Silicon Image 10Q 2007 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-26887

Silicon Image, Inc.

(Exact name of registrant as specified in its charter)


Delaware		77-0396307
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filerþ Accelerated Filero Non-Acceleratedo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of October 31, 2007, there were 84,200,525 shares outstanding of the registrant’s Common Stock, $0.001 par value per share.

Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three and Nine Months Ended
September 30, 2007

Table of Contents


Part I. Financial Information	3
Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006	4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Controls and Procedures	25
Part II. Other Information	26
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3. Defaults Upon Senior Securities	44
Item 4. Submission of Matters to a Vote of Security Holders	44
Item 5. Other Information	44
Item 6. Exhibits	45
Signatures	46
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Silicon Image, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)


	September 30,			December 31,
	2007			2006
Assets
Current Assets:
Cash and cash equivalents	$	130,658		$	81,921
Short-term investments		95,031			168,724
Accounts receivable, net of allowances for doubtful accounts of $1,727 in 2007 and $235 in 2006		45,597			39,931
Inventories, net		19,741			28,287
Prepaid expenses and other current assets		4,512			4,895
Deferred income taxes		10,239			12,793

Total current assets		305,778			336,551

Property and equipment, net		23,272			18,431
Goodwill		19,210			13,021
Intangible assets, net		1,566			78
Deferred income taxes, non-current		15,250			10,580
Other assets		19,825			1,570

Total assets	$	384,901		$	380,231

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	22,382		$	14,187
Accrued and other liabilities		19,871			37,308
Deferred license revenue		5,346			5,264
Deferred margin on sales to distributors		30,564			17,712

Total current liabilities		78,163			74,471

Other long-term liabilities		5,168			538

Total liabilities		83,331			75,009

Commitments and contingencies (See Note 7)
Stockholders’ Equity:
Common stock		90			87
Treasury stock		(38,096	)		—
Additional paid-in capital		413,902			386,258
Accumulated deficit		(74,254	)		(80,964	)
Accumulated other comprehensive loss		(72	)		(159	)

Total stockholders’ equity		301,570			305,222

Total liabilities and stockholders’ equity	$	384,901		$	380,231

See accompanying Notes to Condensed Consolidated Financial Statements.

Silicon Image, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Revenue:
Product	$	74,173	$	69,149	$	195,715	$	184,096
Development, licensing and royalties		12,109		9,178		39,457		23,909

Total revenue		86,282		78,327		235,172		208,005

Cost of revenue and operating expenses:
Cost of revenue (1)		37,500		32,721		105,196		87,854
Research and development (2)		20,489		16,866		56,709		47,611
Selling, general and administrative (3)		16,827		17,472		51,122		49,496
Amortization of intangible assets		540		78		1,692		430

Total cost of revenue and operating expenses		75,356		67,137		214,719		185,391

Income from operations		10,926		11,190		20,453		22,614
Interest income and other, net		2,302		2,623		8,618		6,181

Income before provision for income taxes		13,228		13,813		29,071		28,795
Provision for income taxes		9,118		5,771		17,673		12,603

Net income	$	4,110	$	8,042	$	11,398	$	16,192


Net income per share – basic	$	0.05	$	0.10	$	0.13	$	0.19

Net income per share – diluted	$	0.05	$	0.09	$	0.13	$	0.18

Weighted average shares – basic		84,489		83,439		86,008		83,424
Weighted average shares – diluted		85,937		87,433		88,063		87,577


(1) Includes stock-based compensation expense	$	421	$	772	$	1,210	$	1,954
(2) Includes stock-based compensation expense		2,181		3,781		6,545		9,393
(3) Includes stock-based compensation expense		2,731		4,073		6,796		11,113

See accompanying Notes to Condensed Consolidated Financial Statements.

Silicon Image, Inc.

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	11,398		$	16,192
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		7,456			5,045
Amortization of intangible assets		1,692			429
Provision for doubtful accounts		450			(2	)
Stock-based compensation expense		14,549			22,460
Income tax benefit from employee based compensation plans		789			12,866
Excess tax benefits from employee stock transactions		(2,880	)		(8,556	)
Accretion of investment premium		(260	)		(322	)
Realized loss/(gain) on investments		(27	)		7
Loss on disposal of property and equipment		995			10
Deferred income taxes		(206	)		—
Changes in assets and liabilities:
Accounts receivable		(3,029	)		(1,861	)
Inventories		8,736			(2,547	)
Prepaid expenses and other assets		1,167			13
Accounts payable		6,421			786
Accrued liabilities and deferred license revenue		(23,102	)		(2,063	)
Patent infringement proceeds		—			4,216
Deferred margin on sales to distributors		12,852			5,174

Cash provided by operating activities		37,001			51,847
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments		100,434			65,280
Purchases of short-term investments		(26,287	)		(186,493	)
Business acquisition, net of cash acquired		(13,751	)		—
Purchases of property and equipment		(10,105	)		(5,958	)
Purchase of intellectual property		(15,040	)		—
Release of restriction on cash received in conjunction with resolution of litigation		—			6,966

Cash provided by (used in) investing activities		35,251			(120,205	)
Cash flows from financing activities:
Proceeds from issuances of common stock, net		12,305			22,418
Excess tax benefits from employee stock transactions		2,880			8,556
Repayments of debt and capital lease obligations		—			(171	)
Payment for financing in connection with purchases of software		(528	)		—
Payments to acquire treasury stock		(38,096	)		—

Cash provided by (used in) financing activities		(23,439	)		30,803

Effect of exchange rate changes on cash and cash equivalents		(76	)		—
Net increase (decrease) in cash and cash equivalents		48,737			(37,555	)
Cash and cash equivalents — beginning of period		81,921			77,877

Cash and cash equivalents — end of period	$	130,658		$	40,322


Supplemental cash flow information:
Cash payment for interest	$	33		$	9

Cash payment for income taxes	$	29,018		$	927

Unrealized net gain on investment security	$	163		$	551

Property and equipment purchased but not paid for	$	1,604		$	3,213

Intangibles purchased not paid for	$	3,750		$	15

See accompanying Notes to Condensed Consolidated Financial Statements.

Silicon Image, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2007

(unaudited)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Silicon Image, Inc. and its subsidiaries (the “Company”, “Silicon Image”, “we” or “our”) included herein have been prepared on a basis consistent with our December 31, 2006 audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the condensed consolidated balance sheets of Silicon Image and our subsidiaries as of September 30, 2007, the related consolidated statements of income for the three and nine months ended September 30, 2007 and 2006, and the related consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006. All significant intercompany accounts and transactions have been eliminated. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007 are not necessarily indicative of future operating results to be expected for the fiscal year ended December 31, 2007.

2. Recent Accounting Pronouncements

In September 2006, the FASB released FASB 157,“Fair Value Measurements”and is effective for fiscal years beginning after November 15, 2007. FASB 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. We are currently assessing the impact that the adoption of this pronouncement will have on our financial statements.

In February 2007, the Financial Accounting Standards Board released FASB 159, “The Fair Value Option for Financial Assets and Financial Liabilities” effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We are currently assessing the impact that the adoption of this pronouncement will have on our consolidated financial statements.

In the June 2007 meeting, the Emerging Issues Task Force, or EITF, reached a final consensus on EITF Issue No. 07-3, or EITF 07-3,Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities.The consensus requires companies to defer and capitalize prepaid, non-refundable research and development payments to third parties over the period that the research and development activities are performed or the services are provided, subject to an assessment of recoverability. EITF 07-3 is effective for new contracts entered into fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. We are currently assessing the impact that the adoption of this pronouncement will have on our consolidated financial statements.

3. Stock-Based Compensation

1995 Equity Incentive Plan (the “1995 Plan”)

In September 1995, the Company’s Board of Directors adopted the 1995 Equity Incentive Plan (the “1995 Plan”), which provides for the granting of incentive stock options (“ISOs”) and non-qualified stock options (“NSOs”) to employees, directors and consultants. In accordance with the 1995 Plan, the stated exercise price shall not be less than 100% and 85% of the fair market value of our common stock on the date of grant for ISOs and NSOs, respectively. In September 1998, the 1995 Plan was amended to allow ISOs to be exercised prior to vesting. We have the right to repurchase shares acquired upon the early exercise of options at their original purchase price if the optionee’s employment with the Company is terminated prior to the shares vesting. Once the shares vest, the Company’s repurchase right expires.

1999 Equity Incentive Plan (the “1999 Plan”)

In October 1999, the 1999 Plan became the successor to the 1995 Plan and was amended to prohibit early exercise of stock options. The number of shares reserved for issuance under the 1999 Plan increases automatically on January 1 of each year by an

amount equal to 5% of our total common shares outstanding as of the immediately preceding December 31st. The 1999 Plan terminates in July 2009.

In June and July 2001, in connection with the CMD Technology, Inc., (“CMD”) and Silicon Communication Lab (“SCL”) acquisitions, we assumed all outstanding options and options available for issuance under the CMD 1999 Stock Incentive Plan and SCL 1999 Stock Option Plan. In April 2004, in connection with the TransWarp acquisition, we assumed all outstanding options and options available for issuance under the TransWarp Stock Option Plan. The terms of these Plans are very similar to those of the 1999 Plan. Our assumption of the CMD, SCL and TransWarp Plans and the outstanding options thereunder did not require the approval of, and was not approved by, our stockholders.

Options granted under our stock option plans are exercisable over periods not to exceed ten years and vest over periods ranging from one to five years and generally vest annually as to 25% of the shares subject to the options. Stock option grants to members of our Board of Directors vest monthly, over periods not to exceed four years. Some options provide for accelerated vesting if certain identified milestones are achieved, upon a termination of employment or upon a change in control of the Company.

Under our stock option plans, 8.7 million shares of common stock remain available for issuance.

Non-plan options

In 2004 and 2003, our Board of Directors granted non-plan options to purchase 1.7 million and 625,000 shares, respectively, of our common stock to three executives and an employee. There were no non-plan option grants in 2005 and 2006. 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. No non-plan options were granted during the nine months ended September 30, 2007.

1999 Employee Stock Purchase Plan (“ESPP”)

Our ESPP provides that eligible employees may contribute up to 15% of their eligible earnings to purchase shares at the lower of 85% of the fair market value of the common stock on the commencement date of the six-month offering period or on the last day of the six-month offering period. At September 30, 2007, there were 2.0 million shares of our common stock reserved for future issuance under the ESPP.

SFAS No. 123(R)

Effective January 1, 2006, we adopted the fair value recognition provisions of the Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment, (“SFAS No. 123(R)”), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected to use the modified prospective transition method as permitted by SFAS No. 123(R) and therefore have not restated our financial results for prior periods. Under this transition method, stock-based compensation expense for the nine months ended September 30, 2007 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”)Accounting for Stock-based Compensation, as adjusted for estimated forfeitures. Stock-based compensation expense for all stock-based compensation awards granted subsequent to December 31, 2005 was based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Under SFAS No. 123(R), our ESPP is considered a compensatory plan and we are required to recognize compensation cost for grants made under ESPP. We recognize compensation expense on a straight-line basis for all share-based payment awards over the respective requisite service period of the awards.

Stock-based Compensation Expense

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Cost of sales	$	421			772		$	1,210			1,954
Research and development		2,181			3,781			6,545			9,393
Selling, general and administrative		2,731			4,073			6,796			11,113
Income tax effect		(1,714	)		(189	)		(4,517	)		(235	)

	$	3,619		$	8,437		$	10,034		$	22,225

As required by SFAS No. 123(R), management made an estimate of expected forfeitures and is recognizing stock-based compensation expense only for those equity awards expected to vest.

Change in forfeiture rate- For the quarter ended September 30, 2007, the Company used a 10.84% estimated forfeiture rate which we believe is indicative of the rate it will experience during the remaining vesting period of currently outstanding unvested options.

