to develop and introduce our products successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would
adversely affect our operating results.

We
plan to introduce new products for the storage market, including our recently announced Serial ATA products. We do not expect to begin generating revenues from these products before
the second half of 2002, and it is possible that we may experience delays beyond this period in generating revenues from these products. To date, we have not achieved any design wins for our new
Serial ATA products. We are still working with a semiconductor foundry and with potential customers to complete product development and to validate manufacturing methods and processes to support
volume production. Each of these steps may involve unanticipated difficulties, which could delay product introduction and reduce market acceptance of the product. There can be no assurance that we
will be able to achieve design wins for these or any of our planned new products, that we will be able to complete development of these products when anticipated, or that these products can be
manufactured in commercial volumes at acceptable yields.

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

Our growth depends upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. One of the ways we develop
new products and enter new markets is through acquisitions of other companies. In the second half of 2000, we completed the acquisitions of Zillion Technologies, LLC and DVDO, Inc., and in the
second half of 2001, we completed the acquisitions of CMD Technology Inc. and Silicon Communication Lab, Inc. (SCL). Acquisitions of high-technology companies involve
numerous risks, including, but not limited to, the following:



No
assurance can be given that our acquisitions of Zillion, DVDO, CMD or SCL, or our future acquisitions, if any, will be successful and will not adversely affect our business, operating
results or

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financial condition. Failure to manage growth effectively and to successfully integrate acquisitions made by us could materially harm our business and operating results.

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

In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. For example, demand in the
semiconductor industry rose to record levels in 1999, but is currently in a downward cycle. The industry has also experienced significant fluctuations in anticipation of changes in general economic
conditions. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third party
suppliers. Production capacity for semiconductors fabricated using 0.18 micron technology, currently the most advanced technology used in mass production, is somewhat limited. This may impact our
ability to meet demand and could also increase our production costs. We expect that less than 5% of our 2002 revenue will be generated by products that are manufactured using 0.18 micron technology.
Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide
conditions.

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

We do not own or operate a semiconductor fabrication facility. We rely almost entirely on TSMC, an outside foundry, to produce all of our display-related
semiconductor products. We also rely on Kawasaki and Atmel, who are also outside foundries, to produce our storage semiconductor products. Our reliance on independent foundries involves a number of
significant risks, including, but not limited to:



For
example, production capacity for semiconductors fabricated using 0.18 micron technology, currently the most advanced technology used in mass production, is somewhat limited. This may
impact our ability to meet demand and could also increase our production costs. We expect that approximately 3% of our 2002 revenue will be generated by products that are manufactured using 0.18
micron technology.

The nature of our production process is complex, which reduces identification of problems until well into the production cycle.

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

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

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

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

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



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

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

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

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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.

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



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

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

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

We may become engaged in intellectual property litigation that could be time-consuming, may be expensive to defend, and could adversely affect our ability to sell
our product.

In recent years, there has been significant litigation in the United States and in other jurisdictions involving patents and other intellectual property rights.
This litigation is particularly prevalent in the semiconductor industry, in which a number of companies aggressively use their patent portfolios to bring infringement claims. In addition, in recent
years, there has been an increase in the filing of so-called "nuisance suits," alleging infringement of intellectual property rights. These claims may be asserted as counterclaims in
response to claims made by a company alleging infringement of intellectual property rights. These suits pressure defendants into entering settlement arrangements to quickly dispose of such suits,
regardless of merit.

In
April 2001, we filed suit against Genesis Microchip for infringement of one of our U.S. patents. At that time, we also filed a complaint against Genesis for unlawful trade
practices related to the importation of articles infringing our patent. In February 2002, our motion to dismiss the unlawful trade practices complaint was granted and we filed an amended
complaint against Genesis alleging infringement of two of our U.S. patents. These patents relate to our DVI receiver products, which generate a significant portion of our revenue. The amended
complaint seeks a declaration that Genesis has infringed our patents, that Genesis' behavior is not licensed, an injunction to halt the importation, sale, manufacture and use of Genesis DVI receiver
chips that infringe our patents, and monetary damages. We expect that this matter will not go to trial until early 2003.

There
can be no assurance that we will prevail in this litigation. While this litigation is pending, Genesis can use the technology covered by these patents to develop products that
might compete with ours. If we are unsuccessful in this litigation, we could be unable to prevent Genesis or others from

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using the technology covered by this patent. Even if we do prevail in this litigation, uncertainties regarding the outcome prior to that time may reduce demand for our products. In addition, further
disputes may occur regarding the scope of the intellectual property license we have granted to Digital Display Working Group participants for use in implementing the DVI specification in their
products. These disputes may result in additional costly and time-consuming litigation or the license of additional elements of our intellectual property for free.

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



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

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

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

Our recent workforce reductions may seriously harm our business.

In connection with our efforts to streamline our operations and reduce costs, in October 2001, we announced a program to reduce our workforce by
approximately 20%, based on our staffing level at that time. In addition, in February 2002 we implemented an additional workforce reduction of approximately 13%, based on our staffing level at
that time. As a result of these reductions, our marketing, sales and customer support capabilities could be reduced, our ability to respond to unexpected challenges may be impaired, and we may be
unable to take advantage of new opportunities. These workforce reductions, or future workforce reductions, if any, may reduce employee morale and create concern among existing employees about job
security, which could lead to increased turnover. Workforce reductions may also raise concerns among customers, suppliers and other corporate partners regarding our continued viability. Further, these
workforce reductions may subject us to the risk of litigation, which could be costly to defend, divert the attention of management and subject us to possible liability for damages.

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Industry cycles may strain our management and resources.

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



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

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

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

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



Our operations are located in areas susceptible to disruptions of electricity service and possibly severe increases in the costs of electric power and energy.

Our operations are primarily based in the San Francisco Bay Area and Los Angeles area, which like much of California are susceptible to disruptions of electricity
service. California's Independent Systems Operator has ordered disruptions of electric services on a rotating basis. As much of our technology development and normal business activities require use of
electric power, any, even short-term, interruption in electric service could damage our business. Moreover, we may face a significant increase in the cost of energy, which could increase
our costs and adversely affect our operating results.

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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.

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



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

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

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



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

Item 7A. Quantitative and Qualitative Disclosures of Market Risk

Interest Rate Risk

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

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Foreign Currency Exchange Risk

All of our sales are denominated in U.S. dollars, and substantially all of our expenses are incurred in U.S. dollars, thus limiting our exposure to foreign
currency exchange risk. We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or
speculative purposes. The effect of an immediate 10% change in foreign currency exchange rates should not have a material effect on our future operating results or cash flows; however, a long term
change in foreign currency rates would likely result in increased wafer, packaging, assembly or testing costs.

Item 8. Financial Statements and Supplementary Data

The Financial Statements and Supplemental Data required by this item are set forth at the pages indicated at Item 14(a).

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

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item, which will be set forth under the captions "Proposal No. 1 Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Compliance" in Silicon Image's Proxy Statement for its 2002 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item, which will be set forth under the captions "Director Compensation," "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation" in Silicon Image's Proxy Statement for its 2002 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item, which will be set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in Silicon
Image's Proxy Statement for its 2002 Annual Meeting of Stockholders, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this Item, which will be set forth under the caption "Certain Relationships and Related Transactions" in Silicon Image's Proxy
Statement for its 2002 Annual Meeting of Stockholders, is incorporated herein by reference.

46

---

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



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

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

On
October 2, 2001, November 21, 2001 and December 6, 2001, we filed amended current reports on Forms 8-K to provide additional unaudited financial
statements and selected unaudited pro forma financial data in connection with our acquisition of CMD.

On
October 30, 2001, we filed a current report on Form 8-K regarding the appointment of Robert Gargus as Chief Financial Officer by the Board of Directors.

