Silicon Image 10Q 2008 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended June 30, 2008

	OR

£	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 Yes R No £

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

Large accelerated Filer R	Accelerated Filer £	Non-Accelerated Filer £	Smaller Reporting Company £
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

As of June 30, 2008, there were 73,609,604 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 Six Months Ended

June 30, 2008

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Part I Financial Information (Unaudited)	3
Item 1 Financial Statements	3
Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	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	26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3 Defaults Upon Senior Securities	43
Item 4 Submission of Matters to a Vote of Security Holders	44
Item 5 Other Information	44
Item 6 Exhibits	45
Signatures	46

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Silicon Image, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	June 30, 2008			December 31, 2007
Assets
Current Assets:
Cash and cash equivalents	$	106,545		$	137,822
Short-term investments		78,911			111,889
Accounts receivable, net of allowances for doubtful accounts $1,976 at June 30, 2008 and $1,565 at December 31, 2007		28,636			21,254
Inventories		17,686			20,198
Prepaid expenses and other current assets		12,201			13,732
Deferred income taxes, current		4,486			3,984
Total current assets		248,465			308,879
Property and equipment, net		23,790			24,191
Goodwill		19,210			19,210
Intangible assets, net		36,095			39,269
Deferred income taxes, non-current		22,199			19,978
Other assets		1,444			1,421
Total assets	$	351,203		$	412,948
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	21,707		$	17,892
Accrued and other liabilities		28,574			36,996
Deferred license revenue		4,295			3,860
Deferred margin on sales to distributors		27,986			26,443
Total current liabilities		82,562			85,191
Other long-term liabilities		11,029			13,910
Total liabilities		93,591			99,101
Commitments and contingencies (See Note 9)
Stockholders’ Equity:
Common stock		91			90
Treasury stock		(106,276	)		(38,096	)
Additional paid-in capital		431,659			418,796
Accumulated deficit		(68,117	)		(67,093	)
Accumulated other comprehensive income		255			150
Total stockholders’ equity		257,612			313,847
Total liabilities and stockholders’ equity	$	351,203		$	412,948

See accompanying Notes to Condensed Consolidated Financial Statements.

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Silicon Image, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three months ended June 30,					Six months ended June 30,
	2008			2007		2008			2007
Revenue:
Product	$	61,836		$	66,532	$	119,023		$	122,871
Licensing		8,247			13,239		18,173			26,019
Total revenue		70,083			79,771		137,196			148,890
Cost of revenue and operating expenses:
Cost of revenue (1)		29,107			36,938		57,244			67,696
Research and development (2)		22,298			19,025		43,840			36,220
Selling, general and administrative (3)		19,067			17,151		37,385			34,295
Amortization of intangible assets		1,587			537		3,174			1,152
Total cost of revenue and operating expenses		72,059			73,651		141,643			139,363
Income (loss) from operations		(1,976	)		6,120		(4,447	)		9,527
Interest income and other, net		1,380			3,290		3,296			6,316
Income (loss) before provision (benefit) for income taxes		(596	)		9,410		(1,151	)		15,843
Provision (benefit) for income taxes		(134	)		5,038		(127	)		8,555
Net income (loss)	$	(462	)	$	4,372	$	(1,024	)	$	7,288

Net income (loss) per share – basic and diluted	$	(0.01	)	$	0.05	$	(0.01	)	$	0.08
Weighted average shares – basic		73,399			86,737		77,257			86,781
Weighted average shares – diluted		73,399			88,817		77,257			89,156
_________________
(1) Includes stock-based compensation expense	$	431		$	443	$	781		$	789
(2) Includes stock-based compensation expense		2,213			2,056		3,447			4,364
(3) Includes stock-based compensation expense		3,614			2,687		6,053			4,065

See accompanying Notes to Condensed Consolidated Financial Statements.