4. Comprehensive Income

The components of comprehensive income, net of related taxes, were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007			2006
Net income	$	4,110	$	8,042	$	11,398		$	16,192
Change in unrealized value of investments		28		321		163			327
Foreign currency translation adjustments		49		—		(76	)		—

Total comprehensive income	$	4,187	$	8,363	$	11,485		$	16,519

5. Net Income Per Share

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period, excluding shares subject to repurchase, and diluted net income per share is computed using the weighted-average number of common shares and diluted equivalents outstanding during the period, if any, determined using the treasury stock method. The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net income	$	4,110	$	8,042	$	11,398	$	16,192


Weighted average shares – basic		84,489		83,439		86,008		83,424

Weighted average shares – diluted		85,937		87,433		88,063		87,577

Net income per share – basic	$	0.05	$	0.10	$	0.13	$	0.19
Net income per share – diluted	$	0.05	$	0.09	$	0.13	$	0.18

The following is a reconciliation of the weighted-average common shares used to calculate basic net income per share to the weighted-average common shares used to calculate diluted net income per share (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Weighted-average common shares for basic net income per share		84,489		83,439		86,008		83,424
Weighted-average dilutive stock options outstanding under the treasury stock method		1,448		3,994		2,055		4,153

Total		85,937		87,433		88,063		87,577

6. Balance Sheet Components


	September 30,			December 31,
	2007			2006
	(in thousands)
Inventories:
Raw materials	$	3,876		$	7,908
Work in process		4,342			2,712
Finished goods		11,523			17,667

Total inventories	$	19,741		$	28,287


Property and equipment
Computers and software	$	27,950		$	22,432
Equipment		27,215			25,836
Furniture and fixtures		3,975			3,068

		59,140			51,336

Less: accumulated depreciation		(35,868	)		(32,905	)

Total property and equipment, net	$	23,272		$	18,431

Accrued liabilities:
Accrued payroll and related expenses	$	4,309		$	4,921
Accrued legal fees		1,421			1,022
Bonus accrual		73			8,718
Accrued income taxes		332			12,683
Other accrued liabilities		13,736			9,964

Total accrued liabilities	$	19,871		$	37,308

7. Commitments and Contingencies

On December 7, 2001, we and certain of our officers and directors were named as defendants along with our underwriters in a securities class action lawsuit. The lawsuit alleges that the defendants participated in a scheme to inflate the price of our stock in our initial public offering and in the aftermarket through a series of misstatements and omissions associated with the offering. The lawsuit is one of several hundred similar cases pending in the Southern District of New York that have been consolidated by the court. In February 2003, the District Court issued an order denying a motion to dismiss by all defendants on common issues of law. In July 2003, we, along with over 300 other issuers named as defendants, agreed to a settlement of this litigation with plaintiffs. While the parties’ request for court approval of the settlement was pending, in December 2006 the United States Court of Appeals for the Second Circuit reversed the District Court’s determination that six focus cases could be certified as class actions. In April 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but acknowledged that the District Court might certify a more limited class. At a June 26, 2007 status conference, the Court terminated the proposed settlement as stipulated among the parties. The parties are negotiating the schedule for filing amended pleadings on plaintiffs’ motion to certify a different class. If a satisfactory settlement is not renegotiated in light of any new class definition, we believe that these claims are without merit and we intend to defend vigorously against them.

2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Ms. Simmonds against certain of the underwriters of the Company’s initial public offerings. The plaintiff alleges that the underwriters violated section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78p(b) by engaging in short-swing trades, and seeks disgorgement of profits in amounts to be proven at trial from the underwriters. The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company.

We and certain of our officers were named as defendants in a securities class action captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus,” commenced on January 31, 2005. Plaintiffs filed the action on behalf of a putative class of stockholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleged that Silicon Image and certain of our officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiff and approving the selection of lead counsel. On July 27, 2005 plaintiffs filed a consolidated amended complaint (“CAC”). The CAC no longer named Mr. Gargus as an individual defendant, but added Dr. David Lee as an individual defendant. The CAC also expanded the class period from June 25, 2004 to April 22, 2005. Defendants filed a motion to dismiss the CAC on September 26, 2005. Plaintiffs subsequently received leave to file, and did file, a second consolidated amended complaint (“Second CAC”) on December 8, 2005. The Second CAC extended the end of the class period from April 22, 2005 to October 13, 2005 and added additional factual allegations under the same causes of action against Silicon Image, Mr. Tirado and Dr. Lee. The complaint also added a new plaintiff, James D. Smallwood. Defendants filed a motion to dismiss the Second CAC on February 9, 2006. Following subsequent pleading by both parties, on June 21, 2006 the court granted defendants’ motion to dismiss the Second CAC with leave to amend. Plaintiffs subsequently filed a third consolidated amended complaint (“Third CAC”) by the court established deadline of July 21, 2006. Defendants filed a motion to dismiss the Third CAC on September 1, 2006 and subsequent pleadings by the parties followed in November and December of 2006 and January of 2007. On February 23, 2007, the court granted defendants’ motion to dismiss the Third CAC with leave to amend. Plaintiffs filed a Fourth Consolidated Amended Complaint (“Fourth CAC”) on March 30, 2007. Defendants filed a motion to dismiss the Fourth CAC on May 25, 2007. Following subsequent pleading by both parties, on September 21, 2007, the court granted defendants’ motion to dismiss the Fourth CAC, without further leave to amend. Final judgment was entered in favor of defendants on September 25, 2007. On October 19, 2007, plaintiffs filed notice of appeal of the court’s final judgment to the United States Court of Appeals for the Ninth Circuit. The Court of Appeals has not yet issued a briefing schedule.

On January 31, 2007, we filed a lawsuit in the United States District Court for the Northern District of California against Analogix Semiconductor, Inc. (“Analogix”), a semiconductor company based in California. The complaint charges Analogix with copyright infringement, misappropriation of trade secrets, and unlawful, unfair and fraudulent business practices. The lawsuit alleges that Analogix, without authorization and in violation of Silicon Image’s intellectual property rights, copied and used our proprietary register maps by gaining unauthorized access to Silicon Image’s proprietary and confidential information, illegally copied and modified Silicon Image’s semiconductor configuration software and knowingly and unlawfully encouraged its existing and prospective customers to modify and use Silicon Image’s semiconductor configuration software with Analogix’s chips, a use that is beyond the scope, and in violation of, the rights granted under, Silicon Image’s software license agreements. In addition to seeking monetary damages in an amount to be determined at trial, we are seeking an injunction barring Analogix from misappropriating Silicon Image’s trade secrets. On June 18, 2007, Analogix filed a counterclaim alleging Silicon Image breached a confidentiality agreement by purportedly disclosing Analogix’s confidential information within Silicon Image. A hearing on the Company’s motion for an injunction is scheduled for November 9, 2007, and a trial date has been set for September 22, 2008.

On January 14, 2005, we received a preliminary notification that the Securities and Exchange Commission had commenced a formal investigation involving trading in our securities. On February 14, 2005, through our legal counsel, we received a formal notification of that investigation and associated subpoenas. On January 18, 2006, the SEC announced that it filed a civil complaint (Case No. CV 06-0256 DSF, C.D. Cal.) for insider trading against Deog Kyoon Jeong, a co-founder and consultant to the Company, and that it was also entering into a consent judgment with Mr. Jeong. The SEC stated that Mr. Jeong had agreed to pay a civil penalty of $56,000 and to disgorge profits of $56,000, without admitting or denying the allegations in the SEC complaint. We are not aware of any further actions taken by the SEC in this matter. We intend to continue to fully cooperate with the SEC in the event that any further actions are necessary.

In addition, we have been named as defendants in a number of judicial and administrative proceedings incidental to our business and may be named again from time to time.

We intend to defend all of the above matters vigorously, and although adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on our results of operations, financial position or cash flows.

Guarantees

Certain of our licensing agreements indemnify our customers for any expenses or liabilities resulting from claimed infringements of third party patents, trademarks or copyrights by our products. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances, the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any claim. However, there can be no assurance that such claims will not be filed in the future.

Contractual Obligations and Off-Balance Sheet Arrangements

The following table represents our future minimum payments under our operating leases, debt, inventory purchase and minimum royalty obligations outstanding at September 30, 2007 (in thousands):


Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	9,418	$	3,519	$	4,236	$	1,663	$	—
Inventory purchase obligations		8,853		8,853		—		—		—
Intangibles purchase commitments		31,371		23,156		8,215		—		—

Total contractual obligations	$	49,642	$	35,528	$	12,451	$	1,663	$	—

8. Customer and Geographic Information

Revenue by geographic area, including development, licensing and royalty revenue was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Japan	$	31,787	$	30,294	$	83,515	$	69,727
Taiwan		11,232		14,895		39,380		44,187
United States		20,374		14,371		48,994		40,450
Europe		5,718		5,180		18,789		13,270
Hong Kong		6,486		3,042		14,611		7,516
Korea		4,682		6,744		13,430		18,110
Other		6,003		3,801		16,453		14,745

Total revenue	$	86,282	$	78,327	$	235,172	$	208,005

Revenue by product line, including development, licensing and royalty revenue was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Consumer Electronics (1)	$	66,589	$	54,265	$	176,978	$	137,874
Personal Computer (1)		10,992		14,462		33,234		37,968
Storage (1)		8,701		9,600		24,960		32,163

Total revenue	$	86,282	$	78,327	$	235,172	$	208,005


(1)		Includes development, licensing and royalty revenue

Revenue by product line, excluding development, licensing and royalty revenue was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Consumer Electronics	$	58,644	$	47,793	$	148,886	$	121,587
Personal Computer		9,326		13,945		29,237		36,414
Storage		6,203		7,411		17,591		26,095
Development, licensing and royalty revenue		12,109		9,178		39,458		23,909

Total revenue	$	86,282	$	78,327	$	235,172	$	208,005

For the three months ended September 30, 2007, four customers generated 15.9%, 15.3%, 13.5% and 10.0% of our revenue, respectively. For the nine months ended September 30, 2007, three customers generated 16.1%, 14.2%, and 11.6%of our revenue, respectively. At September 30, 2007, two customers represented 15.4%, and 11.9% of gross accounts receivable respectively.

For the three months ended September 30, 2006, three customers generated 18.2%, 16.9% and 10.2% of our revenue, respectively. For the nine months ended September 30, 2006, three customers generated 17.2%, 13.6% and 13.0% of our revenue, respectively. At September 30, 2006, three customers represented 21.9%, 13.7%, and 11.3% of gross accounts receivable respectively.

For each period presented, substantially all long-lived assets were located within the United States.

Our Chief Executive Officer, who is considered to be our chief operating decision maker, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. We operate in a single operating segment that includes the design, development and implementation of semiconductors for the secure storage, distribution and presentation of high-definition content.

9. Provision for income taxes

For the three and nine months ended September 30, 2007, we recorded a provision for income taxes of $9.1 million and $17.7 million, respectively. The effective tax rate for the three and nine months ended September 30, 2007 was 68.9% and 60.8% respectively. The effective tax rate is based on projected taxable income for 2007. The effective tax rate for the three months ended September 30, 2007 of 68.9% comprised of 53.8%, 1.2% and 13.9% for federal, state and foreign, respectively.

For the three and nine months ended September 30, 2006, we recorded a provision for income taxes of $5.8 million and $12.6 million, respectively. The effective tax rate for the three and nine months ended September 30, 2006 was 41.8% and 43.8% respectively and was based on our projected taxable income for 2006. The effective tax rate took into account the fact that a portion of the expected benefit due to the use of net operating loss and research credit carryforwards resulted from stock option transactions, and therefore was not expected to reduce the income tax provision, but instead would be recorded as a credit to additional paid-in capital when realized. The effective tax rate for the three months ended September 30, 2006 of 41.8% was comprised of 34.4% Federal, 4.2% State and 3.2% foreign, respectively. We provided a valuation allowance of $52.3 million as of December 31, 2005 on 100% of the net deferred tax assets as management determined it was more likely than not that the deferred tax assets would not be realized. In the fourth quarter of 2006, we released our valuation allowance as we determined that the deferred tax assets at that time were more likely than not, to be realized. We continue to assess the recoverability of the deferred tax assets on an ongoing basis.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” (“FIN 48”) on January 1, 2007. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the adoption of FIN 48, we recorded a reduction to opening retained earnings as of January 1, 2007 of approximately $4.7 million related primarily to our measurement of certain tax credits based on the requirements of FIN 48. We have historically classified accruals for tax uncertainties in current taxes payable and, where appropriate, as a reduction to deferred

tax assets. As a result of the adoption of FIN 48, we have reclassified $5.6 million from current taxes payable to other long term liabilities. In addition, we further increased other long term liabilities by $4.0 million, decreased current deferred tax assets by $2.3 million and increased non-current deferred tax assets by $1.7 million.

As of the adoption date, we had gross tax affected unrecognized tax benefits of approximately $14.4 million of which $11.5 million, if recognized, would affect the effective tax rate. We anticipate an increase to the unrecognized tax benefits during 2007 as compared to 2006, related primarily to tax credits and certain U.S. and foreign tax positions related to our global expansion strategy. The 2007 changes to the unrecognized tax benefits are not expected to have a material effect on our results of operations for 2007 as the effects of these items are included in our current estimates of the forecasted 2007 tax provision.

During the three months ended September 30, 2007, the Company reclassified approximately $4.6 million from other long-term liabilities related to unrecognized tax benefits to current taxes payable. The adjustment related to changes in estimates reflected in the 2006 tax returns filed in the current period as compared to those reflected in the tax provision for the year ended December 31, 2006. This adjustment also reduced by $4.6 million the amount of unrecognized tax benefits that, if recognized would affect the effective tax rate. We will continue to reexamine our tax provision in future periods, and any effect that estimated unrecognized tax benefits may have on our financial position at each reporting period and update our estimates as appropriate at that time.

Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes and, as of the adoption date, we had accrued interest related to unrecognized tax benefits of approximately $60,000. The provision for income taxes for the three and nine months ended September 30, 2007 included approximately $94,000 and $254,000 respectively, of interest on unrecognized tax benefits.

We conduct business globally and, as a result, we and one or more of our subsidiaries file income tax returns in various jurisdictions throughout the world including with the U.S. federal and various U.S. state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. We remain subject to federal and state examination for all years from 1995 forward by virtue of the tax attributes carrying forward from those years. We also remain subject to examination in most foreign jurisdictions for all years since 2002 or the year we began operations in those countries if later. We are not aware of any material income tax examinations in progress at this time.

10. Business Acquisition

The following acquisition was accounted for under Statement of Financial Accounting Standards No. 141, “Business Combinations.” Accordingly, the results of operations are included in the accompanying Condensed Consolidated Statement of Income since the acquisition date, and the related assets and liabilities were recorded based upon their relative fair values at the date of acquisition. Pro forma financial information has not been presented as their historical operations were not material to our consolidated financial statements.

On January 2, 2007, we acquired sci-worx GmbH (“sci-worx”), a leading intellectual property (“IP”) and design service provider specializing in multimedia, communications, and networking applications, for a gross cash consideration of approximately $15.8 million (net cash consideration of $13.8 million) for 100% of the outstanding shares of common stock. In addition, we incurred approximately $410,000 in costs directly related to the consummation of this transaction. These costs were included in the total purchase price consideration. The acquisition of sci-worx is expected to enhance our ability to integrate additional functions into our semiconductors and to accelerate the expansion of our system-on-a-chip (“SoC”) design capabilities for the storage, distribution and presentation of high-definition (“HD”) content in the consumer environment. The results of sci-worx have been included in the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2007.

Net tangible assets acquired is as follows: (in thousands)


	January 3, 2007
Cash	$	2,015
Accounts receivable, net of allowances for doubtful accounts		2,598
Unbilled accounts receivable		1,077
Inventories, net		191
Other current assets		661
Property and equipment, net		1,583
Other long-term assets		38
Deferred tax assets		1,910
Accounts payable		(548	)
Accrued liabilities		(1,131	)
Other current liabilities		(1,509	)

Total liabilities assumed	$	6,885

The allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed at the time of the acquisition is as follows (in thousands):


Net tangible assets acquired	$	6,885
Goodwill		6,110
Others		41
Intangible assets and other:
Core developed technology		970
Customer relationships		810
Contractual backlog		1,360

		16,176
Direct acquisition costs		410

Purchase price	$	15,766

During the quarter ended June 30, 2007, we increased the goodwill relating to sales commission for development, licensing and royalty revenue of approximately $79,000 not accounted for at the time of the acquisition.

Intangible Assets

The core developed technology and customer relationships intangible assets are being amortized straight line over an estimated useful life between two to four years, and the contractual backlog intangible asset is being amortized straight line over an estimated useful life of one year. No residual value has been estimated for the intangible assets. In accordance with SFAS No. 142Goodwill and Other Intangibles, we will evaluate the acquired goodwill for impairment on an annual basis.

Identifiable intangible assets comprise the following (in thousands):


			9/30/2007
	Gross		Accumulated			Net book
	Amount		Amortization			value
Intangible assets and other:
Core developed technology	$	970	$	(280	)	$	690
Customer relationships		810		(243	)		567
Contractual backlog		1,360		(1,088	)		272

Total	$	3,140	$	(1,611	)	$	1,529

Estimated future amortization expense for our intangible assets is as follows for the fiscal years ending December 31 (in thousands):


2007	$	445
2008		697
2009		237
2010		150
2011		—

	$	1,529

11. License of Sunplus Intellectual Property and Related Revenue Transaction

In February 2007, we entered into an agreement with Sunplus Technology Co., Ltd. (“Sunplus”) to license certain technology (“IP Technology purchased”) from Sunplus for $40.0 million, as described below, and to license certain of our intellectual property (“IP Technology sold”) to Sunplus for $5.0 million. The purpose of the IP Technology purchased is to obtain advanced technology for development of future Silicon Image products. The IP Technology sold to Sunplus provides them with comprehensive digital

television system functionality. In February 2007, we also entered into a Video Processor Development, Marketing and Sales Agreement (“Development Agreement”) with Sunplus with the objective of jointly developing and marketing a chip that would use the technologies in the License Agreement. In June 2007, the parties mutually agreed to amend and terminate the Development Agreement due to change in future market demand for the specific chip to be developed.

The License Agreement continues to be in effect and provides for the payment of an aggregate of $40.0 million to Sunplus by Silicon Image, $35.0 million of which is payable in consideration for the licensed technology and related deliverables and $5.0 million of which is payable in consideration for Sunplus support and maintenance obligations. Through September 30, 2007, we have paid Sunplus $15.0 million of the consideration for the licensed technology and related deliverables in February 2007 and accrued for $3.8 million of the consideration for the period ended September 30, 2007. We are required to pay the remaining $16.3 million upon our acceptance of certain milestone deliverables under the contract. The $5.0 million to be paid for support and maintenance by Sunplus is payable over a two-year period starting upon delivery of the final Sunplus deliverables. As of September 30, 2007, the amounts paid under this agreement are recorded as other assets in the Condensed Consolidated Balance Sheet. The Company is expected to begin to amortize the license beginning from the fourth quarter of 2007, straight line, over a period of seven years, as a result of the fact that in October 2007, we approved the inclusion of certain of the acquired IP blocks in certain of our product designs.

12. Related Party Transaction

On November 8, 2005, the Board of Directors of Silicon Image approved David Lee, Chairman of the Board of Directors of Simplay Labs, LLC, a wholly-owned subsidiary of Silicon Image, Inc., making an investment in and joining the Board of Directors of Synerchip Co., Ltd. (“Synerchip”). On November 21, 2005, Dr. Lee was appointed to the Board of Directors of Synerchip. Dr. Lee made a personal investment in the amount of $10,000 directly in Synerchip, and a limited partnership he controls made an investment in the amount of $500,000 in Synerchip. Sunplus Technology Co., Ltd. (“Sunplus”), a long-time customer and vendor of Silicon Image also has Board representation and an investment in Synerchip. Because of Sunplus’ representation on the Board of Directors of Synerchip and investment in Synerchip, Synerchip may be deemed an affiliate of Sunplus. On March 24, 2006, Dr. Lee resigned as an employee of Silicon Image and its related subsidiary Simplay Labs; therefore, Sunplus and Synerchip ceased as related parties to Silicon Image as of such date.

The related party transactions with Sunplus and Synerchip and its related subsidiaries and affiliates through the nine month period ended September 30, 2006 ( which consist of transactions occurring during 2006 on or before March 24, 2006) are described below:

Silicon Image paid $363,000 to Sunplus for purchases of integrated semiconductors for the nine month period ended September 30, 2006.

Silicon Image paid $221,000 to Synerchip for purchases of integrated semiconductors for the nine month period ended September 30, 2006.

In March 2002, Silicon Image and Sunplus entered into a five-year Technology License Agreement pursuant to which Sunplus licensed certain LVDS receiver technology from Silicon Image. In connection with this agreement, Sunplus paid $132,000 to Silicon Image in related royalty fees for the nine month period ended September 30, 2006.

In June 2003, Silicon Image and Sunplus entered into a three-year Strategic Relationship Agreement for joint manufacturing, marketing, selling and distribution of certain semiconductors. In connection with this agreement, Sunplus paid annual subscription fees to Silicon Image in the amounts of $50,000 for the nine month period ended September 30, 2006.

13. Stock Repurchase Program

In February 2007, our Board of Directors authorized a stock repurchase program under which we intend, from time to time, as business conditions warrant, to purchase up to $100 million of common stock, on the open market, or in negotiated or block transactions, over a 36 month period. We may commence purchasing, or increase, decrease or discontinue purchasing at any time without any prior notice. From August 1 through August 31, 2007, we repurchased a total of 1.25 million shares of our common stock at a total cost of $7.0 million. For the nine months ended September 30, 2007, we have repurchased a total of 5 million shares of our common stock at a total cost of $38.1 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-Q entitled “Factors Affecting Future Results,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within thisForm 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “estimates,” “may,” “will” and variations of such words 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 thisForm 10-Q with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image, Inc. in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

Silicon Image and Simplay HD are trademarks, registered trademarks or service marks of Silicon Image, Inc. in the United States and other countries. HDMI™ and High-Definition Multimedia Interface are trademarks or registered trademarks of HDMI Licensing, LLC in the United States and other countries, and are used under license from HDMI Licensing, LLC. All other trademarks and registered trademarks are the property of their respective owners.

Available Information

Our Internet website address iswww.siliconimage.com.We are not including the information contained on our web site as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q. We make available free of charge, through our Internet website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable, after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Overview

Headquartered in Sunnyvale, California, we are a leader in driving the design, development and implementation of semiconductors for the secure storage, distribution and presentation of high-definition content. We create and promote industry standards for digital content delivery such as the Digital Visual Interface specification (“DVI”), the High Definition Multimedia Interface™ or HDMI™ and the Serial Advanced Technology Attachment specification (“SATA”), leveraging partnerships with global leaders in the consumer electronics and personal computing markets to meet the growing digital content needs of consumers worldwide. We are also a leading provider of semiconductor intellectual property solutions for high-definition multimedia and data storage applications.

Our mission is to be the leader in the design, development and implementation of semiconductors for the secure storage, distribution and presentation of high-definition content in the home and mobile environments. We are dedicated to the promotion of technologies, standards and products that facilitate the movement of digital content between and among digital devices across the consumer electronics (“CE”), personal computer (“PC”) and storage markets. We have been at the forefront of the development and promotion of several industry-standard, high-speed, digital, secure interfaces, including DVI, HDMI and the SATA.

We place an emphasis on understanding and having strategic relationships within the ecosystem of companies that provide the content and products that drive digital content creation and consumption. Towards that end, we have developed strategic relationships with major Hollywood studios such as Universal, Warner Brothers, Disney and Fox and leading consumer electronics companies such as Sony, Hitachi, Toshiba, Matsushita (Panasonic), Philips and Thomson. Through these relationships we have formed a strong understanding of the requirements for storing, distributing and viewing high quality digital video and audio in the home and mobile environments, especially in the area of High Definition (“HD”) content. We have also developed a substantial intellectual property (“IP”) base for building open standards and products necessary to promote opportunities for our products.

DVI, a video-only standard that we pioneered and designed for PC applications, enables PCs to send video data between a computer and a digital display. By defining a robust, high-speed serial communication link between host systems and displays, DVI enables sharper, crystal-clear images and lower cost designs. Accommodating bandwidth in excess of 165 MHz, DVI provides UXGA support with a single-link interface. In many applications DVI is being replaced by the more feature-rich HDMI.

HDMI is a high-bandwidth, all-digital, interconnect technology used in both CE and PC applications to provide high quality uncompressed video and audio. Through the creation and development of the HDMI standard along with Sony, Hitachi, Toshiba, Matsushita (Panasonic), Philips and Thomson, we helped drive a worldwide standard for digital connectivity that has resulted in an installed base of over 85 million devices as of the end of 2006, according to market-research firm In-Stat. In-Stat projects that over 325 million HDMI enabled devices will ship in 2010 resulting in an installed base of almost 1 billion units by the end of 2010.

We also believe a world of digital devices requires a robust testing regimen to ensure rock-solid plug and play interoperability. Today we operate several HDMI Authorized testing centers in Asia, Europe and North America that do this vital testing. We also saw a market need to develop a much more comprehensive test suite in 2005 and launched a new program called Simplay HD™. The Simplay HD program offers the industry what we believe to be the most comprehensive method for ensuring both product interoperability and performance. Through the use of the Simplay HD logo program, it also provides consumers with a way of identifying products that have had the more rigorous verification.

The Simplay HD Testing Program is open to all manufacturers of consumer electronics devices implementing HDMI and High-bandwidth Digital Content Protections (“HDCP”), including High Definition Televisions (“HDTVs”), Set Top Boxes (“STBs”), DVD players, Audio/Video (“A/V”) receivers and cables. More than 140 products had been Simplay HD-verified, conferring upon those products a higher level of certainty that the products are HDMI compliant and fully interoperable with other HDMI-compliant products. As further evidence of the impact that the Simplay HD program raised the awareness of HDMI interoperability, a major electronics retailer has begun to strongly recommend that all HDMI products be certified through the Simplay HD program prior to being placed on its store shelves. We believe that Simplay has further enhanced our reputation with manufacturers and consumers for quality, reliable products and leadership in the HDMI market.

The rate of innovation within the HDMI standard has been rapid, with 7 revisions of the standard over the last 5 years. These releases have brought greater benefits to the consumer in terms of digital video and audio quality and increased functionality. We believe that we can obtain a competitive advantage as the only merchant semiconductor supplier in the HDMI founding member group. Our unique position has enabled as to introduce new innovations in quality and connectivity into the HDMI standard revisions and produce products that are first to market.