47

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

|                                           |                                                  | Year Ended December 31, |        
|------------------------------------------ | ------------------------------------------------ | ----------------------- | -------
|
|Revenue                                    |                                                  | $                       | 51,966 
|Cost and operating expenses:               |                                                  |                         |        
|                                           | Cost of revenue(1)                               |                         |        
|                                           | Research and development(2)                      |                         |        
|                                           | Selling, general and administrative(3)           |                         |        
|                                           | Stock compensation and warrant expense           |                         |        
|                                           | Amortization of goodwill and intangible assets   |                         |        
|                                           | In-process research and development              |                         |        
|                                           | Impairment of goodwill and intangible assets     |                         |        
|                                           | Restructuring                                    |                         |        
|                                           | Patent defense and acquisition integration costs |                         |        
|                                           |                                                  |                         |        
|Total cost and operating expenses          |                                                  |                         | 130,496
|                                           |                                                  |                         |        
|Loss from operations                       |                                                  |                         | (78,530
|Interest income                            |                                                  |                         | 2,731  
|Interest expense and other, net            |                                                  |                         | (309   
|                                           |                                                  |                         |        
|Net loss before provision for income taxes |                                                  |                         | (76,108
|Provision for income taxes                 |                                                  |                         |       
|                                           |                                                  |                         |        
|Net loss                                   |                                                  | $                       | (76,108
|                                           |                                                  |                         |        
|Net loss per share:                        |                                                  |                         |        
|                                           | Basic and diluted                                |                         | $      
|                                           |                                                  |                         |        
|                                           | Weighted average shares                          |                         |        
|                                           |                                                  |                         |        

---

See
accompanying Notes to Consolidated Financial Statements

48

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

|                                               |                                                                                                                                   | December 31,                               |       
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------
|
|Assets                                         |                                                                                                                                   |                                            |       
|Current Assets:                                |                                                                                                                                   |                                            |       
|                                               | Cash and cash equivalents                                                                                                         |                                            | $     
|                                               | Short-term investments                                                                                                            |                                            |       
|                                               | Accounts receivable, net of allowance for doubtful accounts of $450 in 2001 and $290 in 2000                                      |                                            |       
|                                               | Inventories, net                                                                                                                  |                                            |       
|                                               | Prepaid expenses and other current assets                                                                                         |                                            |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total current assets                       |       
|Property and equipment, net                    |                                                                                                                                   |                                            | 8,694 
|Goodwill and intangible assets, net            |                                                                                                                                   |                                            | 21,628
|Other assets                                   |                                                                                                                                   |                                            | 1,642 
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total assets                               |       
|                                               |                                                                                                                                   |                                            |       
|Liabilities and Stockholders' Equity           |                                                                                                                                   |                                            |       
|Current Liabilities:                           |                                                                                                                                   |                                            |       
|                                               | Accounts payable                                                                                                                  |                                            | $     
|                                               | Accrued liabilities                                                                                                               |                                            |       
|                                               | Capital lease and other obligations, current                                                                                      |                                            |       
|                                               | Deferred margin on sales to distributors                                                                                          |                                            |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total current liabilities                  |       
|Capital lease and other obligations, long-term |                                                                                                                                   |                                            | 819   
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total liabilities                          |       
|                                               |                                                                                                                                   |                                            |       
|Commitments and contingencies (Notes 7 and 8)  |                                                                                                                                   |                                            |       
|Stockholders' Equity:                          |                                                                                                                                   |                                            |       
|                                               | Convertible preferred stock, par value $0.001; 5,000,000 shares authorized; no shares issued or outstanding                       |                                            |       
|                                               | Common stock, par value $0.001; 150,000,000 shares authorized; shares issued and outstanding: 63,515,7422001 and 53,949,0002000 |                                            |       
|                                               | Additional paid-in capital                                                                                                        |                                            |       
|                                               | Notes receivable from stockholders                                                                                                |                                            |       
|                                               | Unearned compensation                                                                                                             |                                            |       
|                                               | Accumulated deficit                                                                                                               |                                            |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total stockholders' equity                 |       
|                                               |                                                                                                                                   |                                            |       
|                                               |                                                                                                                                   | Total liabilities and stockholders' equity |       
|                                               |                                                                                                                                   |                                            |       

See
accompanying Notes to Consolidated Financial Statements

49

---



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

|                                                                                     |  | Convertible
Preferred Stock |   |   |     |   |        |  |   |    |  |   |         |   |   |        |  
|------------------------------------------------------------------------------------ |  | --------------------------- | - | - | --- | - | ------ |  | - | -- |  | - | ------- | - | - | ------ | -
|
|
|
|Balance at December 31, 1998                                                         |  | 9,560                       |   | $ | 10  |   | 13,572 |  | $ | 14 |  | $ | 24,953  |   | $ | (96    | )
|Common stock issued for cash and notes                                               |  |                            |   |   |    |   | 5,630  |  |   | 5  |  |   | 1,718   |   |   | (1,385 | )
|Repayments of note receivable                                                        |  |                            |   |   |    |   |       |  |   |   |  |   |        |   |   | 26     |  
|Net proceeds from initial public offering                                            |  |                            |   |   |    |   | 8,970  |  |   | 9  |  |   | 48,282  |   |   |       |  
|Conversion of Convertible Preferred Stock upon completion of initial public offering |  | (9,560                      | ) |   | (10 | ) | 23,314 |  |   | 23 |  |   | (13     | ) |   |       |  
|Unearned compensation                                                                |  |                            |   |   |    |   |       |  |   |   |  |   | 9,116   |   |   |       |  
|Stock compensation expense                                                           |  |                            |   |   |    |   |       |  |   |   |  |   | 739     |   |   |       |  
|Stock warrant expense (Note 8)                                                       |  |                            |   |   |    |   |       |  |   |   |  |   | 595     |   |   |       |  
|Net loss                                                                             |  |                            |   |   |    |   |       |  |   |   |  |   |        |   |   |       |  
|                                                                                     |  |                             |   |   |     |   |        |  |   |    |  |   |         |   |   |        |  
|Balance at December 31, 1999                                                         |  |                            |   |   |    |   | 51,486 |  |   | 51 |  |   | 85,390  |   |   | (1,455 | )
|Net issuances of common stock                                                        |  |                            |   |   |    |   | 710    |  |   | 1  |  |   | 998     |   |   |       |  
|Common stock issued for ESPP                                                         |  |                            |   |   |    |   | 194    |  |   |   |  |   | 1,013   |   |   |       |  
|Common stock issued for acquisitions (Note 2)                                        |  |                            |   |   |    |   | 1,498  |  |   | 2  |  |   | 31,953  |   |   |       |  
|Common stock issued for warrant exercise                                             |  |                            |   |   |    |   | 61     |  |   |   |  |   |        |   |   |       |  
|Repayments of notes receivable                                                       |  |                            |   |   |    |   |       |  |   |   |  |   |        |   |   | 1,293  |  
|Unearned compensation                                                                |  |                            |   |   |    |   |       |  |   |   |  |   | 13,086  |   |   |       |  
|Stock compensation expense                                                           |  |                            |   |   |    |   |       |  |   |   |  |   | 4,707   |   |   |       |  
|Net loss                                                                             |  |                            |   |   |    |   |       |  |   |   |  |   |        |   |   |       |  
|                                                                                     |  |                             |   |   |     |   |        |  |   |    |  |   |         |   |   |        |  
|Balance at December 31, 2000                                                         |  |                            |   |   |    |   | 53,949 |  |   | 54 |  |   | 137,147 |   |   | (162   | )
|Net issuances of common stock                                                        |  |                            |   |   |    |   | 845    |  |   | 2  |  |   | 569     |   |   |       |  
|Common stock issued for ESPP                                                         |  |                            |   |   |    |   | 342    |  |   |   |  |   | 1,491   |   |   |       |  
|Common stock issued for acquisitions (Note 2)                                        |  |                            |   |   |    |   | 7,931  |  |   | 8  |  |   | 45,477  |   |   |       |  
|Common stock issued for warrant exercise                                             |  |                            |   |   |    |   | 449    |  |   |   |  |   |        |   |   |       |  
|Expense on option acceleration (Note 3)                                              |  |                            |   |   |    |   |       |  |   |   |  |   | 303     |   |   |       |  
|Interest on notes receivable                                                         |  |                            |   |   |    |   |       |  |   |   |  |   |        |   |   | (5     | )
|Unearned compensation                                                                |  |                            |   |   |    |   |       |  |   |   |  |   | 6,892   |   |   |       |  
|Stock compensation expense                                                           |  |                            |   |   |    |   |       |  |   |   |  |   | 2,401   |   |   |       |  
|Net loss                                                                             |  |                            |   |   |    |   |       |  |   |   |  |   |        |   |   |       |  
|                                                                                     |  |                             |   |   |     |   |        |  |   |    |  |   |         |   |   |        |  
|Balance at December 31, 2001                                                         |  |                            |   | $ |    |   | 63,516 |  | $ | 64 |  | $ | 194,280 |   | $ | (167   | )
|                                                                                     |  |                             |   |   |     |   |        |  |   |    |  |   |         |   |   |        |  