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Silicon Image, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six months ended June 30,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(1,024	)	$	7,288
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation		5,257			5,027
Amortization of intangible assets		3,174			1,152
Provision for doubtful accounts		534			1,544
Stock-based compensation expense		10,281			9,218
Income tax benefit (deficiency) from employee based compensation plans		(501	)		84
Excess tax benefits from employee stock transactions		(304	)		(1,345	)
(Accretion)/Amortization of investment (discount)/premium		378			(164	)
Realized gain on investments		(52	)		(17	)
Loss on disposal of property and equipment		402			695
Changes in assets and liabilities:
Accounts receivable		(7,781	)		(3,639	)
Inventories		2,512			5,697
Prepaid expenses and other assets		1,508			(9,673	)
Deferred income taxes		(2,723	)		637
Accounts payable		(1,745	)		5,980
Accrued liabilities and other liabilities		(361	)		(17,467	)
Deferred revenue		435			(2,312	)
Deferred margin on sales to distributors		1,543			1,375
Cash provided by operating activities		11,533			4,080
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments		144,681			64,346
Purchases of short-term investments		(111,937	)		(18,657	)
Business acquisition, net of cash acquired		-			(13,751	)
Purchases of property and equipment		(4,622	)		(7,609	)
Purchase of intellectual property		-			(10,000	)
Cash provided by investing activities		28,122			14,329
Cash flows from financing activities:
Proceeds from issuances of common stock, net		3,084			9,679
Excess tax benefits from employee stock transactions		304			1,345
Payment for vendor financed software and intangibles purchased		(6,153	)		(528	)
Payments to acquire treasury stock		(68,180	)		(31,140	)
Cash used in financing activities		(70,945	)		(20,644	)
Effect of exchange rate changes on cash and cash equivalents		13			(125	)
Net decrease in cash and cash equivalents		(31,277	)		(2,360	)
Cash and cash equivalents — beginning of period		137,822			81,921
Cash and cash equivalents — end of period	$	106,545		$	79,561

Supplemental cash flow information:
Cash payment for interest	$	19		$	33
Cash payment for income taxes		1,215			25,576
Unrealized net gain (loss) on investment securities		(30	)		135
Property and equipment purchased but not paid for		636			2,674

See accompanying Notes to Condensed Consolidated Financial Statements.

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Silicon Image, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(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, 2007 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 June 30, 2008 and December 31, 2007, the related consolidated statements of operations for the three and six months ended June 30, 2008 and 2007, and the related consolidated statements of cash flows for the six months ended June 30, 2008 and 2007. 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, 2007. The Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 are not necessarily indicative of future operating results to be expected for the fiscal year ending December 31, 2008.

Certain prior period amounts have been reclassified to conform to the current period presentation, including the reclassification of revenue generated by our Simplay subsidiary from the Licensing revenue caption to Product revenue and revenue between our lines of business, in order to more closely align our revenue presentation with our key operating metrics. We have also renamed the caption Development, licensing and royalty revenue as Licensing revenue.

2. Recent Accounting Pronouncements

In May 2008, the FASB issued Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP 14-1"), which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. FSP 14-1 is effective for fiscal years beginning after December 15, 2008. The Company does not believe that the implementation of this standard will have a material impact on its consolidated financial statements.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of FSP FAS 142-3 on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company is currently assessing the impact that the adoption of SFAS 161 will have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) significantly changes current practices regarding business combinations. Among the more significant changes, SFAS 141(R) expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; requires assets acquired and liabilities assumed from contractual and non-contractual contingencies to be recognized at their acquisition-date fair values with subsequent changes

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recognized in earnings; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. SFAS 160 will change the accounting and reporting for minority interests, reporting them as equity separate from the parent entity’s equity, as well as requiring expanded disclosures. SFAS 141(R) and SFAS 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not believe that the implementation of these standards will have a material impact on its condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment to FASB No. 115” (“SFAS 159”). Under SFAS 159, entities may elect to measure specified financial instruments as well as warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. The Company did not adopt the fair value option for any of its financial instruments.