HDMI Licensing, LLC issued its fifth HDMI version (“HDMI 1.3”) in June 2006 and its sixth version (“HDMI 1.3a”) in November 2006. We introduced the industry’s first family of HDMI 1.3 products in the summer of 2006, providing a time-to-market advantage to our customers. By the end of December 31, 2006, a number of top-tier CE manufacturers had announced products using our HDMI products, led by Sony (Playstation3) and Samsung Electronics (BD-P1200 Blu-ray Disc player and its new plasma, liquid crystal display (“LCD”) and Digital Light Processing (“DLP”) HDTVs. Subsequently, we had a number of other companies develop products using our family of HDMI 1.3 chips.

We shipped the first HDMI-compliant silicon to the market, and we remain a market leader for HDMI functionality, with more than 120.6 million units shipped to date. We recently expanded our HDMI product line with the introduction of the industry’s first HDMI 1.3-compliant discrete receiver and transmitter discrete chips, a new switch product family and a new family of integrated input processors designed to help manufacturers offer cutting-edge HDMI 1.3 functionality. For the first three quarters of 2007, approximately 25.9% of our consumer electronics product revenue was derived from IC sales of 1.3 or 1.3a class products.

Market Opportunity

Our HDMI interconnect technology is used in many high-definition products, including both source and receiver devices. Source devices include DVD players, HD and Blu-ray DVD recorders, A/V receivers, set-top boxes (“STBs”), game consoles, digital cameras and high definition camcorders, and receiver devices include digital TVs (“DTVs”).

According to the market research firm In-Stat, an estimated over 63 million HDMI-enabled devices were shipped worldwide in 2006, including nearly 61 million CE devices. In-Stat projects that approximately 130 million devices, including approximately 115 million CE devices, will be shipped worldwide in 2007.

The market acceptance and adoption of HDMI has been a significant factor in our growth over the last several years, driving both our product and licensing revenues. As of September 30, 2007, there were 719 companies that had licensed HDMI from HDMI Licensing, LLC, our wholly-owned subsidiary and the agent responsible for the licensing of HDMI. HDMI has the support of major Hollywood studios as part of their ongoing efforts in the areas of digital rights management and content protection, since HDMI offers significant advantages over analog A/V interfaces, including the ability to transmit uncompressed, high-definition digital video and multi-channel digital audio over a single cable.

A key element of our growth in CE product sales during the past several years has been our ability to work closely with top-tier CE original equipment manufacturers (“OEMs”) in developing new capabilities and features to incorporate into the HDMI standard.

We also work closely with our customers to develop a broad line of products to meet their various needs for particular market segments (e.g., semiconductors with advanced features for high-end products, and lower-priced semiconductor solutions for mid-range, mass- market products).

For CE manufacturers, HDMI is a lower-cost, standardized means of interconnecting their devices, which enables these manufacturers to build feature-rich products that deliver a true home theatre entertainment experience. For consumers, HDMI provides a simpler way to connect and use devices which provide the higher-quality entertainment experience available with digital content.

For PC and monitor manufacturers, HDMI enables PCs to connect to DTVs and monitors with HD quality video signals. More than 110 HDMI PC products are currently on the market, including HDMI-enabled products from major OEMs for desktop media-center PCs and notebook PCs, as well as add-in graphics cards, motherboards and LCD monitors. The introduction of Microsoft’s new operating system in January 2007, Vista, with its digital content rights management requirements, has also begun to generate increased interest in HDMI connectivity by PC manufacturers.

In the storage market, we have assumed a leadership role in Serial Advanced Technology Attachment (“SATA”). SATA, based on serial signaling technology, is a computer bus technology for connecting hard disk drives and other devices that is faster than traditional Parallel Advance Technology Attachment specification (“PATA”) or USB connectors. SATA is replacing parallel PATA in desktop storage and making inroads in the enterprise arena due to its improved price/performance ratio. The market for external SATA (“eSATA”) has grown significantly since mid-2005. eSATA connectors enable faster transmission of data than traditional PATA or USB connectors. We are a leading supplier of discrete SATA and eSATA solutions for motherboard and add-in-card manufacturers.

With the advent of portable media players, such as MP3 players and other similar devices, consumers are downloading and storing an increasing array of digital content, including video, photos, and music, which we believe is creating a growing awareness and need for low-cost, simple, secure and reliable CE storage. In late 2006, we introduced our second generation SteelVine™ storage processor to address this anticipated market demand. Our storage processor solutions are fully SATA-compliant and offer SoC implementations that include a high-speed switch, a custom-designed dual-instruction RISC (reduced instruction set computing) microprocessor, firmware, SATA interface, as well as advanced features and capabilities such as 3 Giga bits per second (“Gb/s”) support Native Command Queuing, hot plug, port multiplier capability and ATAPI support.

New Initiatives

At the beginning of 2007, we completed two important transactions. These transactions enhance our ability to offer higher levels of integration and greater price/performance value to our customers.

In February 2007, we entered into an intellectual property license from Sunplus Technology Co. The IP licensed to us in this transaction represents approximately 60 blocks of market-tested IP in the area of DTV and DVD SoC implementations. These IP blocks represent fundamental building blocks in the DVD and DTV markets that are expected to advance our connectivity solutions for the home and mobile environment as well as allow us to offer greater value to our customers. We anticipate that our first generation of products based on this IP will start shipping in late 2008, and will be included our second generation of integrated input processors.

Increasing our effectiveness and efficiency of bring new products to market and incorporating the technology acquired in the Sunplus license arrangement is of paramount importance. The other transaction, our acquisition of sci-worx GmbH, which was completed in January 2007, provided over 140 highly skilled engineers whom we believe will increase our ability to absorb the Sunplus IP and put it to use in new more integrated products over the next several years. In addition, the acquisition provided additional IP, especially in the areas of multi-format decoders, which is complimentary to our existing technology and the technology acquired through the Sunplus licensing arrangement.

We believe that the sci-worx and Sunplus transactions are very important steps in our efforts to support our future growth. These two initiatives are expected to allow us to complement our digital connectivity innovations with more value as we integrate many of the processing blocks required by our customers.

Future Directions

Our view of tomorrow includes the consumer’s ability to purchase digital content from any source (cable, satellite, terrestrial broadcast or the Internet) and the ability to securely store it, move it and display it on any device they own. This will require the advancement of home connectivity in the area of protocols and content protection. These two areas represent two of our key core

competencies. We believe we now have a larger and more comprehensive IP portfolio, talent and vision to implement compelling products, technologies and standards that enhances our ability to realize our vision of digital content everywhere.

During 2006, we commenced the implementation of a global strategy that we believe will, in the long run, result in certain operational benefits as well as provide us with a lower annual effective tax rate that is lower than if we did not pursue this strategy. Our strategy involves an increased investment in technology and headcount outside of the United States in order to better align asset ownership and business functions with our expectations related to the sources, timing and amounts of future revenues and profits. As a result of undertaking these efforts, we anticipate our 2007 annual effective tax rate to approximate 61% which is materially higher than our combined statutory rates of approximately 38%. The difference between the annual effective tax rate and the combined statutory rates of 38% was due primarily to certain forecasted unbenefited foreign losses in 2007 related to the ongoing implementation of a new global business structure. The unbenefited foreign losses represent expenses for sharing in the costs of our ongoing research and development efforts as well as licensing commercial rights to exploit pre-existing intangibles to better align with customers outside the Americas. In future years, we expect to achieve operational benefits and a lower tax rate in connection with this new business structure. — See “Risk Factors —There are risks to our global strategy.

Concentrations, Commitments and Contingencies

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our top five customers, including distributors, generated 60.5% and 56.1% of our total revenue for the three and nine months ended September 30, 2007, respectively, compared to 59.5% and 58.4% of our total revenue for the same periods of 2006, respectively. Additionally, the percentage of revenue generated through distributors tends to be significant, since many original equipment manufacturers (OEMs) rely upon third party manufacturers or distributors to provide purchasing and inventory management functions. For the three and nine months ended September 30, 2007, 50.9% and 45.6% of our total revenue, respectively, was generated through distributors, compared to 46.6% and 52.8% in the comparable periods of 2006, respectively. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases faster than product revenue, we would expect a decrease in the percentage of our total revenue generated through distributors.

A significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, generated 69.7% and 71.0% of our total revenue in the three and nine months ended September 30, 2007, respectively, compared to 75.0% and 74.1% for the same periods of 2006, respectively. The reason for the geographical concentration in Asia is that most of our products are part of flat panel TVs, graphic cards and motherboards, the majority of which are manufactured in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our geographic revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has been denominated in U.S. dollars.

Our commitments and contingencies at September 30, 2007, are presented in Note 7 to our condensed consolidated financial statements included in Item 1 of this Form 10-Q.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) 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 to be most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition, (2) cash equivalents and short-term investments, (3) concentration of credit risk, (4) allowance for doubtful accounts receivable, (5) inventories, (6) long-lived assets, (7) goodwill and intangible assets, (8) deferred tax assets, (9) accrued liabilities, (10) guarantees, indemnifications and warranty liabilities, (11) stock-based compensation expense, (12) advertising and research and development, and (13) legal matters. For a discussion of the critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2006.

Results of Operations

REVENUE

					��
	Three months ended September 30,								Nine months ended September 30,
	2007		2006			Change			2007		2006		Change
	(dollars in thousands)								(dollars in thousands)
Product revenue	$	74,173	$	69,149			7.3	%	$	195,715	$	184,096		6.3	%
Development, licensing and royalty revenue		12,109		9,178			31.9	%		39,457		23,909		65.0	%

Total revenue	$	86,282	$	78,327			10.2	%	$	235,172	$	208,005		13.1	%


	Three months ended September 30,							Nine months ended September 30,
	2007		2006		Change			2007		2006		Change
	(dollars in thousands)							(dollars in thousands)
Consumer Electronics (1)	$	66,589	$	54,265		22.7	%	$	176,978	$	137,874		28.4	%
Personal Computers (1)		10,992		14,462		-24.0	%		33,234		37,968		-12.5	%
Storage (1)		8,701		9,600		-9.4	%		24,960		32,163		-22.4	%

Total revenue	$	86,282	$	78,327		10.2	%	$	235,172	$	208,005		13.1	%


(1)		Includes development, licensing and royalty revenue


	Three months ended September 30,							Nine months ended September 30,
	2007		2006		Change			2007		2006		Change
	(dollars in thousands)							(dollars in thousands)
Consumer Electronics	$	58,644	$	47,793		22.7	%	$	148,886	$	121,587		22.5	%
Personal Computers		9,326		13,945		-33.1	%		29,237		36,414		-19.7	%
Storage		6,203		7,411		-16.3	%		17,591		26,095		-32.6	%
Development, licensing and royalty revenue		12,109		9,178		31.9	%		39,458		23,909		65.0	%

Total revenue	$	86,282	$	78,327		10.2	%	$	235,172	$	208,005		13.1	%

Total revenues for the three and nine months ended September 30, 2007 were $86.3 million and $235.2 million, respectively, representing an increase of 10.2% and 13.1% over the comparable periods in 2006. The increase in revenues in 2007 compared to comparable periods in 2006, is primarily due to increase in revenues from our Consumer Electronics (“CE”) and development, licensing and royalty revenue offset in part by declines in revenues from our personal computers and storage products. The increase in CE revenues compared to comparable periods in 2006 is primarily due to increased shipments of a majority of our CE parts particularly new products such as our input processors and HDMI 1.3 chips. Our HDMI 1.3 chips generally have higher average selling prices (“ASP”) as compared to HDMI 1.2 and other legacy HDMI chips. CE revenues also increased due to the CE revenues from our acquisition of sci-worx (now Silicon Image Germany). This increase in CE revenues was partially offset by overall decreases in ASPs across CE products. Our HDMI 1.3 chips are targeted towards the DTV, AV receiver, Blu Ray recorders, HD DVD, game console and mobile markets. We believe that as the market acceptance of the HDMI 1.3 standard continues to grow, sales of our HDMI 1.3 products will contribute a significant percentage of our CE revenues; however, this increase in HDMI 1.3 products sales will be affected by expected declines in the ASPs for these chips. The decrease in Personal Computer (“PC”) and Storage revenues over comparable periods in 2006 is primarily due to lower shipments coupled with ASP declines in the respective lines of businesses. The decrease in ASP in the PC business is due to the competitive nature of the PC business coupled with lower sales of our new HDMI 1.3 PC products. We expect the PC revenues to increase in the fourth quarter as compared to the third quarter. The decrease in the ASP in the storage business is due to a slower than desired transition from our legacy non-core storage semiconductor products to our SteelVine storage processor products. Development, licensing and royalty revenues increased due to increased licensing activity attributable to HDMI and SATA licenses as well as the timing of recognition of revenue from development and licensing arrangements.