See accompanying Notes to Consolidated Financial Statements

50

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

|                                                     |                                                                                       | Year Ended December 31,                                     |                                         
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------
|
|Cash flows from operating activities:                |                                                                                       |                                                             |                                         
|                                                     | Net loss                                                                              |                                                             | $                                       
|                                                     | Adjustments to reconcile net loss to cash provided by (used in) operating activities: |                                                             |                                         
|                                                     |                                                                                       | Depreciation and amortization                               |                                         
|                                                     |                                                                                       | Stock compensation and warrant expense                      |                                         
|                                                     |                                                                                       | Amortization of goodwill and intangible assets              |                                         
|                                                     |                                                                                       | In-process research and development                         |                                         
|                                                     |                                                                                       | Impairment of goodwill and intangible assets                |                                         
|                                                     |                                                                                       | Non-cash restructuring                                      |                                         
|                                                     |                                                                                       | Changes in assets and liabilities, net of amounts acquired: |                                         
|                                                     |                                                                                       |                                                             | Accounts receivable                     
|                                                     |                                                                                       |                                                             | Inventories                             
|                                                     |                                                                                       |                                                             | Prepaid expenses and other assets       
|                                                     |                                                                                       |                                                             | Accounts payable                        
|                                                     |                                                                                       |                                                             | Accrued liabilities                     
|                                                     |                                                                                       |                                                             | Deferred margin on sales to distributors
|                                                     |                                                                                       |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|Cash flows from investing activities:                |                                                                                       |                                                             |                                         
|                                                     | Purchases of short-term investments                                                   |                                                             |                                         
|                                                     | Proceeds from sale of short-term investments                                          |                                                             |                                         
|                                                     | Purchases of property and equipment                                                   |                                                             |                                         
|                                                     | Acquisition costs, net of cash acquired                                               |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|Cash flows from financing activities:                |                                                                                       |                                                             |                                         
|                                                     | Proceeds from issuances of common stock                                               |                                                             |                                         
|                                                     | Repayments of notes receivable                                                        |                                                             |                                         
|                                                     | Repayments of debt                                                                    |                                                             |                                         
|                                                     | Security deposit on lease financing                                                   |                                                             |                                         
|                                                     | Net proceeds from initial public offering                                             |                                                             |                                         
|                                                     | Other                                                                                 |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|                                                     |                                                                                       |                                                             |                                         
|Net increase (decrease) in cash and cash equivalents |                                                                                       |                                                             | (4,278                                  
|Cash and cash equivalentsbeginning of period        |                                                                                       |                                                             | 23,224                                  
|                                                     |                                                                                       |                                                             |                                         
|Cash and cash equivalentsend of period              |                                                                                       | $                                                           | 18,946                                  
|                                                     |                                                                                       |                                                             |                                         
|Supplemental cash flow information:                  |                                                                                       |                                                             |                                         
|                                                     | Acquisitions of property and equipment under capital lease arrangements               |                                                             | $                                       
|                                                     |                                                                                       |                                                             |                                         
|                                                     | Issuances of common stock in exchange for notes receivable                            |                                                             | $                                       
|                                                     |                                                                                       |                                                             |                                         
|                                                     | Financing arrangements for insurance premiums                                         |                                                             | $                                       
|                                                     |                                                                                       |                                                             |                                         
|                                                     | Cash payments for interest                                                            |                                                             | $                                       
|                                                     |                                                                                       |                                                             |                                         
|                                                     | Cash payments (refunds) for income taxes                                              |                                                             | $                                       
|                                                     |                                                                                       |                                                             |                                         

See accompanying Notes to Consolidated Financial Statements

51

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SILICON IMAGE, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

We were incorporated in January 1995 and design, develop and market semiconductor solutions for applications that require cost-effective,
high-bandwidth, integrated solutions for high-speed data communications, and storage subsystems for storage area networks.

Basis of presentation

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

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation or to give effect to our two-for-one stock
split, which was effective August 18, 2000.

Revenue recognition

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

For
sales to distributors with agreements allowing for price concessions and product returns, we recognize revenue at the time we estimate the distributor sells the product to its end
customer. Revenue is not recognized upon shipment since, due to various forms of price concessions, the sales price is not substantially fixed or determinable at that time. Additionally, these
distributors have contractual rights to return products, up to a specified amount for a given period of time. Revenue is recognized when the distributor sells the product to an end-user,
at which time the sales price becomes fixed. Pursuant to these agreements, older or end-of-life products are sold with no right of return and are not eligible for price
concessions. In these cases, revenue is recognized upon shipment.

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

52

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

Allowance for Doubtful Accounts

We review accounts receivable and provide a reserve for amounts we estimate will not be collectible. During our review, we consider our historical experience, the
age of the receivable balance, the credit-worthiness of the customer, and the reason for the delinquency. Write-offs to date have been minimal.

Inventories and Related Reserves

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

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

Long-lived assets

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

For
certain long-lived assets, primarily fixed assets and goodwill and intangible assets, we are required to estimate the useful life of the asset and recognize its cost as
an expense over the useful life. We use the straight-line method to expense long-lived assets, which results in an equal amount of expense in each period. Additionally,
pursuant to applicable accounting rules, we periodically assess whether long-lived assets have been impaired. We deem an asset to be impaired if its estimated fair value is less than the
cost at which it is recorded on our balance sheet. Our estimate of fair value is

53

---

based on the net present value of expected future cash flows attributable to the asset. Predicting future cash flows attributable to a particular asset is difficult, and requires the use of
significant judgment.

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

Income taxes

We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to
their estimated realizable value. Therefore, we provide a valuation allowance to the extent we do not believe it is likely that we will generate sufficient taxable income in future periods to realize
the benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. At December 31, 2001, we had net operating loss
carryforwards for federal and state income tax purposes of approximately $31.3 million and $10.4 million, respectively, that were fully reserved and therefore are not recorded on our
balance sheet as an asset.

Accrued liabilities

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

Stock-based compensation

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

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

54

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Cash equivalents and short-term investments

We consider all highly-liquid investments maturing within three months from the date of purchase to be cash equivalents. All of our short-term
investments are classified as available-for-sale at the balance sheet dates, and have been presented at amortized cost, which approximates fair value. If material, any
temporary difference between the cost and fair value of an investment would be presented as a separate component of stockholder's equity. At December 31, 2001, the average remaining contractual
maturity of all short-term investments was approximately five months.

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

December 31,2001

2000Cash and Cash Equivalents:Cash

$
594

$
406Commercial paper


9,637


12,339Market auction preferred securities


6,900


8,400Money market funds


1,815


2,079$
18,946

$
23,224Short-term investments:Commercial paper

$


$
13,176Corporate notes and bonds


13,157


23,388US government agencies


6,022


Bank certificates of deposit


3,093


401$
22,272

$
36,965


Concentration of credit risk

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

Other

Advertising and research and development costs are expensed as incurred.