3. Significant Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates. Areas where significant judgment and estimates are applied include revenue recognition, stock based compensation, cash equivalents and short-term investments, allowance for doubtful accounts, inventory valuation, realization of long lived assets, including goodwill and intangibles, income taxes, deferred tax assets, accrued liabilities, guarantees, indemnifications and warranty liabilities, foreign currency, and legal matters. The condensed consolidated financial statements include the accounts of Silicon Image, Inc. and its subsidiaries after elimination of all inter-company balances and transactions.

For a discussion of the significant accounting policies, see Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2007.

Financial Instruments

The Company accounts for its investments in debt securities under Statement of Financial Accounting Standards, or SFAS, No. 115, Accounting for Certain Investments in Debt and Equity Securities and FASB Staff Position, or FSP No. 115-1/124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income. We follow the guidance provided by FSP 115-1/124-1 and Emerging Issues Task Force ("EITF") No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, to assess whether our investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the condensed consolidated statements of operations. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

The classification of our investments into cash equivalents and short term investments is in accordance with Statement of Financial Accounting Standard No. 95 ("SFAS No. 95") Statement of Cash Flows. Cash equivalents have maturities of three months or less from the date of purchase. Short-term investments consist of commercial paper, United States government agency obligations, corporate/municipal notes and bonds. These securities have maturities greater than three months from the date of purchase.

Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157 ("SFAS 157") “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. SFAS 157 is effective for the current fiscal year and was adopted by the company as of January 1, 2008. The adoption of SFAS 157 on our assets and liabilities did not have a significant impact on our financial statements.

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SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

In February 2008, the Financial Accounting Standards Board ("FASB") issued Staff Position No. 157-2 ("FSP 157-2") that delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay is intended to allow the FASB and constituents additional time to consider the effect of various implementation issues that have arisen, or that may arise, from the application of SFAS 157.

Further information about the application of SFAS 157 may be found in Note 13 below.

4. Stock-Based Compensation

The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers and non-employee board members. This program includes incentive and non-statutory stock option grants, grants of restricted stock units (RSUs) and an automatic grant program for non-employee board members pursuant to which non-employee board members will receive option grants at designated intervals over their period of board service. Stock option grants to employees and officers under the discretionary grant program generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each month over the next 36 months of continued service. 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. RSU grants generally vest over a one to four year period and certain of the RSU grants also have performance based vesting criteria. Additionally, the Company has an Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at the lower of 85% of the fair market value on the commencement date of the six-month offering period or on the last day of the six-month offering period.

Valuation and Expense Information Under SFAS 123(R)

Share-based compensation expense recognized under Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment”, (SFAS 123(R)) consists primarily of expenses for employee stock options, employee stock purchase plan and employee RSU grants.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions:

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Employee stock option plans:
Expected life in years		4.8			4.9			4.8			4.9
Expected volatility		62.3	%		70.0	%		64.8	%		74.1	%
Risk-free interest rate		3.3	%		4.8	%		2.7	%		4.7	%
Expected dividends	none			none			none			none
Weighted average fair value	$	3.70		$	5.10		$	2.80		$	6.09

Employee Stock Purchase Plan:
Expected life in years		0.5			0.5			0.5			0.5
Expected volatility		78.1	%		51.0	%		78.1	%		51.0	%
Risk-free interest rate		3.5	%		5.2	%		3.5	%		5.2	%
Expected dividends	none			none			none			none
Weighted average fair value	$	1.63		$	3.62		$	1.63		$	3.62

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. For the three months ended June 30, 2008 no shares were purchased under the ESPP program.