COST OF REVENUE AND GROSS PROFIT


	Three months ended September 30,									Nine months ended September 30,
	2007			2006			Change			2007			2006			Change
	(dollars in thousands)									(dollars in thousands)
Cost of revenue (1)	$	37,500		$	32,721			14.6	%	$	105,196		$	87,854			19.7	%
Total gross profit	$	48,782		$	45,606			7.0	%	$	129,976		$	120,151			8.2	%
Gross profit margin		56.5	%		58.2	%					55.3	%		57.8	%


(1) Includes stock-based compensation expense	$	421		$	772					$	1,210		$	1,954

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, license development costs, as well as other related overhead costs relating to the aforementioned costs including stock-based compensation expense. Total cost of revenue was $37.5 million and $105.2 million for the three and nine months ended September 30, 2007 compared to $32.7 million and $87.9 million for the comparable periods in 2006. The $4.8 million and $17.3 million increases in cost of revenue for three and nine months ended September 30, 2007, respectively, over the comparable periods in 2006 were primarily due to increased volumes of activity and manufacturing costs per unit, increase in inventory reserves for certain slow moving parts, integration expenses associated with the sci-worx acquisition and higher depreciation expense from additional testing equipment. These increases were partially offset by a decrease in stock-based compensation expense primarily as a result of changes in our Black-Scholes fair value assumptions as described in Note 3 to the Condensed Consolidated Financial Statement under Item 1.

Total gross profit was $48.8 million and $130.0 million for the three and nine months ended September 30, 2007 an increase of 7.0% and 8.2%, respectively from $45.6 million and $120.2 million for the comparable periods of 2006. Our gross profit margin of 56.5% and 55.3% for the three and nine months ended September 30, 2007, respectively, decreased from 58.2% and 57.8% for the same periods of 2006. Gross profit margins in absolute dollars increased for the three and nine months of 2007 as compared to the same periods in 2006 as a result of overall increase in sales, primarily in CE including the increase in development and licensing activities. The gross margin percentages decreased over the same periods as a result of product ASP erosion, changes in product mix and increased manufacturing costs per unit. We expect product gross margins in the fourth quarter of 2007 to be flat as compared to the third quarter of 2007.

OPERATING EXPENSES

Research and Development (“R&D”)


	Three months ended September 30,									Nine months ended September 30,
	2007			2006			Change			2007			2006			Change
	(dollars in thousands)									(dollars in thousands)
Research and development (1)	$	20,489		$	16,866			21.5	%	$	56,709		$	47,611			19.1	%
Percentage of total revenue		23.7	%		21.5	%					24.1	%		22.9	%


(1) Includes stock-based compensation expense		$	2,181			$	3,781							$	6,545			$	9,393

R&D expense consists primarily of employee compensation, including stock-based compensation expense, and other related costs, fees for independent contractors, the cost of software tools used for designing and testing our products, masks costs and costs associated with prototype materials.

R&D expense was $20.5 million and $56.7 million for the three and nine months ended September 30, 2007, respectively, as compared to $16.9 million and $47.6 million for the same periods in 2006. R&D expenses increased primarily due to the integration of sci-worx engineers and the expansion of the research and development activities in China resulting in increased headcount. The increased R&D expenses were offset in part by a decrease in lower consulting costs and stock-based compensation expense primarily as a result of changes in our Black-Scholes fair value assumptions as described in Note 3 to the Condensed Consolidated Financial Statement under Item 1. We expect the R&D expenses to increase in the fourth quarter of 2007 due to the commencement of amortization of the intangibles paid to and licensed from Sunplus as described in Note 11 to the Condensed Consolidated Financial Statement under Item I.

Selling, General and Administrative (“SG&A”)


	Three months ended September 30,									Nine months ended September 30,
	2007			2006			Change			2007			2006			Change
Selling, general and administrative (1)	$	16,827		$	17,472			-3.7	%	$	51,122		$	49,496			3.3	%
Percentage of total revenue		19.5	%		22.3	%					21.7	%		23.8	%


(1) Includes stock-based compensation expense		$	2,731			$	4,073							$	6,796			$	11,113

SG&A expense consists primarily of employee compensation, including stock-based compensation expense, sales commissions, professional fees, marketing and promotional expenses. SG&A expense was $16.8 million and $51.1 million for the three and nine months ended September 30, 2007, respectively, as compared to $17.5 million and $49.5 million for the same periods. For the three months ended September 30, 2007, the decrease in SG&A expense is primarily due to a decrease in marketing, promotional and consulting expenses. The increase in SG&A expense for the nine months ended September 30, 2007, is primarily due to the integration of sci-worx, increased compensation expense as a result of higher headcount, increased consulting expenses for the implementation of our global strategy, increased legal expenses for various patent filings and litigation activities partially offset by a decrease in bonus and commission accruals as a result of lower achievement relative to plan and a decrease in stock-based compensation expense primarily as a result of changes in our Black-Scholes fair value assumptions as described in Note 3 to the Condensed Consolidated Financial Statement under Item 1.

Amortization of Intangible Assets


	Three months ended September 30,									Nine months ended September 30,
	2007			2006			Change			2007			2006			Change
Amortization of intangible assets	$	540		$	78			592.3	%	$	1,692		$	430			293.5	%
Percentage of total revenue		0.6	%		0.1	%					0.7	%		0.2	%

Amortization of intangible assets was $540,000 and $1.7 million for the three and nine months ended September 30, 2007, respectively, as compared to $78,000 and $430,000 for the same periods in 2006. The increase in amortization of intangible assets is primarily due to the intangible assets acquired in the sci-worx acquisition as described in Note 10 to the Condensed Consolidated Financial Statements under Item I.

Interest Income and other, net


	Three months ended September 30,									Nine months ended September 30,
	2007			2006			Change			2007			2006			Change
Interest income and other, net	$	2,302		$	2,623			-12.2	%	$	8,618		$	6,181			39.4	%
Percentage of total revenue		2.7	%		3.3	%					3.7	%		3.0	%

Interest income and other, net, which primarily includes interest income, was $2.3 million and $8.6 million for the three and nine months ended September 30, 2007, respectively, compared to $2.6 million and $6.2 million for the same periods of 2006. For the three months ended September 30, 2007, interest income is slightly lower due to lower cash and investment balances as compared to the same period in 2006. For the nine months ended September 30, 2007, interest income increased as the average cash balances during 2007 was higher as compared to the same period in 2006.

Provision for income taxes.


	Three months ended September 30,									Nine months ended September 30,
	2007			2006			Change			2007			2006			Change
Provision for income taxes	$	9,118		$	5,771			58.0	%	$	17,673		$	12,603			40.2	%
Percentage of total revenue		10.6	%		7.4	%					7.5	%		6.1	%

For the three and nine months ended September 30, 2007, we recorded a provision for income taxes of $9.1 million and $17.7 million, respectively. The effective tax rate for the three and nine months ended September 30, 2007 was 68.9% and 60.8%, respectively. The effective tax rate is based on projected taxable income for 2007. The effective tax rate for the three months ended September 30, 2007 of 68.9% comprised of 53.8%, 1.2% and 13.9% for federal, state and foreign, respectively.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (“FIN 48”) as of January 1, 2007. See “Note 9: Provision for income taxes” to the Condensed Consolidated Financial Statements for further discussion.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

The cash flow provided by operating and financing activities and cash used in investing activities set forth below is for the nine months ending September 30, 2007 and 2006.


	September 30,			September 30,
	2007			2006			Change
	(dollars in thousands)
Total cash, cash equivalents and short-term investments	$	225,689		$	235,790		$	(10,101	)


Cash provided by operating activities	$	37,001		$	51,847		$	(14,846	)
Cash provided by (used in) investing activities		35,251			(120,205	)		155,456
Cash provided by (used in) financing activities		(23,439	)		30,803			(54,242	)
Effect of exchange rate changes on cash & cash equivalents		(76	)		—			(76	)

Net increase (decrease) in cash and cash equivalents	$	48,737		$	(37,555	)	$	86,292

Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments were $225.7 million at September 30, 2007, a decrease of $10.1 million from $235.8 million at September 30, 2006 primarily as a result of usage of cash for $38.1 million in stock repurchases, $13.8 million (net) on purchase of sci-worx, $15.0 million on purchase of intangibles from Sunplus and $29.0 million in tax payments partially offset by increased sales activities, $12.3 million proceeds in connection with funds received on the exercise of stock options and for purchases of stock by employees under the employee stock purchase plan (ESPP).

Operating Activities

We generated $37.0 million in cash from operating activities in the nine months ended September 30, 2007 as compared to $51.8 million in the same period of 2006. The decrease in cash from operating activities was primarily due to increase in accounts receivable, decrease in accrued liabilities and accrued expenses and deferred license revenue partially offset by increases in accounts payable and deferred margin on sale to distributors and decreases in inventory and prepaid expenses and others assets during the nine months of the year ended September 30, 2007.

Investing and Financing Activities

We generated $35.3 million in cash in our investing activities in the nine month period ended September 30, 2007 as compared to $120.2 million used in the same period of 2006. The increase in cash provided by investing activities is mainly due to sale of securities (net of purchases) of approximately $74.1 million partially offset by purchase of sci-worx for $13.8 million, purchase of intangibles related to Sunplus transaction $15.0 million and purchases of testing equipment, testing boards, other R&D equipment and miscellaneous other assets for $10.1 million. The sale of securities was intended to fund the program of stock repurchases and business acquisition as described in Notes 13 and 10 to the Condensed Consolidated Financial Statements, respectively. We used $23.4 million in our financing activities in the nine months ended September 30, 2007 as compared to $30.8 million provided by financing activities for the same period in 2006. The use of the cash from financing activities for the nine months ended September 30, 2007 is primarily due to $38.1 million of stock repurchases partially offset by the $12.3 million in proceeds from the exercise of stock options and sales of shares under the ESPP.

Commitments and Contractual Obligations

Future minimum payments for our operating leases, debt and inventory related purchase obligations outstanding at September 30, 2007 are as follows (in thousands):


Contractual obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	9,418	$	3,519	$	4,236	$	1,663	$	—
Inventory purchase obligations		8,853		8,853		—		—		—
Intangibles purchase commitments		31,371		23,156		8,215		—		—

Total contractual obligations	$	49,642	$	35,528	$	12,451	$	1,663	$	—

Unrecognized Tax Benefits

As of the FIN 48 adoption date of January 1, 2007, we had gross tax affected unrecognized tax benefits of approximately $14.4 million (refer to Note 9). As of September 30, 2007, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities, and hence the unrecognized tax benefits have been excluded from the above commitment and contractual obligations table.

Stock Repurchase Program

Long-term liquidity

Based on our estimated cash flows, we believe our existing cash and short-term investments are sufficient to meet our capital and operating requirements for at least the next twelve months. We expect to continue to invest in property and equipment in the ordinary course of business. Our future operating and capital requirements depend on many factors, including the levels at which we generate product revenue and related margins, the extent to which we generate cash through stock option exercises and proceeds from sales of shares under our employee stock purchase plan, the timing and extent of development, licensing and royalty revenue, investments in inventory, property, plant and equipment and accounts receivable, the cost of securing access to adequate manufacturing capacity, our operating expenses, including legal and patent assertion costs, and general economic conditions. In addition, cash may be required for future acquisitions should we choose to pursue any. To the extent existing resources and cash from operations are insufficient to support our activities, we may need to raise additional funds through public or private equity or debt financing. These funds may not be available when we need them, or if available, we may not be able to obtain them on terms favorable to us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

A sensitivity analysis was performed on our investment portfolio as of September 30, 2007. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, 100, or 150 basis points over a twelve-month time horizon. The following represents the potential decrease to the value of our investments given a negative shift in the yield curve used in our sensitivity analysis.


0.5%	1.0%	1.5%
200.000	400,000	600,000

Foreign Currency Exchange Risk

Our sales are primarily 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. The effect of an immediate 10% change in foreign currency exchange rates may impact our future operating results or cash flows as any such increases in our currency exchange rate may result in increased wafer, packaging, assembly or testing costs as well as ongoing operating activities in our foreign operations. Additionally, many of our foreign distributors price our products in the local currency of the countries in which they sell. Therefore, significant strengthening of the U.S. dollar relative to those foreign currencies could result in reduced demand or lower U.S. dollar prices for our products, which would negatively affect our operating results.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our disclosure controls and procedures, they are included in the scope of our periodic controls evaluation.

For the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 has been made known to them on a timely basis and that such information has been properly recorded, processed, summarized and reported, as required.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the third quarter of our 2007 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

On July 31, 2007, the Company received a demand letter dated July 31, 2007, demanding on behalf of alleged shareholder Vanessa Simmonds that the Company’s board of directors prosecute a claim against the underwriters of the Company’s initial public offering, in addition to certain unidentified officers, directors and principal shareholders as identified in the Company’s IPO prospectus, for violations of sections 16(a) and 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78p(b). In October 2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Ms. Simmonds against certain of the underwriters of the Company’s initial public offerings. The plaintiff alleges that the underwriters violated section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78p(b) by engaging in short-swing trades, and seeks disgorgement of profits in amounts to be proven at trial from the underwriters. The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company.