Comprehensive income (loss)

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

55

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Net loss per share

Basic net loss per share is based on weighted average common shares outstanding, excluding shares subject to repurchase, and diluted net loss per share is based
on weighted average common shares and dilutive equivalents outstanding, if any. The following tables set forth the computation of basic and diluted net loss per share (in thousands, except per share
amounts):

|                    |                                                    | Year Ended December 31, |       
|------------------- | -------------------------------------------------- | ----------------------- | ------
|
|Numerator:          |                                                    |                         |       
|                    | Net loss                                           |                         | $     
|Denominator:        |                                                    |                         |       
|                    | Weighted average shares                            |                         |       
|                    | Less: unvested common shares subject to repurchase |                         |       
|                    |                                                    |                         |       
|                    |                                                    |                         | 57,790
|                    |                                                    |                         |       
|Net loss per share: |                                                    |                         |       
|                    | Basic and diluted net loss per share               |                         | $     
|                    |                                                    |                         |       

As
a result of our net losses, all common share equivalents would have been anti-dilutive and have therefore been excluded from the diluted net loss per share calculation.
The following table summarizes securities outstanding as of each period end, on an as-converted basis, that were anti-dilutive and not included in the calculation of diluted
net loss per share (in thousands):

|                                             |  | December 31,
|-------------------------------------------- |  | ------------
|
|Unvested common shares subject to repurchase |  | 1,532       
|Stock options                                |  | 14,712      
|Common stock warrants                        |  | 180         
|                                             |  |             
|                                             |  | 16,424      
|                                             |  |             

Recent accounting pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141 (SFAS No. 141), Business Combinations, and Statement
No. 142 (SFAS No. 142), Goodwill and Other Intangible
Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and establishes criteria for the separate recognition
of intangible assets acquired in a business combination. SFAS No. 142 requires goodwill and certain intangible assets to no longer be amortized to expense, but instead be subject to periodic
testing for impairment. SFAS No. 142 is effective for our fiscal year beginning on January 1, 2002, except for the amortization and non-amortization provisions, which apply
to all acquisitions subsequent to June 30, 2001. In accordance with SFAS No. 142, beginning January 1, 2002, we will no longer amortize goodwill or the value of previously
acquired assembled workforces. At December 31, 2001, we had $21.6 million of goodwill and intangible assets recorded on our balance sheet, $17.4 million of which is goodwill and
assembled workforces. For 2001 and 2000, we recorded goodwill and intangible asset amortization

56

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expense of $14.1 million and $4.4 million, respectively, representing 13.4% and 7.5% of our total operating expenses. We expect to record intangible asset amortization expense of
approximately $3.3 million in 2002, assuming the assets do not become impaired and no other acquisitions are made.

In
October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of Accounting Principles Board
("APB") No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including amortizable and non-amortizable
intangible assets, and is effective for our fiscal year beginning on January 1, 2002, as well as for interim periods within 2002. We do not expect the adoption of SFAS No. 144 to have a
material effect on our results of operations or financial position.

In
November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or a Reseller of the Vendor's Products." This EITF requires us to record certain consideration paid to distributors of our products as a reduction of revenue, whereas we previously recorded this
consideration as a sales and marketing expense. We do not expect the implementation of this EITF to have a material effect on our results of operations or financial position.

NOTE 2BUSINESS COMBINATIONS

CMD Technology ("CMD")

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

Escrow
shares are being held as our security for indemnification obligations of CMD's shareholders. We have until June 7, 2002 to submit escrow claims, and have submitted claims
for approximately 1 million shares to date. There can be no assurance that our claims will result in shares being returned to us. If shares are returned to us prior to June 7, 2002, we
will reduce goodwill on our balance sheet by $4.94 per share. If shares are returned to us after June 7, 2002, we will record non-operating income for $4.94 per share.

57

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The allocation of the aggregate purchase price is based on management's analysis and estimates of the fair values of tangible assets, intangible assets and
in-process research and development, which was expensed during the quarter ended September 30, 2001. Intangible assets recorded in connection with this acquisition will be amortized
to expense ratably over the estimated useful lives referenced below. However, effective January 1, 2002, upon the adoption of SFAS No. 142, goodwill and certain intangible assets will no
longer be amortized to expense, but will be subject to periodic testing for impairment. The purchase price allocation and related amortization periods are summarized below (in thousands):

Net assets acquired

$
4,155Acquired technology


10,178

18-42 monthsUnearned compensation


6,314

30 monthsAssembled workforce


2,340

24 monthsCustomer agreement


1,939

24 monthsIn-process research and development expense


1,500Trade name


435

42 monthsGoodwill


18,270

42 months$
45,131


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

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

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

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

58

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Upon
closing, we refinanced $3.1 million of CMD's outstanding bank debt. The loan matures in April 2002, is secured by a certificate of deposit totaling
$3.1 million, and bears interest at 2% above the rate in effect under the certificate of deposit (2.05% at December 31, 2001). We expect to renew this note upon maturity.

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

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

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

Silicon Communication Lab, Inc. ("SCL")

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

Escrow
shares and cash are being held as our security for indemnification obligations of SCL's shareholders. We have until July 7, 2002 to submit escrow claims, and
have not submitted any to date.

The
allocation of the aggregate purchase price is based on management's analysis and estimates of the fair values of tangible and intangible assets. Goodwill recorded in connection with
this acquisition will not be amortized to expense, but will be subject to periodic testing for impairment in accordance with SFAS No. 142. Unearned compensation will be amortized to expense
over a period of 24 months

59

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

Net assets acquired

$
(977
)Unearned compensation


2,102Acquired technology


162Goodwill


10,863$
12,150


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

Cash

$
226Accounts receivable


12Fixed assets


43Other assets


18Accounts payable


(120
)Accrued liabilities


(656
)Short term debt


(500
)$
(977
)


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

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

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

DVDO, Inc. ("DVDO")

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

Escrow
shares are being held as our security for indemnification obligations of DVDO's shareholders. We have until July 6, 2002 to submit escrow claims, and have not submitted any
claims to date.

60

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

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

Inventory

$
355Other current assets


270Fixed assets


179Intangible assets (see Note 5)


25,709Current liabilities


(1,996
)Unearned compensation


4,897In-process research and development expense


8,410$
37,824


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

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

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

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

61

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

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

The
following unaudited, pro forma information gives effect to the acquisition of DVDO as if it had occurred on January 1, 2000, by consolidating the results of DVDO's operations
with our results of operations for the year ended December 31, 2000 (in thousands).

Year Ended
December 31, 2000Pro forma

As reportedRevenue

$
51,307

$
50,035Net loss


(30,859
)

(23,243
)Net loss per share:Basic and diluted net loss per share

$
(0.61
)
$
(0.47
)Weighted average shares


50,418


49,720


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

Zillion Technologies, LLC ("Zillion")

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

NOTE 3ASSET IMPAIRMENT AND RESTRUCTURING ACTIVITIES

During the quarter ended September 30, 2001, we began to restructure our business to focus on products and technology in which we have, or believe we can
achieve, a leadership position. In connection with this restructuring, certain products will be phased out or de-emphasized and some

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R&D projects, including certain digital video processing projects, will no longer be funded. As a result of these actions, the prevailing economic and industry conditions and the departure of certain
key DVDO employees during the quarter, we recorded an intangible asset impairment expense of $13.9 million, and reversed $1.2 million of unearned compensation, a component of
stockholders' equity. The impairment expense of $13.9 million represents a reduction of acquired technology of $5.7 million, patent applications and other intangible assets of
$0.9 million and related goodwill of $7.3 million. The impairment amount was determined by comparing discounted expected future cash flows to the net carrying value of the intangible
assets as prescribed by SFAS No. 121.

During
the quarter ended December 31, 2001, we reduced our workforce by approximately 60 people, primarily in connection with the program discussed above and as a result of
the continued integration of recently acquired companies. In connection with these actions, we recorded a restructuring expense of $1.5 million, consisting of severance related costs of
$902,000, including $303,000 representing the intrinsic value of modified stock options, an expected loss on leased facilities of $500,000 and fixed asset write-offs of $50,000. In
addition, we reversed $286,000 of unearned compensation, a component of stockholders' equity, for terminated employees. Also for the fourth quarter of 2001, we recorded an impairment expense of
$16.0 million related to goodwill and intangible assets recorded in connection with the CMD acquisition. This charge resulted from a reduced sales outlook for products using or incorporating
CMD's technology. The impairment expense of $16.0 million represents a reduction of acquired technology of $3.9 million, customer agreement of $1.0 million, tradename of $245,000
and related goodwill of $10.9 million. The impairment amount was determined by comparing discounted expected future cash flows to the net carrying value of the intangible assets as prescribed
by SFAS No. 121.