Stock-based Compensation Expense

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Cost of sales	$	431		443	$	781		789
Research and development		2,213		2,056		3,447		4,364
Selling, general and administrative		3,614		2,687		6,053		4,065
	$	6,258	$	5,186	$	10,281	$	9,218

Stock Options Activity

The following is a summary of option activity for our Stock Option Plans excluding RSUs (in thousands, except weighted average exercise price):

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value

Outstanding at January 1, 2008		14,030		$	8.92		6.75	$	3,576
Granted		1,201			5.01		-		-
Exercised		(385	)		3.59		-		-
Forfeitures and cancellations		(527	)		10.05		-		-
Outstanding at June 30, 2008		14,319		$	8.69		6.71	$	13,686

Vested and expected to vest at June 30, 2008		13,252		$	8.75		6.54	$	12,634
Exercisable at June 30, 2008		8,908		$	8.84		5.72	$	9,407

At June 30, 2008, the total compensation cost related to options granted to employees under our share-based compensation plans but not yet recognized was approximately $30.5 million, net of estimated forfeitures. The unamortized compensation expense will be amortized on a straight-line basis, and the weighted average period of this expense is approximately 2.5 years.

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Restricted Stock Units

RSUs granted to non-executive employees vest over a period of four years subject to the employee’s continuing service to the Company over that period. Vesting of RSUs to executives is dependent on continuing service over a period of one to two years as well as achieving certain performance conditions. RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. The cost of the RSUs is determined using the fair value of the Company’s common stock on the date of the grant. Compensation is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures.

A summary of the RSUs outstanding as of June 30, 2008 is as follows: (in thousands):

	Number of shares			Aggregate Intrinsic Value
Outstanding at January 1, 2008		-			-
Awarded		3,715			-
Vested		-			-
Forfeitures		(25	)		-
Outstanding at June 30, 2008		3,690		$	26,754
Vested and expected to vest at June 30, 2008		2,780		$	20,155
Exercisable at June 30, 2008		-			-

As of June 30, 2008, the Company had $10.2 million of total unrecognized compensation expense, net of estimated forfeitures, related to RSUs. The unamortized compensation expense will be recognized on a straight-line basis, and the weighted average estimated remaining life is 2.1 years.

5. Stock Repurchase Program

In February 2007, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to $100.0 million of common stock, on the open market, or in negotiated or block transactions, over a 36 month period. As of December 31, 2007, we had repurchased a total of 5.0 million shares at a total cost of $38.1 million. In February 2008, the Company’s Board of Directors authorized an additional $100 million stock repurchase program, under which shares may be repurchased over a period of three years, to commence following completion of the Company’s accelerated stock repurchase plan (“ASR”) (see below). Purchases under this program may be increased, decreased or discontinued at any time without prior notice.

In February 2008, we entered into an accelerated stock repurchase agreement (ASR) with Credit Suisse International (Credit Suisse), to purchase shares of common stock for an aggregate purchase price of approximately $62 million. The ASR terminated on June 30, 2008 (‘termination date’) with final settlement taking place in July 2008 (‘settlement date). On June 25, 2008, Silicon Image made a payment of approximately $6.2 million for the purchase of shares based on the volume weighted average share price during the period of the agreement. On the settlement date, Credit Suisse returned approximately $1 million based on the average share price during the settlement period. In accordance with the relevant accounting guidance, the Company has reflected the 11.5 million shares repurchased and the $68.2 million paid to Credit Suisse as treasury stock and will record a portion of the $1 million received as part of other income in the income statement in the third quarter of 2008.

With the repurchase, the Company completed its original stock repurchase program and repurchased approximately $5 million of its stock under the new $100 million stock repurchase program approved by the Board of Directors in February 2008.