We and certain of our officers were named as defendants in a securities class action captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus,” commenced on January 31, 2005. Plaintiffs filed the action on behalf of a putative class of stockholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleged that Silicon Image and certain of our officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 27, 2005, the Court issued an order appointing lead plaintiff and approving the selection of lead counsel. On July 27, 2005 plaintiffs filed a consolidated amended complaint (“CAC”). The CAC no longer named Mr. Gargus as an individual defendant, but added Dr. David Lee as an individual defendant. The CAC also expanded the class period from June 25, 2004 to April 22, 2005. Defendants filed a motion to dismiss the CAC on September 26, 2005. Plaintiffs subsequently received leave to file, and did file, a second consolidated amended complaint (“Second CAC”) on December 8, 2005. The Second CAC extended the end of the class period from April 22, 2005 to October 13, 2005 andadded additional factual allegations under the same causes of action against Silicon Image, Mr. Tirado and Dr. Lee. The complaint alsoadded a new plaintiff, James D. Smallwood. Defendants filed a motion to dismiss the Second CAC on February 9, 2006.Following subsequent pleading by both parties, on June 21, 2006 the court granted defendants’ motion to dismiss the Second CAC with leave to amend. Plaintiffs subsequently filed a third consolidated amended complaint (“Third CAC”) by the court established deadline of July 21, 2006. Defendants filed a motion to dismiss the Third CAC on September 1, 2006 and subsequent pleadings by the parties followed in November and December of 2006 and January of 2007. On February 23, 2007, the court granted defendants’ motion to dismiss the Third CAC with leave to amend. Plaintiffs filed a Fourth Consolidated Amended Complaint (“Fourth CAC”) on March 30, 2007. Defendants filed a motion to dismiss the Fourth .CAC on May 25, 2007. Following subsequent pleading by both parties, on September 21, 2007, the court granted defendants’ motion to dismiss the Fourth CAC, without further leave to amend. Final judgment was entered in favor of defendants on September 25, 2007. On October 19, 2007, plaintiffs filed notice of appeal of the court’s final judgment to the United States Court of Appeals for the Ninth Circuit. The Court of Appeals has not yet issued a briefing schedule.

copied and modified Silicon Image’s semiconductor configuration software and knowingly and unlawfully encouraged its existing and prospective customers to modify and use Silicon Image’s semiconductor configuration software with Analogix’s chips, a use that is beyond the scope, and in violation of, the rights granted under, Silicon Image’s software license agreements. In addition to seeking monetary damages in an amount to be determined at trial, we are seeking an injunction barring Analogix from misappropriation of Silicon Image’s trade secrets. On June 18, 2007, Analogix filed a counterclaim alleging Silicon Image breached a confidentiality agreement by purportedly disclosing Analogix’s confidential information within Silicon Image. A hearing on the Company’s motion for an injunction is scheduled for November 9, 2007, and a trial date has been set for September 22, 2008.

In addition, we have been named as defendants in a number of judicial and administrative proceedings incidental to our business and may be named again from time to time.

Item 1A. Risk Factors

You should carefully consider the following risk factors; in addition to those identified in our Annual Report on Form 10-K for the year ended December 31, 2006, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our common stock. These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

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

Our annual and quarterly operating results are likely to fluctuate 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:

	•		the growth, evolution and rate of adoption of industry standards for our key markets, including CE devices, digital-ready PCs and displays, and storage devices and systems;

	•		our product mix is evolving and has a greater dependence on the CE market which may be more susceptible to ASP and competitive pressures than other lines of business;

	•		the fact that our licensing revenue is heavily dependent on a few key licensing transactions being completed for any given period, the timing of which is not always predictable and is especially susceptible to delay beyond the period in which completion is expected, and our concentrated dependence on a few licensees in any period for substantial portions of our expected licensing revenue and profits;

	•		the fact that our licensing revenue has been uneven and unpredictable over time, and is expected to continue to be uneven and unpredictable for the foreseeable future, resulting in considerable fluctuation in the amount of revenue recognized in a particular quarter;

	•		competitive pressures, such as the ability of competitors to successfully introduce products that are more cost-effective or that offer greater functionality than our products, including integration into their products of functionality offered by our

			products, the prices set by competitors for their products, and the potential for alliances, combinations, mergers and acquisitions among our competitors;

	•		average selling prices of our products, which are influenced by competition and technological advancements, among other factors;

	•		government regulations regarding the timing and extent to which digital content must be made available to consumers;

	•		the availability of other semiconductors or other key components that are required to produce a complete solution for the customer; usually, we supply one of many necessary components; and

	•		the cost of components for our products and prices charged by the third parties who manufacture, assemble and test our products.

Because we have little or no control over these factors and/or their magnitude, 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 annual and quarterly operating results are highly dependent upon how well we manage our business.

Our annual and quarterly operating results may fluctuate significantly based on how well we manage our business. Some of these factors include the following:

	•		our ability to manage product introductions and transitions, develop necessary sales and marketing channels, and manage other matters necessary to enter new market segments;

	•		our ability to successfully manage our business in multiple markets such as CE, PC, and storage, which may involve additional research and development, marketing or other costs and expenses;

	•		our ability to enter into licensing deals when expected and make timely deliverables and milestones on which recognition of revenue often depends;

	•		our ability to engineer customer solutions that adhere to industry standards in a timely and cost-effective manner;

	•		our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;

	•		our ability to manage joint ventures and projects, design services, and our supply chain partners;

	•		our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;

	•		our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;

	•		the success of the distribution and partner channels through which we choose to sell our products and

	•		our ability to manage expenses and inventory levels;

	•		our ability to successfully integrate acquired businesses and technologies into our operations; and

	•		our ability to successfully implement our plans to transfer certain of our technology, sales administration and procurement functions offshore to be closer to customers and suppliers, lower our tax liability, and reduce certain costs.

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

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

Part of our business strategy is to license certain of our technology to companies that address markets in which we do not want to directly participate. There can be no assurance that additional companies will be interested in licensing our technology on commercially favorable terms or at all. We also cannot ensure that companies who license our technology will introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances. Many of these factors require significant judgments. Licensing revenue could fluctuate significantly from period to period because it is heavily dependent on a few key deals being completed in aparticular period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin content, licensing revenue can have a disproportionate impact on gross profit and profitability. Also, generating revenue from licensing arrangements is a lengthy and complex process that may last beyond the period in which efforts begin, and once an agreement is in place, the timing of revenue recognition may be dependent on customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology, and other factors. Licensing that occurs in connection with actual or contemplated litigation is subject to risk that the adversarial nature of the transaction will induce non-compliance or non-payment. The accounting rules associated with recognizing revenue from licensing transactions are increasingly complex and subject to interpretation. Due to these factors, the amount of license revenue recognized in any period may differ significantly from our expectations.

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

The CE, PC and storage markets in which we operate are intensely competitive. These markets are characterized by rapid technological change, evolving standards, short product life cycles and declining selling prices. We expect competition for many of our products to increase, as industry standards become widely adopted and as new competitors enter our markets.

Our products face competition from companies selling similar discrete products, and from companies selling products such as chipsets with integrated functionality. Our competitors include semiconductor companies that focus on the CE, display or storage markets, as well as major diversified semiconductor companies, and we expect that new competitors will enter our markets. Current or potential customers, including our own licensees, may also develop solutions that could compete with us, including solutions that integrate the functionality of our products into their solutions. In addition, potential OEM customers may have internal semiconductor capabilities, and may develop their own solutions for use in their products rather than purchasing them from companies such as us. Some of our 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 products with theirs. Many of our competitors have longer operating histories, greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do and as a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements, or devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, Intel, National Semiconductor, NXP semiconductor, and Texas Instruments, and CE manufacturers, such as Hitachi, Matsushita, NXP semiconductor, Sony, Thomson and Toshiba, may compete against us in the future. Some of our competitors could merge, which may enhance their market presence. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has resulted in, and is likely to continue to result in price reductions and loss of market share in certain markets. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and gross margins.

Our success depends in part on demand for our new products.

Our future growth depends in part on the success of our ability to develop and market more highly integrated semiconductors, such as Digital TV SoC solutions and HDTV input processors which we have recently introduced into the market and which may or may not contribute significantly to our overall CE revenue. In the storage market, our growth depends in part on market acceptance of our product offerings based on our SteelVine storage processor architecture. These products may not achieve the desired level of market acceptance in the anticipated timeframes. These products are subject to significant competition from established companies that have been selling such products for longer periods of time than Silicon Image. In the PC market, our DVI products face

potential competition from emerging new standards, such DisplayPort, and from integration from larger PC semiconductor suppliers.

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

Our success in the CE market is largely dependent upon the continued adoption and widespread implementation of the HDMI specification. Demand for our products may be inhibited by unanticipated unfavorable changes in or new regulations that delay or impede the transition to digital broadcast technologies in the U.S. or abroad. Demand for our CE products may also be inhibited in the event of negative consumer experience with HDMI technology as more consumers put it into service. Transmission of audio and video from “player devices” (such as a DVD player or set-top box) to intermediary devices (such as an audio-video receiver (“AVR”)) to displays (such as an HDTV) over HDMI with HDCP represents a combination of new technologies working in concert. Cable and satellite system operators are just beginning to require transmissions of digital video with HDCP between sources and receiving devices in consumer homes, and DVD players incorporating this technology have only recently come to market. Complexities with these technologies, the interactions between content protection technologies and HDMI with HDCP, and the variability in HDMI implementations between manufacturers may cause some of these products to work incorrectly, or for the transmissions to not occur correctly, or for certain products not to be interoperable. Also, the user experience associated with audiovisual transmissions over HDMI with HDCP is unproven, and users may reject products incorporating these technologies or they may require more customer support than expected. Such occurrences could negatively impact consumer acceptance of HDMI, which could inhibit demand for our CE products. Delays or difficulties in integration of these technologies into products or failure of products incorporating this technology to achieve market acceptance could have an adverse effect on our business.

In addition, we believe that the rate of HDMI adoption may be accelerated by FCC rules and European Information Communications and Consumer Electronics Technology Industry Associations (“EICTA”) and Cable & Satellite Broadcasting Association of Asia (“CASBAA”) recommendations described below.

In the United States, the FCC issued its Plug and Play order in October 2003. In November 2003 and March 2004, these rules, known as the Plug & Play Final Rules (Plug & Play Rules), became effective. The Plug and Play Rules are relevant to DVI and HDMI with respect to high definition set-top boxes and the labeling of digital cable ready televisions. Regarding high-definition set-top boxes, the FCC stated that, as of July 1, 2005, all high definition set-top boxes acquired by cable operators for distribution to subscribers would need to include either a Digital Visual Interface (“DVI”) or High-Definition Multimedia Interface (“HDMI”) with HDCP. Regarding digital cable ready televisions, the FCC stated that a 720p or 1080i unidirectional digital cable television may not be labeled or marketed as digital cable ready unless it includes the interfaces for DVI or HDMI with HDCP according to a phase-in timetable. In the past, the FCC has made modifications to its rules and timetable for the DTV transition and it may do so in the future. We cannot predict whether these FCC rules will be amended prior to completion of the phase-in dates or that such phase-in dates will not be delayed. In addition, we cannot guarantee that the FCC will not in the future reverse these rules or adopt rules requiring or supporting different interface technologies, either of which would adversely affect our business.

In January 2005, EICTA issued its “Conditions for High Definition Labeling of Display Devices” which requires all HDTVs using the “HD Ready” logo to have either an HDMI or DVI input with HDCP. In August 2005, EICTA issued its “Minimum Requirements for HD Television Receivers” which requires HD Receivers without an integrated display (e.g. HD STBs) utilizing the “HDTV” logo and intended for use with HD sources (e.g. television broadcasts), some of which require content protection in order to permit HD quality output, to have either a DVI or HDMI output with HDCP.

In August 2005, CASBAA issued a series of recommendations in its “CASBAA Principles for Content Protection in the Asia-Pacific Pay-TV Industry” for handling digital output from future generations of set-top boxes for Video On Demand (“VOD”), Pay-per-view (“PPV”), Pay-TV and other encrypted digital programming applications. These recommendations include the use of one or more HDMI with HDCP or DVI with HDCP digital outputs for set-top boxes capable of outputting uncompressed high-definition content.

With respect to the EICTA and CASBAA recommendations, we cannot predict the rate at which manufacturers will implement the HDMI-related recommendations in their products.

In addition, the HDMI founders decided to reduce the annual license fee payable by HDMI adopters from $15,000 to $10,000 per year effective on November 1, 2006 for all adopters after that date in order to encourage more widespread adoption of HDMI.