The
following table sets forth the restructuring reserves as of October 9, 2001, the effective date of the restructuring, and activity against the reserve through
December 31, 2001 (in thousands). All cash payments are expected to be complete by the fourth quarter of 2002.

|                                                   |  | Balance
Oct 9, 2001 |       | Utilized |   | Balance
Dec 31, 2001
|-------------------------------------------------- |  | ------------------- | ----- | -------- | - | --------------------
|Severance costs                                    |  | $                   | 599   |          | $ | (191                
|Non-cash intrinsic value of modified stock options |  |                     | 303   |          |   | (303                
|Estimated loss on building sublease                |  |                     | 500   |          |   | (115                
|Non-cash fixed asset write-down                    |  |                     | 50    |          |   |                    
|                                                   |  |                     |       |          |   |                     
|                                                   |  | $                   | 1,452 |          | $ | (609                
|                                                   |  |                     |       |          |   |                     

NOTE 4RELATED PARTY TRANSACTIONS

In 1999, we issued 1,485,000 shares of Common Stock to several of our officers in exchange for notes receivable totaling $1,385,000. The notes outstanding at
December 31, 2001 bear interest at rates ranging from 5.30% to 5.98% per annum, and are due in June and September, 2004. Principal and interest payments of $1,293,000 and $26,000 were received
in 2000 and 1999, respectively. The outstanding principal and interest under these notes at December 31, 2001 was $167,000.

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NOTE 5BALANCE SHEET COMPONENTS

December 31,2001

2000(in thousands)Inventories:Raw materials

$
1,911

$
1,366Work in process


1,337


407Finished goods


3,288


1,291$
6,536

$
3,064Property and equipment:Computers and software

$
4,582

$
3,699Equipment


8,041


2,415Furniture and fixtures


1,262


83713,885


6,951Less: accumulated depreciation


(5,191
)

(2,580
)$
8,694

$
4,371Goodwill and intangible assets:Acquired technology

$
11,475

$
10,767Patents and other


4,429


1,848Goodwill


24,204


13,09440,108


25,709Less: accumulated amortization


(18,480
)

(4,356
)$
21,628

$
21,353Accrued liabilities:Customer rebates and accrued sales returns

$
1,073

$
1,147Accrued payroll and related expenses


3,053


1,838Restructuring accrual (see Note 3)


843


Other accrued liabilities


3,793


2,760$
8,762

$
5,745


NOTE 6INCOME TAXES

Our provision for income taxes for 2000 was $368,000 and consisted of approximately $328,000 for Federal taxes and $40,000 for State taxes. No provision for
income taxes was recorded for the years

64

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ended December 31, 2001 and 1999 since we generated both book and tax losses. Our effective tax rate differs from the federal statutory tax rate due to the following (in thousands):

|                               |  | Years Ended December 31, |        
|------------------------------ |  | ------------------------ | -------
|
|Tax at federal statutory rate  |  | $                        | (26,638
|Nondeductible expenses         |  |                          | 20,263 
|Changes in valuation allowance |  |                          | 6,375  
|Tax credits and other          |  |                          |       
|                               |  |                          |        
|                               |  | $                        |       
|                               |  |                          |        

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

December 31,2001

2000Net operating loss carryforwards

$
11,856

$
3,176Deferred revenue


1,683


2,051Tax credits


2,234


700Inventory related items


2,822


1,435Other items not currently deductible


1,332


1,46919,927


8,831Less: valuation allowance


(19,927
)

(8,831
)$


$



Tax
benefits from employee stock transactions of $243,000 and $4.5 million were generated in 2001 and 2000, respectively. When realizable, such benefits are recorded as a
reduction of income taxes payable, with a corresponding increase to stockholders' equity. Therefore, these benefits do not have the effect of reducing our income tax expense.

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

At
December 31, 2001, we had net operating loss carryforwards for federal and state income tax purposes of approximately $31.3 million and $10.4 million,
respectively, that expire through 2021. Under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating loss carryforwards may be restricted or limited in certain circumstances. We
do not expect to be subject to these restrictions or limitations.

65

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NOTE 7DEBT AND LEASE OBLIGATIONS

In November 2001, we financed a $382,000 insurance premium with monthly payments of $44,000. This agreement bears interest at a rate of 7% and will be paid
in full in July 2002.

In
June 2001, upon closing of the CMD acquisition, we assumed a $3.1 million loan. This loan, which matures in April 2002, is secured by a certificate of deposit
totaling $3.1 million, and bears interest at 2% above the rate in effect under this certificate of deposit (2.05% at December 31, 2001). We intend to refinance this note over a longer
term.

In
May 2001, we financed a $423,000 insurance premium with monthly payments of $32,000. This agreement bears interest at a rate of 7.5% and will be paid in full in
June 2002.

In
October 2000, we entered into an equipment financing agreement with monthly payments of approximately $42,000 due through October 2003. This agreement is secured by a
certificate of deposit totaling $860,000, the current and non-current portions of which are included prepaid expenses and other current assets and other assets, respectively, and bears
interest at 2% above the rate in effect under this certificate of deposit (1.9% at December 31, 2001).

We
lease certain software and equipment under lease agreements accounted for as capital leases. These leases mature from February 2002 to September 2003, currently require
monthly payments of $115,000 and bear interest at rates ranging from 7.5% to 9.1%. Many of these leases include end of lease bargain purchase options, which we intend to exercise. Our obligations
under these leasing arrangements are secured by the leased equipment and, in some cases, cash.

In
October 1999, we entered into a noncancelable operating lease for our principal operating facility that expires in July 2003 and requires average monthly rental payments
of approximately $135,000. The
lease is secured by a certificate of deposit in the amount of $583,000, the current and non-current portions of which are included in prepaid expenses and other current assets and other
assets, respectively. This security requirement will be reduced to zero by July 2003. In June 2001, in connection with our acquisition of CMD, we acquired the lease of an operating
facility in Irvine, California that expires in November 2005 with average monthly rental payments of $105,000. A portion of this facility has been subleased through July 2003, generating
sublease income of approximately $15,000 to offset our payment obligations.

In
October 1999, the balance due under a line of credit was repaid in full and the line of credit expired in April 2000.

Rent
expense, net of sublease income, totaled $2,419,000, $1,549,000, and $685,000 in 2001, 2000, and 1999, respectively. Future minimum lease payments under operating leases have not
been reduced for sublease rental income of $700,000 and $106,000 for the years ended December 31, 2002, and 2003,

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respectively. Future minimum payments on our operating leases and debt and capital leases outstanding at December 31, 2001 are as follows (in thousands):

|Year Ending December 31,        |  | Debt |       | Capital
Leases |   | Operating Leases |   |  
|------------------------------- |  | ---- | ----- | -------------- | - | ---------------- | - | -
|2002                            |  | $    | 3,682 |                | $ | 1,145            |   | $
|2003                            |  |      | 183   |                |   | 636              |   |  
|2004                            |  |      |      |                |   |                 |   |  
|2005                            |  |      |      |                |   |                 |   |  
|2006                            |  |      |      |                |   |                 |   |  
|                                |  |      |       |                |   |                  |   |  
|Total minimum payments          |  |      | 3,865 |                |   | 1,781            |   | $
|                                |  |      |       |                |   |                  |   |  
|Less interest on capital leases |  |      |       |                |   | (137             | ) |  
|                                |  |      |       |                |   |                  |   |  
|Present value of payments       |  |      |       |                |   | 1,644            |   |  
|Less long-term portion          |  |      | (183  | )              |   | (636             | ) |  
|                                |  |      |       |                |   |                  |   |  
|Short-term portion              |  | $    | 3,682 |                | $ | 1,008            |   |  
|                                |  |      |       |                |   |                  |   |  

NOTE 8STOCKHOLDERS' EQUITY

Convertible Preferred Stock

In October 1999, all outstanding convertible preferred shares were converted into common shares as indicated below.

Series

Outstanding

ConvertedA

1,565,000

6,260,000B

400,000

1,864,406C

4,000,000

8,000,000D

3,594,859

7,189,7189,559,859

23,314,124


Stock split

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

Common stock

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

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Stock warrants

In September 1998, we entered into an agreement with Intel to develop and promote the adoption of a digital display interface specification. In connection
with this agreement, we granted Intel a warrant to purchase 285,714 shares of our common stock at $1.75 per share. This warrant was immediately exercisable. Under the same agreement, we granted Intel
a warrant to purchase 285,714 shares of our common stock at $0.18 per share upon achievement of a specified milestone. This warrant became exercisable during the quarter ended March 31, 1999
when the milestone was achieved. Both of these warrants were exercised in May 2001. We recorded expense of $595,000 in 1999 associated with these warrants. Additionally, if a second specified
milestone is achieved, which we do not believe is likely, we will grant Intel another warrant to purchase 285,714 shares of our common stock at $0.18 per share. Upon achievement of the milestone, we
will record an expense equal to the fair value of the warrant at the time of issuance. The estimated fair value of the warrant at December 31, 2001 was $1.0 million.