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6. Comprehensive income (loss)

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

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Net income (loss)	$	(462	)	$	4,372		$	(1,024	)	$	7,288
Change in unrealized value of investments		(87	)		20			(30	)		135
Foreign currency translation adjustments		(10	)		(114	)		133			(125	)
Total comprehensive income (loss)	$	(559	)	$	4,278		$	(921	)	$	7,298

7. Net Income (loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period and diluted net income (loss) 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 (loss) per share (in thousands, except per share amounts):

	Three months ended June 30,					Six months ended June 30,
	2008			2007		2008			2007

Net income (loss)	$	(462	)	$	4,372	$	(1,024	)	$	7,288

Weighted average shares – basic		73,399			86,737		77,257			86,781
Weighted average shares – diluted		73,399			88,817		77,257			89,156
Net income (loss) per share – basic and diluted	$	(0.01	)	$	0.05	$	(0.01	)	$	0.08

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

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Weighted-average common shares for basic net income (loss) per share		73,399		86,737		77,257		86,781
Weighted-average dilutive stock options outstanding under the treasury stock method		-		2,080		-		2,375
Weighted-average common shares for diluted net income (loss) per share		73,399		88,817		77,257		89,156

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8. Balance Sheet Components

	June 30, 2008			December 31, 2007
	(in thousands)
Inventories:
Raw materials	$	2,547		$	3,132
Work in process		5,437			2,719
Finished goods		9,702			14,347
Total inventories	$	17,686		$	20,198

Property and equipment
Computers and software	$	28,301		$	29,950
Equipment		28,868			28,188
Furniture and fixtures		4,021			4,061
		61,190			62,199
Less: accumulated depreciation		(37,400	)		(38,008	)
Total property and equipment, net	$	23,790		$	24,191

Accrued and other liabilities:
Accrued payroll and related expenses	$	5,495		$	5,586
Accrued legal fees		1,452			970
Payable related to intangibles acquired		10,000			17,500
Other accrued liabilities		11,628			12,940
Total accrued liabilities	$	28,575		$	36,996

9. Commitments and Contingencies

Legal Proceedings

On December 7, 2001, we and certain of our officers and directors were named as defendants, along with the underwriters of the Company’s initial public offering, 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. Plaintiffs filed an amended complaint on August 14, 2007. On September 27, 2007, plaintiffs filed a motion for class certification in the six focus cases. The court has not yet decided the class certification motion. On November 13, 2007 defendants in the six focus cases filed a motion to dismiss the complaint for failure to state a claim, which the district court denied on March 8, 2008.

On July 31, 2007, we received a demand on behalf of alleged shareholder Vanessa Simmonds that our board of directors prosecute a claim against the underwriters of our initial public offering, in addition to certain unidentified officers, directors and principal shareholders as identified in our IPO prospectus, for violations of sections 16(a) and 16(b) of the Securities Exchange Act of 1934. 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 our initial public offering. The plaintiff alleges that the underwriters engaged in short-swing trades and seeks disgorgement of profits in amounts to be proven at trial from the underwriters. On February 25, 2008, Ms. Simmonds filed an amended complaint. The suit names us as a nominal defendant, contains no claims against us and seeks no relief from us.

In January 2005, 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.” 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 we 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 Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Final judgment was entered in favor of defendants on September 25,

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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. Appellants’ opening brief was filed February 28, 2008 and our responsive pleading was filed April 14, 2008. Appellants filed a reply brief on May 16, 2008. The court has not yet set a date for a hearing on the appeal.

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”). The complaint charges Analogix with copyright infringement, misappropriation of trade secrets and unfair competition under California law. The lawsuit alleges that Analogix, without authorization and in violation of our intellectual property rights, copied and used our proprietary register maps by gaining unauthorized access to our proprietary and confidential information, violated our copyright protection and unfairly competed with Silicon Image in the marketplace. In addition to seeking monetary damages in an amount to be determined at trial, we seek an injunction barring Analogix from misappropriation of Silicon Image’s trade secrets. On June 18, 2007, Analogix filed a counterclaim alleging that we breached a confidentiality agreement by purportedly disclosing Analogix’s confidential information within the Company. The court has set a trial date for September 29, 2008.