Accordingly, if there are not sufficient new adopters of HDMI to offset the reduction in the annual license fee payable per adopter, our revenues will be negatively impacted.

We will have difficulty selling our products if customers do not design our products into their product offerings or if our customers’ product offerings are not commercially successful.

Our products are generally incorporated into our customers’ products at the design stage. As a result, we rely on equipment manufacturers to select our products to be designed into their products. Without these “design wins,” it becomes difficult to sell our products. We often incur significant expenditures on the development of a new product without any assurance that an equipment manufacturer will select our product for design into its own product. Additionally, in some instances, we are dependent on third parties to obtain or provide information that we need to achieve a design win. Some of these third parties may be our competitors and, accordingly, may not supply this information to us on a timely basis, if at all. Once an equipment manufacturer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. Furthermore, even if an equipment manufacturer designs one of our products into its product offering, we cannot be assured that its product will be commercially successful or that we will receive any revenue from that product. Sales of our products largely depend on the commercial success of our customers’ products. Our customers generally can choose at any time to stop using our products if their own products are not commercially successful or for any other reason. We cannot assure you that we will continue to achieve design wins or that our customers’ equipment incorporating our products will ever be commercially successful.

Our products typically have lengthy sales cycles. A customer may decide to cancel or change its product plans, which could cause us to lose anticipated sales. In addition, our average product life cycles tend to be short and, as a result, we may hold excess or obsolete inventory that could adversely affect our operating results.

After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customers generally need three months to over nine months to test, evaluate and adopt our product and an additional three months to over nine months to begin volume production of equipment that incorporates our product. Due to this lengthy sales cycle, we may experience significant delays from the time we incur operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. In addition, anticipated sales could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

While our sales cycles are typically long, our average product life cycles tend to be relatively short as a result of the rapidly changing technology environment in which we operate. As a result, the resources devoted to product sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the future that if we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.

Our customer may not purchase anticipated levels of products, which can result in increased inventory levels

We generally do not obtain firm, long-term purchase commitments from our customers, and, in order to accommodate the requirements of certain customers, we may from time to time build inventory that is specific to that customer in advance of receiving firm purchase orders. The short-term nature of our customers’ commitments and the rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers. Should the customer’s needs shift so that they no longer require such inventory, we may be left with excessive inventories, which could adversely affect our operating results.

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

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For the three months ended September 30, 2007, shipments to our distributors, Microtek Inc., Innotech Corporation, and World Peace

Group generated 15.9%, 15.3% and 13.5% of our revenue, respectively. For the nine months ended September 30, 2007, shipments to Innotech Corporation, Microtek Inc., and World Peace Group all of whom are distributors, generated 16.1%, 14.2% and 11.6% of our revenue, respectively. For the three months ended September 30, 2006, shipments to Innotech, Microtek, and World Peace, generated 18.2%, 17.0% and 10.2%, respectively, of our revenue. For the nine months ended September 30, 2006, shipments to Microtek, Innotech and World Peace, generated 17.2%, 13.6% and 13.0%, respectively, of our revenue. In addition, an end-customer may buy through multiple distributors, contract manufacturers, and/or directly, which could create an even greater concentration. We cannot be certain that customers and key distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products and generate revenue. As a result of this concentration of our customers, our results of operations could be negatively affected if any of the following occurs:

	•		one or more of our key customers, including distributors, becomes insolvent or goes out of business;

	•		one or more of our key customers or distributors significantly reduces, delays or cancels orders; and/or

	•		one or more key customers select products manufactured by one of our competitors for inclusion in their future product generations.

Due to our participation in multiple 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 fluctuates 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 50.9% and 45.6% of our revenue for the three and nine months ended September 30, 2007, respectively. Distributors generated 46.6% and 52.8% of our revenue for the three and nine months ended September 30, 2006, respectively. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

	•		manage a more complex supply chain;

	•		monitor and manage the level of inventory of our products at each distributor;

	•		estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and

	•		monitor the financial condition and credit-worthiness of our distributors, many of which are located outside of the United States, and the majority of which are not publicly traded.

Since we have limited ability to forecast inventory levels at our end customers, it is possible that there may be significant build-up of inventories in the retail channel, with the OEM or the OEM’s contract manufacturer. Such a buildup could result in a slowdown in orders, requests for returns from customers, or requests to move out planned shipments. This could adversely impact our revenues and profits.

Any failure to manage these challenges could disrupt or reduce sales of our products and unfavorably impact our financial results.

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. We have recently introduced new storage products for the consumer and small to medium-sized business markets and we expect to introduce new CE, PC and storage products in the future. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design,

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

	•		accurate prediction of market requirements and evolving standards, including enhancements or modifications to existing standards such as HDMI, HDCP, DVI, SATA I and SATA II;

	•		identification of customer needs where we can apply our innovation and skills to create new standards or areas for product differentiation that improve our overall competitiveness either in an existing market or in a new market;

	•		development of advanced technologies and capabilities, and new products that satisfy customer requirements;

	•		competitors’ and customers’ integration of the functionality of our products into their products, which puts pressure on us to continue to develop and introduce new products with new functionality;

	•		timely completion and introduction of new product designs;

	•		management of product life cycles;

	•		use of leading-edge foundry processes and achievement of high manufacturing yields and low cost testing;

	•		market acceptance of new products; and

	•		market acceptance of storage processor architectures like SteelVine.

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

There are risks to our global strategy

During 2006, we commenced the implementation of a global strategy that we believe will, in the long run, result in certain operational benefits as well as provide us with a lower annual effective tax rate that is lower than if we did not pursue this strategy. Our strategy involves an increased investment in technology and headcount outside of the United States in order to better align asset ownership and business functions with our expectations related to the sources, timing and amounts of future revenues and profits. As a result of undertaking these efforts, we anticipate our 2007 annual effective tax rate to approximate 61% which is materially higher than our combined statutory rates of approximately 38%. The difference between the annual effective tax rate and the combined statutory rates of 38% was due primarily to certain forecasted unbenefited foreign losses in 2007 related to the ongoing implementation of a new global business structure. The unbenefited foreign losses represent expenses for sharing in the costs of our ongoing research and development efforts as well as licensing commercial rights to exploit pre-existing intangibles to better align with customers outside the Americas. In future years, we expect to achieve operational benefits and a lower tax rate in connection with this new business structure. The expected operational benefits and lower tax rate will depend on a number of factors, including our future business results and profitability, and the effectiveness and timing of our implementation of our global strategy. While we

expect declines in our annual effective tax rate after 2007, we may continue to experience higher tax rates until our new global strategy is fully operational.

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. An acquisition of companies or intangible assets is a strategy we may use to develop new products and enter new markets. In January 2007, we completed the acquisition of sci-worx. We may acquire additional companies or technologies in the future. Acquisitions involve numerous risks, including, but not limited to, the following:

	•		difficulty and increased costs in assimilating employees, including our possible inability to keep and retain key employees of the acquired business or challenges associated with managing employees in multiple geographic jurisdictions;

	•		disruption of our ongoing business;

	•		discovery of undisclosed liabilities of the acquired companies and legal disputes with founders or shareholders of acquired companies;

	•		inability to successfully incorporate acquired technology and operations into our business and maintain uniform standards, controls, policies and procedures;

	•		inability to commercialize acquired technology; and

	•		the need to take impairment charges or write-downs with respect to acquired assets.

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

Our acquisition of sci-worx GmbH exposes us to a variety of risks.

We acquired sci-worx, a limited liability company based in Germany, in January 2007. In addition to the acquisition-related risks described in the risk factor above, this acquisition may expose us to complexities of operating in Germany, a country in which we have not previously had significant operations and whose regulatory framework with which we are unfamiliar, and of difficulties in managing and integrating approximately 172 employees based in Germany. In addition, the technologies acquired from sci-worx may require significant additional development before they can be marketed and may not generate sufficient revenue to offset expenses associated with the acquisition. Any of these problems or factors with respect to the acquisition of sci-worx could adversely affect our business, financial condition or results of operations.

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:

	•		improve operational and financial systems;

	•		train and manage our employee base;

	•		successfully integrate operations and employees of businesses we acquire or have acquired;

	•		attract, develop, motivate and retain qualified personnel with relevant experience; and

	•		adjust spending levels according to prevailing market conditions.

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

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

The semiconductor industry is characterized by significant downturns and wide fluctuations in supply and demand. 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 fabricated semiconductors is subject to allocation, whereby not all of our production requirements would be met. This may impact our ability to meet demand and could also increase our production costs and inventory levels. 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. Our financial performance has been and may in the future be, negatively impacted by downturns in the semiconductor industry. In a downturn situation, we may incur substantial losses if there is excess production capacity or excess inventory levels in the distribution channel.

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

We do not own or operate a semiconductor fabrication facility. We rely on third party semiconductor manufacturing companies overseas to produce the vast majority of our semiconductor products. We also rely on outside assembly and test services to test all of our semiconductor products. Our reliance on independent foundries, assembly and test facilities involves a number of significant risks, including, but not limited to:

	•		reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;

	•		lack of guaranteed production capacity or product supply, potentially resulting in higher inventory levels;

	•		lack of availability of, or delayed access to, next-generation or key process technologies; and

	•		limitations on our ability to transition to alternate sources if services are unavailable from primary suppliers.

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

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

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 problems can often only occur well into the production cycle, when an actual product exists that can be analyzed and tested.

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

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

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. 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. For the three months and nine months ended September 30, 2007, approximately 76.4% and 79.2% of our revenue, respectively was generated from customers and distributors located outside of the United States, primarily in Asia. In the three and nine months ended September 30, 2006, approximately 75.0% and 74.1%, respectively, of our total revenue were 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. In addition, we undertake various sales and marketing activities through regional offices in several other countries and, with our recent acquisition of sci-worx, we have significantly expanded our research and development operations outside of the United States. We intend to continue to expand our international business activities. Accordingly, we are subject to international risks, including, but not limited to:

	•		political, social and economic instability;

	•		exposure to different business practices and legal standards, particularly with respect to intellectual property and employment;

	•		natural disasters and public health emergencies;

	•		nationalization of business and blocking of cash flows;

	•		trade and travel restrictions

	•		the imposition of governmental controls and restrictions;

	•		burdens of complying with a variety of foreign laws;

	•		import and export license requirements and restrictions of the United States and each other country in which we operate;

	•		unexpected changes in regulatory requirements;

	•		foreign technical standards;

	•		changes in taxation and tariffs;

	•		difficulties in staffing and managing international operations;

	•		fluctuations in currency exchange rates;

	•		difficulties in collecting receivables from foreign entities or delayed revenue recognition;

	•		expense and difficulties in protecting our intellectual property in foreign jurisdictions;

	•		exposure to possible litigation or claims in foreign jurisdictions; and

	•		potentially adverse tax consequences.

Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales. In addition, original equipment manufacturers that design our semiconductors into their products sell them outside of the United States.

This exposes us indirectly to foreign risks. Because sales of our products are denominated exclusively in United States dollars, relative increases in the value of the United States dollar will increase the foreign currency price equivalent of our products, which could lead to a change in the competitive nature of these products in the marketplace. This in turn could lead to a reduction in sales and profits.

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 may be possible for a third-party, including our licensees, to misappropriate our copyrighted material or trademarks. 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. In addition, practicality also limits our assertion of intellectual property rights. Patent litigation is expensive and its results are often unpredictable. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers, and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.

Our participation in working groups for the development and promotion of industry standards in our target markets, including the DVI, and HDMI specifications, requires us to license some of our intellectual property for free or under specified terms and conditions, which may make it easier for others to compete with us in such markets.

A key element of our business strategy includes participation in working groups to establish industry standards in our target markets, promote and enhance specifications, and develop and market products based on such specifications and future enhancements. We are a promoter of the Digital Display Working Group (“DDWG”), which published and promotes the DVI specification, a founder in the working group that develops and promotes the HDMI specification, and a promoter in the working group that develops and promotes the UDI specification. In connection with our participation in such working groups:

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

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

	•		we have agreed to license specific elements of our intellectual property to other UDI promoters and third parties who execute an adopter’s agreement.

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

We intend to continue to be involved and actively participate in other standard setting initiatives. Accordingly, we may license additional elements of our intellectual property to others for use in implementing, developing, promoting or adopting standards in our target markets, in certain circumstances at little or no cost, which may make it easier for others to compete with us in such markets. In addition, even if we receive license fees and/or royalties in connection with the licensing of our intellectual property, there can be no assurance that such license fees and/or royalties will adequately compensate us for having to license our intellectual property.

Our success depends in part on our relationships with Sunplus and other strategic partners.