In
February 1999, we granted a leasing company a warrant to purchase up to 64,284 shares of our common stock at $1.75 per share. This warrant was immediately exercisable and was
exercised in March 2000. We did not record an expense for this warrant since the estimated fair market value of the warrant on the date of grant was not considered material.

1999 Equity Incentive Plan (the "1999 Plan")

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

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

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

Options
granted under all Plans are exerciseable over periods not to exceed ten years (repriced options expire after six years) and vest over periods ranging from one to five years. Some
options provide for accelerated vesting if certain identified milestones are achieved.

68

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Non-plan options

In 2001 and 2000, our Board of Directors granted options to purchase 1.6 million and 500,000 shares of our common stock to three executives and an
employee. In 2001, 350,000 of the options granted in 2000 were repriced in connection with our stock option exchange program discussed below and are included in the 2001 and 2000 option grants above.
In 1999, the Board granted options to purchase 258,000 shares to several executives. All non-plan options were granted with exercise prices equal to the fair market value on the date of
grant and with vesting periods ranging from four to five years, and expire in ten years, except that the repriced options were priced above our stock's fair market value on the date of the repricing
and expire in six years. 500,000 shares granted in 2001 may be exercised prior to vesting. Our non-plan option grants did not require the approval of, and were not approved by, our
stockholders.

Option Data

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

|                     |            | Options Available for Future Issuance |        |     |        |     |        |        |        |      
|-------------------- | ---------- | ------------------------------------- | ------ | --- | ------ | --- | ------ | ------ | ------ | -----
|
|
|
|
|
|
|At December 31, 1998 |            | 1,782                                 |        |    |        |    |        | 4,350  |        |     
|                     | Authorized |                                       | 4,000  |     |       |     |       |        |       |      
|                     | Granted    |                                       | (4,302 | )   |       |     |       |        | 4,302  |      
|                     | Canceled   |                                       | 198    |     |       |     |       |        | (198   | )    
|                     | Exercised  |                                       |       |     |       |     |       |        | (3,186 | )    
|                     |            |                                       |        |     |        |     |        |        |        |      
|At December 31, 1999 |            | 1,678                                 |        |    |        |    |        | 5,268  |        |     
|                     | Authorized |                                       | 2,584  |     |       |     |       |        |       |      
|                     | Granted    |                                       | (6,631 | )   |       |     |       |        | 6,631  |      
|                     | Assumed    |                                       |       |     |       |     |       |        |       |      
|                     | Canceled   |                                       | 3,143  |     |       |     |       |        | (3,160 | )    
|                     | Exercised  |                                       |       |     |       |     |       |        | (710   | )    
|                     |            |                                       |        |     |        |     |        |        |        |      
|At December 31, 2000 |            | 774                                   |        |    |        |    |        | 8,029  |        | 17   
|                     | Authorized |                                       | 2,697  |     | 6,238  |     | 1,971  |        |       |      
|                     | Assumed    |                                       |       |     | (3,723 | )   | (956   | )      |       |      
|                     | Granted    |                                       | (5,865 | )   | (2,602 | )   | (1,002 | )      | 5,865  |      
|                     | Canceled   |                                       | 2,457  |     | 303    |     | 92     |        | (2,457 | )    
|                     | Exercised  |                                       |       |     |       |     |       |        | (476   | )    
|                     |            |                                       |        |     |        |     |        |        |        |      
|At December 31, 2001 |            | 63                                    |        | 216 |        | 105 |        | 10,961 |        | 7,541
|                     |            |                                       |        |     |        |     |        |        |        |      

At
December 31, 2001, 5,326,000 options were vested, and 402,000 unvested shares had been exercised and remain subject to our repurchase rights. Of the options outstanding at
December 31, 2001, and in the absence of any acceleration of vesting for which some options outstanding and some

69

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severance agreements with employees provide and any cancellations of options outstanding, approximately 3,889,000 shares will vest in 2002, 3,445,000 in 2003, 3,029,000 in 2004, 2,434,000 in 2005 and
2,382,000 in 2006 and thereafter.

Information
with respect to options outstanding at December 31, 2001 is as follows:

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|
|$  0.06-$0.50 |  | 1,137               |  | $                  
|$  0.51-$1.14 |  | 4,509               |  |                    
|$  1.15-$2.53 |  | 2,370               |  |                    
|$  2.54-$3.25 |  | 3,237               |  |                    
|$  3.26-$5.47 |  | 3,769               |  |                    
|$  5.48-$5.63 |  | 4,517               |  |                    
|$5.64-$26.50  |  | 966                 |  |                    
|              |  |                     |  |                    
|              |  | 20,505              |  | $                  
|              |  |                     |  |                    

The
weighted average grant-date fair value of options granted was $1.89, $11.15, and $3.92 per option during 2001, 2000 and 1999, respectively. The grant-date
fair value was estimated using the Black-Scholes pricing model with the following assumptions:

Year Ended December 31,2001

2000

1999Expected life (years)

5.0

5.0

4.0Risk-free interest rate

3.5
%
5.8
%
5.7
%Dividend yield





Volatility

90
%
90
%
75
%


Stock Option Exchange (Repricing)

On December 22, 2000, we implemented an option exchange program to allow employees and certain consultants to exchange approximately 3,000,000 stock
options with a weighted average exercise price of $25.39 for new options with an exercise price of $5.63 (the fair market value on that date). On April 4, 2001, this program was extended to
executives at the December 22, 2000 price (which was greater than the fair market value of our stock on April 4, 2001). Under this program, new options vest over a four-year
period and expire in six years. Compensation expense associated with the option exchange program will be recorded until the options are exercised or expire, provided and to the extent that the average
price of our stock exceeds the grant price. No expense was recorded in 2001 or 2000 in connection this program.

70

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Employee Stock Purchase Plan

In October 1999, we adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 500,000 shares of common stock for issuance under the
Purchase Plan. The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during two-year offering periods with exercise dates every six months. Shares are
purchased using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of our common stock at either the
first day of each offering period or the date of purchase. In 2001 and 2000, 342,000 and 194,000 shares of common stock, respectively, were sold under the Purchase Plan at average prices of $4.36 and
$5.22 per share, respectively. A total of 1,019,000 shares were reserved for future issuance at December 31, 2001. The number of shares reserved for issuance under the Purchase Plan is
increased automatically on January 1 of each year by an amount equal to 1% of our total outstanding common shares as of the immediately preceding December 31.

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

Year Ended December 31,2001

2000

1999Expected life (years)

1.49

1.35

Risk-free interest rate

1.8
%
5.5
%
Dividend yield





Volatility

90
%
90
%



SFAS 123 Expense

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

|                                                 |                                       | Year Ended December 31,                       |        
|------------------------------------------------ | ------------------------------------- | --------------------------------------------- | -------
|
|Net loss-as reported                             |                                       | $                                             | (76,108
|                                                 | SFAS 123 expense adjustment           |                                               |        
|                                                 |                                       |                                               |        
|                                                 |                                       | Net loss-adjusted                             |        
|                                                 |                                       |                                               |        
|Basic and diluted net loss per share-as reported |                                       | $                                             | (1.32  
|                                                 | Impact of SFAS 123 expense adjustment |                                               |        
|                                                 |                                       |                                               |        
|                                                 |                                       | Basic and diluted net loss per share-adjusted |        
|                                                 |                                       |                                               |        

71

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Unearned Compensation

During 2001, 2000, and 1999, we recognized unearned compensation of $12.4 million, $13.1 million and $9.1 million, respectively. These
amounts were recognized in connection with stock options granted or assumed, and sales of restricted stock. Unearned stock compensation is amortized to expense over the vesting period using an
accelerated method, and may decrease if employees terminate service prior to vesting. As a result of the departure of certain key DVDO employees, $1.2 million of unearned compensation was
reversed during 2001. Expense associated with option grants to employees was $10.1 million, $4.4 million and $5.3 million for 2001, 2000, and 1999, respectively.