On June 11, 2008, Analogix filed a lawsuit in the United States District Court for the Northern District of California against us alleging violations of the Sherman Act Sections 1 and 2, Cartwright Act, and Section 17200 of the California Business and Professions Code. The complaint seeks monetary damages and injunctive relief. The complaint alleges that Silicon Image, and co-defendants HDMI Licensing, LLC and Simplay Labs, LLC, conspired with the founders of the HDMI Consortium in violation of the antitrust laws. Specifically, the complaint claims that the defendants and the founders of the HDMI Consortium have created certain structural advantages and engaged in anti-competitive conduct for the purpose of monopolizing the markets for HDMI Solutions and Discrete HDMI Solutions. Silicon Image believes the HDMI Consortium is pro-competitive, bringing critical technology to the market and enabling hundreds of adopters to supply HDMI-enabled products. We intend to vigorously contest Analogix’s claims. The court has yet to set a trial date.

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, 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.

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Contractual Obligations and Off-Balance Sheet Arrangements

The following table represents our future minimum payments under our operating leases, inventory and other non-inventory purchase outstanding at June 30, 2008 (in thousands):

Contractual obligations	Total		Less than 1 year		2-3 years		4-5 years		More than 5 years
Operating lease obligations	$	8,526	$	3,755	$	4,696	$	75	$	-
Inventory purchase obligations		5,095		5,095		-		-		-
Intangibles purchase commitments		22,699		19,928		2,771		-		-
Total contractual obligations	$	36,320	$	28,778	$	7,467	$	75	$	-

The amounts above exclude liabilities under FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, as we are unable to reasonably estimate the ultimate amount or timing of settlement.

10. Customer and Geographic Information

We operate in one reportable operating segment, semiconductors and IP solutions for the secure storage, distribution and presentation of high-definition content. Our Chief Executive Officer, who is considered to be our chief operating decision maker, reviews financial information presented on one operating segment basis for purposes of making operating decisions and assessing financial performance.

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

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Japan	$	20,895	$	27,646	$	40,181	$	51,728
United States		11,671		15,239	$	24,982		28,620
Taiwan		13,690		15,902		25,837		28,147
Europe		8,735		6,096		16,897		13,071
Korea		3,138		4,865		7,007		8,749
Hong Kong		7,509		5,516		12,976		8,125
Other		4,445		4,507		9,316		10,450
Total revenue	$	70,083	$	79,771	$	137,196	$	148,890

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

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Consumer Electronics (1)	$	50,310	$	63,036	$	99,845	$	113,334
Personal Computer (1)		11,758		9,475		22,927		19,297
Storage (1)		8,015		7,260		14,424		16,259
Total revenue	$	70,083	$	79,771	$	137,196	$	148,890

____________

(1)	Includes licensing revenue

	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Consumer Electronics	$	44,613	$	52,274	$	87,065	$	94,516
Personal Computer		10,970		8,518		20,977		16,967
Storage		6,253		5,740		10,981		11,388
Licensing revenue		8,247		13,239		18,173		26,019
Total revenue	$	70,083	$	79,771	$	137,196	$	148,890

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For the three months ended June 30, 2008, three customers each generated 15.3%, 12.3%, and 12.2% of our revenue, respectively. For the six months ended June 30, 2008, three customers each generated 14.9%, 12.3%, and 11.6% of our revenue, respectively. At June 30, 2008, three customers each represented 16.3%, 13.5% and 10.8% of gross accounts receivable, respectively.

For the three months ended June 30, 2007, three customers each generated 18.3%, 12.5%, and 11.7% of our revenue respectively. For the six months ended June 30, 2007, three customers each generated 16.6%, 13.2% and 10.5% of our revenue respectively. At June 30, 2007, two customers each represented 19.0 and 10.6% of gross accounts receivable, respectively.

Location of long lived assets including property plant and equipment, goodwill and intangibles are as follows (in thousands):

	June 30, 2008		December 31, 2007
US	$	66,982	$	70,051
Germany		10,570		10,855
Other foreign countries		1,543		1,764
Total	$	79,095	$	82,670

11. Provision (benefit) for Income Taxes

For the three and six months ended June 30, 2008, we recorded a benefit for income taxes of ($134,000) and ($127,000), respectively. The effective tax rate for the three and six months ended June 30, 2008 are 22.5% and 11.0%, respectively, and are based on our projected taxable income for 2008, plus certain discrete items recorded during the quarter.