We have entered into strategic partnerships with third parties. In February 2007, we entered into a license agreement with Sunplus. Under the terms of the license agreement, we received a license to use and further develop advanced video processor technology. The license agreement provides for the payment of an aggregate of $40.0 million to Sunplus by Silicon Image, $35.0 million of which is payable in consideration for the licensed technology and related deliverables and $5.0 million of which is payable in consideration for Sunplus support and maintenance obligations. Through September 30, 2007, we have paid Sunplus $15.0 million of the consideration for the licensed technology and related deliverables in February 2007, and accrued for $3.8 million of the consideration for the period ended September 30, 2007, of which we will begin amortizing in the fourth quarter of 2007. We are required to pay the remaining $16.3 million upon delivery and acceptance of certain milestones. The $5.0 million to be paid for support and maintenance by Sunplus is payable over a two-year period starting upon delivery of the final Sunplus deliverables. We believe that the intellectual property licensed under this license agreement will enhance our ability to develop integrated DTV technology and other consumer product offerings. The success of the agreement depends upon our successful integration of the operations of sci-worx, which will be critical to our ability to develop products based on the Sunplus licensed IP. The success of the agreement also depends upon the continued market acceptance of our HDTV and consumer products. The achievement of milestones upon which the payments to Sunplus are contingent may also not be achieved. We may not succeed in developing successful products based on the Sunplus intellectual property.

While these strategic partnerships are designed to drive revenue growth and adoption of our technologies and industry standards promoted by us and also reduce our research and development expenses, there is no guarantee that these strategic partnerships will be successful. Negotiating and performing under these strategic partnerships involves significant time and expense; we may not realize anticipated increases in revenue, standards adoption or cost savings; and these strategic partnerships may make it easier for the third parties to compete with us; any of which may have a negative effect our business and results of operations.

Our success depends on managing our relationship with Intel.

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

	•		Intel and Silicon Image have been parties to business cooperation agreements;

	•		Intel and Silicon Image are parties to a patent cross-license;

	•		Intel and Silicon Image worked together to develop HDCP;

	•		an Intel subsidiary has the exclusive right to license HDCP, of which we are a licensee;

	•		Intel and Silicon Image were two of the promoters of the DDWG;

	•		Intel and Silicon Image are two of the promoters of the Unified Display Interface Working Group;

	•		Intel is a promoter of the SATA working group, of which we are a contributor;

	•		Intel is a supplier to us and a customer for our products;

	•		we believe that Intel has the market presence to drive adoption of SATA by making it widely available in its chipsets and motherboards, which could affect demand for our products;

	•		we believe that Intel has the market presence to affect adoption of HDMI by either endorsing complementary technology or promulgating a competing standard, which could affect demand for our products;

	•		Intel may potentially integrate the functionality of our products, including SATA, DVI, or HDMI into its own chips and chipsets, thereby displacing demand for some of our products;

	•		Intel may design new technologies that would require us to re-design our products for compatibility, thus increasing our R&D expense and reducing our revenue;

	•		Intel’s technology, including its 845G chipset, may lower barriers to entry for other parties who may enter the market and compete with us; and

	•		Intel may enter into or continue relationships with our competitors that can put us at a relative disadvantage.

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

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

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

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

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

	•		stop selling products or using technology that contains the allegedly infringing intellectual property;

	•		attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; and

	•		attempt to redesign products that contain the allegedly infringing intellectual property.

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

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

We indemnify certain of our licensing customers against infringement.

We indemnify certain of our licensing agreements customers for any expenses or liabilities resulting from third-party claims of infringements of patent, trademark, trade secret, or copyright rights by the technology we license. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, we have not paid any such claims or been required to defend any lawsuits with respect to any claim. In the event that we were required to defend any lawsuits with respect to our indemnification obligations, or to pay any claim, our results of operations could be materially adversely affected.

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

Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. Although we have entered into a limited number of employment contracts with certain executive officers, we generally do not have employment contracts with our key employees. 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. Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing.

The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business. In addition, regulations adopted by The NASDAQ Stock Market requiring shareholder approval for all stock option plans, as well as regulations adopted by the New York Stock Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. In addition, SFAS No. 123(R),Share Based Payment, requires us to record compensation expense for options granted to employees. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.

We have experienced transitions in our management team, our board of directors and our independent registered public accounting firm in the past and may continue to do so in the future.

We have experienced a number of transitions with respect to our board of directors, executive officers, and our independent registered public accounting firm in recent quarters, including the following:

	•		In January 2005, Steve Laub (who replaced David Lee in November 2004) resigned from the positions of chief executive officer and president and from the board of directors, Steve Tirado was appointed as chief executive officer and president and to the board as well, and Chris Paisley was appointed chairman of the board of directors.

	•		In February 2005, Jaime Garcia-Meza was appointed as vice president of our storage business.

	•		In April 2005, Robert C. Gargus retired from the position of chief financial officer and Darrel Slack was appointed as his successor.

	•		In April 2005, four of our then independent outside directors, David Courtney (chairman of the audit committee), Keith McAuliffe, Chris Paisley (chairman of the board) and Richard Sanquini, resigned from our board of directors and board committees.

	•		In April 2005, Darrel Slack, our then chief financial officer, was elected to our board of directors.

	•		In May 2005, Masood Jabbar and Peter Hanelt were elected to our board of directors.

	•		In June 2005, David Lee did not stand for re-election as a director at our annual meeting of stockholders, and accordingly, Dr. Lee resigned from our board of directors.

	•		In June 2005, PricewaterhouseCoopers LLP resigned as our independent registered public accounting firm. In July 2005, we appointed Deloitte & Touche LLP as our new independent registered public accounting firm.

	•		In August 2005, Darrel Slack began a personal leave of absence.

	•		In August 2005, Dale Brown resigned from the positions of chief accounting officer and corporate controller.

	•		In August 2005, Robert Freeman was appointed as interim chief financial officer and chief accounting officer.

	•		In September 2005, Darrel Slack resigned from the position of chief financial officer and from our board of directors and the board of directors of HDMI Licensing, LLC, our wholly-owned subsidiary.

	•		In October 2005, William George was elected to our board of directors.

	•		In October 2005, Robert Bagheri resigned from the position of executive vice president of operations.

	•		In October 2005, John LeMoncheck, then vice president, consumer electronics and PC/display, left Silicon Image.

	•		In October 2005, John Shin was appointed as interim vice president, consumer electronics and PC/display businesses and served in that position until February 2006. Mr. Shin serves as vice president of engineering, and has held that position since October 2003.

	•		In November 2005, Robert Freeman’s position changed from interim chief financial officer to chief financial officer.

	•		In December 2005, William Raduchel was elected to our board of directors.

	•		In January 2006, Dale Zimmerman was appointed as our vice president of worldwide marketing.

	•		In February 2006, John Hodge was elected to our board of directors.

	•		In September 2006, Patrick Reutens resigned from the position of chief legal officer.

	•		In January 2007, Edward Lopez was appointed as our chief legal officer.

	•		In February 2007, David Hodges advised our board of directors that he had decided to retire and as such he did not stand for reelection to our board of directors when his term expired at our 2007 Annual Meeting of Stockholders.

	•		In April 2007, Robert R. Freeman, announced his intention to retire from his position as Chief Financial Officer.

	•		In April 2007, Rob Valiton resigned from his position as Vice President of Worldwide Sales.

	•		In April 2007, Sal Cobar was appointed as Vice President of Worldwide Sales.

	•		In July 2007, Paul Dal Santo was appointed as Chief Operating Officer.

	•		In October 2007, Robert R. Freeman, resigned from his position as Chief Financial Officer.

	•		In October 2007, Harold L. Covert was appointed as Chief Financial Officer.

Such past and future transitions may continue to result in disruptions in our operations and require additional costs.

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

Securities class action suits and derivative suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management. . Please see the descriptions of securities suits pending against us and certain of our officers and directors contained under the heading “Legal Proceedings” above

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. Taiwan Semiconductor Manufacturing Company, or 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 assemble and test our semiconductor products, is also located in Taiwan. For the three months and nine months ended September 30, 2007 customers and distributors located in Japan generated 36.8% and 35.5% of our revenue in each period and customers and distributors located in Taiwan generated 13.0% and 16.7% of our revenue, respectively. For the three and nine months ended September 30, 2006, customers and distributors located in Japan generated 38.7% and 33.5% of our revenue, respectively. For the three and nine months ended September 30, 2006, customers and distributors located in Taiwan generated 19.0% and 21.2% of our revenue, respectively. 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:

	•		an earthquake or other disaster in the San Francisco Bay Area or the Los Angeles area damaged our facilities or disrupted the supply of water or electricity to our headquarters or our Irvine facility;

	•		an earthquake, typhoon or other disaster in Taiwan or Japan resulted in shortages of water, electricity or transportation, limiting the production capacity of our outside foundries or the ability of ASE to provide assembly and test services;

	•		an earthquake, typhoon or other disaster in Taiwan or Japan damaged the facilities or equipment of our customers and distributors, resulting in reduced purchases of our products; or

	•		an earthquake, typhoon or other disaster in Taiwan or Japan disrupted the operations of suppliers to our Taiwanese or Japanese customers, outside foundries or ASE, which in turn disrupted the operations of these customers, foundries or ASE and resulted in reduced purchases of our products or shortages in our product supply.

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

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

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

Several jurisdictions have implemented rules that would require that certain products, including semiconductors, be made lead-free. All of our products are available to customers in a lead-free format. While we believe that we are generally in compliance with existing regulations, such environmental regulations are subject to change and the jurisdictions may impose additional regulations which could require us to incur costs to develop replacement products. These changes will require us to incur cost or may take time or may not always be economically or technically feasible, or may require disposal of non-compliant inventory. In addition, any requirement to dispose or abate previously sold products would require us to incur the costs of setting up and implementing such a program.

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

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

	•		authorizing the issuance of preferred stock without stockholder approval;

	•		providing for a classified board of directors with staggered, three-year terms;

	•		requiring advance notice of stockholder nominations for the board of directors;

	•		providing the board of directors the opportunity to expand the number of directors without notice to stockholders;

	•		prohibiting cumulative voting in the election of directors;

	•		requiring super-majority voting to amend some provisions of our certificate of incorporation and bylaws;

	•		limiting the persons who may call special meetings of stockholders; and

	•		prohibiting stockholder actions by written consent.

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

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

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:

	•		actual or anticipated changes in our operating results;

	•		changes in expectations of our future financial performance;

	•		changes in market valuations of same companies in our markets;

	•		changes in market valuations or expectations of future financial performance of our vendors or customers;

	•		changes in our key executives and technical personnel; and

	•		announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.

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 2. Unregistered Sales of Equity Securities and Use of Proceeds (in thousands, except per share amounts)

Approximate Dollar

Value of Shares

Total Number

Average

Total Number of Shares

that May Yet Be

of Shares

Price Paid

Purchased as Part of

Purchased Under the

Period

Purchased

per Share

Publicly Announced Plans

Plan

Repurchases from August 1, 2007 through August 31, 2007

1,250

5.56

1,250

61,905

In February 2007, our Board of Directors authorized a stock repurchase program under which we intend, from time to time, as business conditions warrant, to purchase up to $100 million of common stock, on the open market, or in negotiated or block transactions, over a 36 month period. We may commence purchasing, or increase, decrease or discontinue purchasing at any time without any prior notice. From August through August 31, 2007, we repurchased a total of 1.25 million shares of our common stock at a total cost of $7.0 million. For the nine months ended September 30, 2007, we have repurchased a total of 5 million shares of our common stock at a total cost of $38.1 million.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a) Exhibits


10.01		Employment offer letter with Paul Dal Santo dated July 23, 2007 (incorporated by reference to Exhibit 10.01 to the Registrant’s current report on Form 8-K filed on August 20, 2007).

10.02		Amendment No. 1 to Transitional Employment and Separation Agreement between Robert Freeman and the Registrant dated August 23, 2007 (incorporated by reference to Exhibit 10.01 to the Registrant’s current report on Form 8-K filed on August 24, 2007).

31.01		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01**		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.02**		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


**		This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by reference into any filing of the registrant, in accordance with Item 601 of Regulation S-K.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Dated: November 7, 2007		Silicon Image, Inc.

		/s/ Harold L. Covert Harold L. Covert
		Chief Financial Officer (Principal Financial Officer)

Exhibit Index


10.01		Employment offer letter with Paul Dal Santo dated July 23, 2007 (incorporated by reference to Exhibit 10.01 to the Registrant’s current report on Form 8-K filed on August 20, 2007).

10.02		Amendment No. 1 to Transitional Employment and Separation Agreement between Robert Freeman and the Registrant dated August 23, 2007 (incorporated by reference to Exhibit 10.01 to the Registrant’s current report on Form 8-K filed on August 24, 2007).

31.01		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01**		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.02**		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


**		This exhibit is being furnished, rather than filed, and shall not be deemed incorporated by reference into any filing of the Registrant, in accordance with Item 601 of Regulation S-K.

Positive
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Legalese
Litigous
Readability	H.S. freshman Good

Silicon Image (SIMG) Inactive 10-Q2007 Q3 Quarterly report

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