Option Grants to Non-employees

During 2001, 2000, and 1999, we granted certain non-employees options to purchase 757,000, 703,000, and 710,000 shares of our stock at weighted
average exercise prices of $4.15, $17.37, and $8.51 per share, respectively. In 2001, 300,000 of the options granted in 2000 were repriced in connection with our stock option exchange program
discussed below and are included in the 2001 option grants above. The expense associated with these option grants is determined using the Black-Scholes model, and is recognized over the term of the
consulting agreement or service period. Expense associated with option grants to non-employees was $2.3 million, $4.7 million, and $739,000 for 2001, 2000, and 1999,
respectively.

NOTE 9BENEFIT PLANS

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

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

On
March 1, 2002, these two Plans were merged to form the Silicon Image 401(k) Savings Plan. This Plan allows all employees age 18 or older to make salary deferral contributions
ranging from 1% to 20% of their eligible earnings. We may make discretionary contributions to the 401(k) Savings Plan upon approval by the Board of Directors.

NOTE 10SEGMENT AND GEOGRAPHIC INFORMATION

Upon completion of our acquisition of CMD, we evaluated whether our storage subsystems business met the criteria of a reportable segment, and concluded that it
did. Since then, we have decided to phase out our older subsystems products and to develop new subsystems products only if we believe they will facilitate or accelerate the use of our storage ICs.
Additionally, we have now substantially completed the integration of CMD's operations, which generally resulted in CMD's functions and activities being absorbed by our pre-existing
functions. Because of these developments, we determined that our storage subsystems operations meet both the quantitative and qualitative

72

---

criteria of SFAS No. 131 for aggregation with our Semiconductor segment, and will therefore report only one segment.

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

|              |  | Year Ended December 31,
|------------- |  | -----------------------
|
|Taiwan        |  | $                      
|Japan         |  |                        
|United States |  |                        
|Hong Kong     |  |                        
|Korea         |  |                        
|Canada        |  |                        
|Other         |  |                        
|              |  |                        
|              |  | $                      
|              |  |                        

All
development and license revenue was derived from non-domestic sources. For all periods presented, substantially all of our long-lived assets were located
within the United States.

In
2001, three customers generated 12%, 12%, and 11% of product revenue. At December 31, 2001, three customers represented 17%, 16% and 12% of gross accounts receivable. In 2000,
two customers generated 18% and 16% of product revenue. At December 31, 2000, one customer represented 14% of gross accounts receivable. In 1999, three customers generated 17%, 16% and 11% of
product revenue.

NOTE 11SUBSEQUENT EVENTS

During the fourth quarter of 2001, we decided to place less emphasis on our storage subsystems board business. As a result, we will phase out our older board
products and develop new board products only if we believe it will facilitate or accelerate the use of our ICs in the storage market. Additionally, we decided to outsource all manufacturing of board
products. As a result of these decisions, and in order to better align our cost structure with our anticipated revenue, we implemented a plan to reduce our workforce by approximately 35 people, or 13%
of our total workforce, in February 2002. We will record a restructuring expense in the first quarter of 2002 for the costs associated with this workforce reduction. We are still finalizing the
details of the restructuring actions and cannot estimate the amount of the expense at this time.

73

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NOTE 12UNAUDITED QUARTERLY FINANCIAL DATA

|                                     |  | Three Months Ended |       
|------------------------------------ |  | ------------------ | ------
|
|
|2001                                 |  |                    |       
|Total revenue                        |  | $                  | 10,451
|Cost of revenue(1)                   |  |                    | 4,372 
|Loss from operations(2)              |  |                    | (7,436
|Net loss(2)                          |  |                    | (6,539
|Basic and diluted net loss per share |  | $                  | (0.13 
|Weighted average shares              |  |                    | 51,965
|2000                                 |  |                    |       
|Total revenue                        |  | $                  | 10,104
|Cost of revenue(3)                   |  |                    | 3,689 
|Loss from operations(4)              |  |                    | (2,684
|Net loss(4)                          |  |                    | (1,813
|Basic and diluted net loss per share |  | $                  | (0.04 
|Weighted average shares              |  |                    | 48,020

---

74

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REPORT OF INDEPENDENT ACCOUNTANTS

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

In
our opinion, the accompanying consolidated balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Silicon Image, Inc., at December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers
LLP

San
Jose, California
January 24, 2002, except as to Note 11,
which is as of February 26, 2002

75

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Signatures

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

| |  | SILICON IMAGE, INC.
| |  | -------------------
| |  | By:                

Power of Attorney

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

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

|Signature                                 |  | Title                                                                                                                                 |  | Date          
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|/s/DAVID D. LEEDavid D. Lee               |  | President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)                                            |  | March 28, 2002
|/s/ROBERT GARGUSRobert Gargus             |  | Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | March 28, 2002
|/s/DAVID A. HODGESDavid A. Hodges         |  | Director                                                                                                                              |  | March 28, 2002
|/s/KEITH MCAULIFFEKeith McAuliffe         |  | Director                                                                                                                              |  | March 28, 2002
|/s/ANDREW S. RAPPAPORTAndrew S. Rappaport |  | Director                                                                                                                              |  | March 28, 2002
|/s/RONALD V. SCHMIDTRonald V. Schmidt     |  | Director                                                                                                                              |  | March 28, 2002
|/s/DOUGLAS C. SPRENGDouglas C. Spreng     |  | Director                                                                                                                              |  | March 28, 2002

76

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Index to Exhibits

|Number |    | Title                                                                                                                                                                                                                                                                                                                                                          
|------ | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.01   |    | Amended and Restated Agreement and Plan of Reorganization, dated as of May 19, 2000, by and among the Registrant, Video Acquisition Corp., and DVDO, Inc. and Laurence A. Thompson, Dale R. Adams, Cheng Hwee
Chee, and David Buuck (Incorporated by reference from Exhibit 2.01 of the Form 10-K/A filed by Registrant on May 19, 2000).                      
|2.02   |    | First Amendment to the Amended and Restated Agreement and Plan of Reorganization, dated as of May 31, 2000, by and among the Registrant, Video Acquisition Corp., and DVDO, Inc. and Laurence A. Thompson, Dale R. Adams, Cheng Hwee Chee,
and David Buuck (Incorporated by reference from Exhibit 2.02 of the Form 10-K filed by Registrant on April 2, 2001).
|2.03   |    | Agreement and Plan of Reorganization, dated June 1, 2001, among the Registrant, Duke Acquisition Corp., CMD Technology Inc. and the principal shareholders of CMD Technology Inc. (Incorporated by reference from Exhibit 2.01 of the
Form 8-K filed by Registrant on June 20, 2001).                                                                          
|2.04   |    | Agreement and Plan of Reorganization, dated June 15, 2001, among the Registrant, Slice Acquisition Corp., Silicon Communication Lab, Inc. and certain shareholders of Silicon Communication Lab, Inc. (Incorporated by reference from
Exhibit 2.01 of the Form 8-K filed by Registrant on June 20, 2001).                                                      
|3.01   |    | Second Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference from Exhibit 3.03 from 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 3.05 from the Form S-1).                                                                                                                                                                                                                                                             
|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 from 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 from the Form S-1).                                                                                                                                                                                        
|10.01  |    | Form of Indemnity Agreement entered into between the Registrant and its directors and officers (Incorporated by reference from Exhibit 10.01 from the Form S-1).                                                                                                                                                                                               
|10.02  | ** | 1995 Equity Incentive Plan, as amended through July 20, 1999, and related forms of stock option agreements and stock option exercise agreements (Incorporated by reference from Exhibit 10.02 from the Form S-1).                                                                                                                                              
|10.03  | ** | 1999 Equity Incentive Plan, as amended, and related forms of stock option agreements and stock option exercise agreements (Incorporated by reference from Exhibit 4.05 of the Form S-8 filed by the Registrant on May 18,
2001).                                                                                                                               
|10.04  | ** | 1999 Employee Stock Purchase Plan and related enrollment form, notice of suspension and notice of withdrawal (Incorporated by reference from Exhibit 01.04 from the Form S-1).                                                                                                                                                                                 
|       |    |                                                                                                                                                                                                                                                                                                                                                                