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. As a result of the adoption of FIN 48, we recorded a reduction to opening retained earnings as of January 1, 2007 of approximately $5.1 million related primarily to our measurement of certain tax credits based on the requirements of FIN 48. The $5.1 million reflected an increase of $0.4 million from the amount previously disclosed in the Company’s quarterly financial statements to correct an error in the original computation of the cumulative effect of the adoption 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 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 $1.3 million (the amount related to our non-current deferred tax assets has been decreased by $0.4 million from the applicable amounts previously disclosed in the Company’s 2007 quarterly financial statements for the above mentioned correction). 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 have affected the effective tax rate. As of June 30, 2008, we had gross tax affected unrecognized tax benefits of $20.8 million of which $8.5 million, if recognized, would affect the effective tax rate.

Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. The provision for income taxes for the three and six months ended June 30, 2008 included approximately $106,000 and $198,000 of accrued interest related to unrecognized tax benefits, respectively. We conduct business globally and, as a result, we and our subsidiaries file income tax returns in various jurisdictions throughout the world including the U.S. federal and various U.S. state jurisdictions as well as various 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 1996 and 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.

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12. Investment in Intellectual Property

In February 2007, we entered into an agreement with Sunplus Technology Co., Ltd. (Sunplus) to license certain technology (Sunplus IP) from Sunplus for $40.0 million, as described below, and to license certain of our intellectual property (Silicon Image IP) to Sunplus for $5.0 million. The purpose of this licensing agreement is to obtain advanced technology for development of our future products. The agreement provides for us to pay an aggregate of $40.0 million to Sunplus, $35.0 million of which is payable in consideration for the Sunplus IP and related deliverables, and $5.0 million of which is payable in consideration for Sunplus support and maintenance obligations. Through June 30, 2008, we have paid Sunplus $22.5 million of the consideration for the licensed technology and related deliverables. We are required to pay the remaining $12.5 million upon our acceptance of certain milestone deliverables under the contract over the next twelve months. The remaining $5.0 million is being paid for support and maintenance by Sunplus over a two-year period ending in the second quarter of 2009. In accordance with SFAS No. 142 Goodwill and Other Intangibles, we will evaluate the Sunplus IP for impairment whenever indicators of impairment exist.

13. Fair Value Measurements

Our financial assets measured at fair value on a recurring basis are cash equivalents and short term investments. Our cash equivalents and short term investments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade corporate bonds, and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

The following table sets forth our cash and cash equivalents and short-term investments as of June 30, 2008, which are measured at fair value on a recurring basis by level within the fair value hierarchy. As required by SFAS No. 157, these are classified based on the lowest level of input that is significant to the fair value measurement.

	Fair value measurements using
(dollars In thousands)	Level 1		Level 2		Level 3		Assets at fair value

Cash and cash equivalents and Short-term investments	$	58,352	$	110,839	$	-	$	169,191
Total	$	58,352	$	110,839	$	-	$	169,191

The above table excludes $16.3 million in cash held by us or in our accounts with investment fund managers as of June 30, 2008. During the three months ended June 30, 2008, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

13. Subsequent Events

In July 2008, we reorganized our business to improve the effectiveness and efficiency of our operating model as part of our program to pursue continuous improvement. As part of this reorganization, we expect to record a restructuring expense consisting of severance costs in the third quarter of 2008.

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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 this Form 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 this Form 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.