77

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|10.05 | ** | Employment Agreement with Dan Atler dated June 15, 1998 (Incorporated by reference from Exhibit 10.05 from the Form S-1).                                                                                                                                                                  
|----- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.06 | ** | Employment Agreement with Parviz Khodi dated June 10, 1999 (Incorporated by reference from Exhibit 10.06 from the Form S-1).                                                                                                                                                               
|10.07 | ** | Amended and Restated Severance Agreement with David Lee dated August 15, 1997 (Incorporated by reference from Exhibit 10.07 from the Form S-1).                                                                                                                                            
|10.08 | ** | Consulting Agreement with Deog-Kyoon Jeong dated March 1, 1999 (Incorporated by reference from Exhibit 10.09 from the Form S-1).                                                                                                                                                           
|10.09 | *  | License Agreement dated March 15, 1995 between Deog-Kyoon Jeong and the Registrant, as amended through June 18, 1997 (Incorporated by reference from Exhibit 10.10 from the Form S-1).                                                                                                     
|10.10 |    | Lease Agreement dated April 9, 1997 between Elisabeth Griffinger and the Registrant (Incorporated by reference from Exhibit 10.11 from the Form S-1).                                                                                                                                      
|10.11 | *  | Business Cooperation Agreement dated September 16, 1998 between Intel Corporation and the Registrant, as amended October 30, 1998 (Incorporated by reference from Exhibit 10.12 from the Form S-1).                                                                                        
|10.12 | *  | Patent License Agreement dated September 16, 1998 between Intel Corporation and the Registrant (Incorporated by reference from Exhibit 10.13 from the Form S-1).                                                                                                                           
|10.13 |    | Digital Visual Interface Specification Revision 1.0 Promoter's Agreement dated January 8, 1999 (Incorporated by reference from Exhibit 10.14 from the Form S-1).                                                                                                                           
|10.14 |    | Revolving Credit Loan & Security Agreement dated December 17, 1998 between Comerica Bank-California and the Registrant (Incorporated by reference from Exhibit 10.15 from the Form S-1).                                                                                                   
|10.15 |    | Research and Development Contract for Gigabit Links and Multimedia Information Delivery Systems dated July 1, 1998 between Inter-University Semiconductor Research Center of Seoul National University and the Registrant (Incorporated by reference
from Exhibit 10.16 from the Form S-1).
|10.16 |    | Research and Development Contract for 1000BASE-T Gigabit Ethernet PHY Chip dated July 1, 1999 between Inter-University Semiconductor Research Center of Seoul National University and the Registrant (Incorporated by reference from
Exhibit 10.17 from the Form S-1).                     
|10.17 |    | Master Lease Agreement and Addendum with Comdisco, Inc. dated February 17, 1999 (Incorporated by reference from Exhibit 10.18 from the Form S-1).                                                                                                                                          
|10.18 | ** | Letter Agreement between Steve Tirado and the Registrant and Addendum thereto (Incorporated by reference from Exhibit 10.19 from the Form S-1).                                                                                                                                            
|10.19 | ** | Form of Restricted Stock Purchase Agreement and Secured Full Recourse Promissory Note entered into between Registrant and its officers and consultants (Incorporated by reference from Exhibit 10.20 from the Form S-1).                                                                   
|10.20 | ** | Form of Nonqualified Stock Option Agreement entered into between Registrant and its officers (Incorporated by reference from Exhibit 10.21 from the Form S-1).                                                                                                                             
|10.21 |    | Letter of Intent dated August 26, 1999 between Intel Corporation and the Registrant (Incorporated by reference from Exhibit 10.22 from the Form S-1).                                                                                                                                      
|      |    |                                                                                                                                                                                                                                                                                            

78

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|10.22 |    | Research and Development Contract for 1000BASE-T Gigabit Ethernet PHY Chip dated January 1, 2000 between Inter-University Semiconductor Research Center of Seoul National University and the Registrant (Incorporated by reference from
Exhibit 10.22 from the Form 10-K filed by the Registrant on March 20, 2000).
|----- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23 |    | Sublease Agreement with Mitsubishi Electronics America, Inc. dated October 15, 1999 (Incorporated by reference from Exhibit 10.23 from the Form 10-K filed by the Registrant on March 30, 2000).                                                                                                                    
|10.24 | ** | Executive Bonus Plan adopted by the Registrant on November 11, 1999 (Incorporated by reference from Exhibit 10.24 from the Form 10K filed by the Registrant on March 30, 2000).                                                                                                                                     
|10.25 | ** | Letter Agreement between Steve Tirado and the Registrant dated November 18, 1999 (Incorporated by reference from Exhibit 10.25 from the Form 10-K filed by the Registrant on March 30, 2000).                                                                                                                       
|10.26 | ** | Amendment No. 1 to Amended and Restated Severance Agreement with David Lee dated January 23, 2000 (Incorporated by reference from Exhibit 10.26 from the Form 10-K filed by the Registrant on March 30, 2000).                                                                                                      
|10.27 | ** | Executive Bonus Plan adopted by Registrant on July 28, 2000 (Incorporated by reference from Exhibit 10.27 from the Form 10-Q filed by the Registrant on August 14, 2000).                                                                                                                                           
|10.28 |    | Variable Rate Installment Note and Security Agreement dated October 18, 2000 between Comerica Bank-California and the Registrant (Incorporated by reference from Exhibit 10.28 from the Form 10Q filed by the Registrant on
November 14, 2000).                                                                     
|10.29 | ** | Letter Agreement between Badar Baqai and the Registrant dated November 13, 2000 (Incorporated by reference from Exhibit 10.29 from the Form 10-K filed by the Registrant on April 2, 2002).                                                                                                                         
|10.30 | ** | Non-Plan Stock Option Agreement between Badar Baqai and the Registrant dated November 22, 2000 (Incorporated by reference from Exhibit 10.30 from the Form 10-K filed by the Registrant on April 2, 2001).                                                                                                          
|10.31 | ** | Amendment No. 2 to Amended and Restated Severance Agreement with David Lee dated March 29, 2001 (Incorporated by reference from Exhibit 10.31 from the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                          
|10.32 | ** | Amendment No. 1 to Consulting Agreement with Deog-Kyoon Jeong dated March 29, 2001 (Incorporated by reference from Exhibit 10.32 from the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                                       
|10.33 | ** | Letter Agreement between Jaime Garcia-Meza and the Registrant dated April 5, 2001 (Incorporated by reference from Exhibit 10.33 from the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                                        
|10.34 | ** | Non-Plan Stock Option Agreement between Jaime Garcia-Meza and the Registrant dated April 5, 2001 (Incorporated by reference from Exhibit 10.34 from the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                         
|10.35 | ** | Non-Plan Stock Option Agreement between Badar Baqai and the Registrant dated April 4, 2001 (Incorporated by reference from Exhibit 10.35 from the Form 10-Q filed by the Registrant on May 15, 2001).                                                                                                               
|      |    |                                                                                                                                                                                                                                                                                                                     

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|10.36 | ** | CMD Technology Inc. 1991 Stock Option Plan and related form of Incentive Stock Option Agreement (Incorporated by reference from Exhibit 4.05 of the Form S-8 filed by the Registrant on June 26, 2001).                       
|----- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.37 | ** | CMD Technology Inc. 1999 Stock Incentive Plan, as amended, and related form of Stock Option Agreement (Incorporated by reference from Exhibit 10.35 from the Form 10-Q filed by the Registrant on November 14, 2001).         
|10.38 | ** | Silicon Communication Lab, Inc. 1999 Stock Option Plan, as amended, and related form of Stock Option Agreement (Incorporated by reference from Exhibit 10.35 from the Form 10-Q filed by the Registrant on November 14, 2001).
|10.39 | ** | Letter Agreement between Robert Gargus and the Registrant dated October 30, 2001 (Incorporated by reference from Exhibit 10.35 from the Form 10-Q filed by the Registrant on November 14, 2001).                              
|10.40 | ** | Letter Agreement between Michael Kelley and the Registrant dated August 19, 1999.                                                                                                                                             
|10.41 | ** | Non-Plan Stock Option Agreement between Robert Gargus and the Registrant dated October 30, 2001.                                                                                                                              
|10.42 | ** | Non-Plan Stock Option Agreement between Hyun Jong Shin and the Registrant dated November 6, 2001.                                                                                                                             
|23.02 |    | Consent of Independent Accountants.                                                                                                                                                                                           
|24.01 |    | Power of Attorney (included on signature page).                                                                                                                                                                               

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