Overview

Silicon Image, Inc. is a technology innovator and a global leader developing high-bandwidth semiconductor and intellectual property (IP) solutions based on our innovative, digital interconnect technology. Our vision is digital content everywhere. Our mission is to be the leader in the innovation, design, development and implementation of semiconductors and IP solutions for the secure storage, distribution and presentation of high-definition content in the home and mobile environments. We are dedicated to the development and 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 believe our track record of innovation around our core competencies, establishing industry standards and building strategic relationships, positions us to continue to drive change in the emerging world for high quality digital media storage, distribution and presentation.

We provide discrete and various levels of integrated semiconductor products as well as IP licensing to consumer electronics, computing, display, storage and networking equipment manufacturers. Our product and IP portfolio includes solutions for high-definition television (HDTV), high-definition set-top boxes (STBs), high-definition digital video disc (DVD) players, digital and personal video recorders (DVRs and PVRs), high-definition game systems, consumer and enterprise storage products and PC display products.

We have worked with industry leaders to create industry standards such as the High-Definition Multimedia Interface (HDMItm) and Digital Visual Interface (DVItm) specifications for digital content delivery. We capitalize on our leadership position through first-to-market, standards-based semiconductor and IP solutions. Our portfolio of IP solutions that we license to third parties for consumer electronics, PCs, multimedia, communications, networking and storage devices further leverages our expertise in these markets. In addition, through Simplay Labs, LLC, our wholly owned subsidiary, we offer one of the most robust and comprehensive test suites and testing technology platforms in the consumer electronics industry. We utilize independent foundries and third-party subcontractors to manufacture, assemble and test all of our semiconductor products.

Our customers are equipment manufacturers in each of our target markets — Consumer Electronics, Personal Computer and Storage. Because we leverage our technologies across different markets, certain of our products may be incorporated into equipment used in multiple markets. We sell our products to original equipment manufacturers (OEMs) throughout the world using a direct sales force and through a network of distributors and manufacturer’s representatives. Our net revenue is generated principally by sales of our semiconductor products, with other revenues derived from IP core licensing and licensing and royalty fees from our standards activities. We maintain relationships with the ecosystem of companies that provide the products that drive digital content creation and consumption, including the major Hollywood studios, consumer electronics companies, retailers and service providers. To that end, we have developed relationships with Hollywood studios such as Universal, Warner Brothers, Disney and Fox and with major consumer electronics companies such as Sony, Hitachi, Toshiba, Matsushita, Phillips and Thomson. Through these and other relationships, we have formed a strong understanding of the requirements for storing, distributing and viewing high quality digital

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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 base for building the standards and products necessary to promote opportunities for our products.

Historically, we have grown our business by introducing and promoting the adoption of new standards and entering new markets. We collaborated with several companies and jointly developed the DVI and HDMI standards. Our first products addressed the PC market. Subsequently, we introduced products for a variety of CE market segments, including DVD, STB, game console and digital television (DTV) markets. More recently, we have expanded our research and development activities and are developing products based on our innovative high speed serial digital interconnect core technology for the mobile device market, including digital still cameras, HD camcorders, portable media players and smart phones, as well as the DRAM memory and home networking markets.

We are headquartered in Sunnyvale, California. Our Internet website address is www.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 or the Annual Report on Form 10-K. We make available through our Internet website free of charge, 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.

Strategy and Core Technologies

Our goal is to enable the access and presentation of high-definition digital content anytime, anywhere, on any device. Our business strategy is to grow the available market for our products and IP solutions through the development, introduction and promotion of industry standards such as HDMI, DVI and Serial Advanced Technology Attachment (SATA) in our core technology areas, which are as follows:

Transition Minimized Differential Signaling (TMDS)

TMDS is a technology for transmitting high-speed serial data. It is used by the DVI and HDMI video interfaces, as well as other digital communication interfaces. TMDS devices are based on a transmitter/receiver pair. The transmitter incorporates an advanced coding algorithm which has reduced electromagnetic interference over copper cables and enables robust clock recovery at the receiver to achieve high skew tolerance for driving longer cable lengths as well as shorter low cost/quality cables.

Internal TMDS (iTMDS)

iTMDS defines a video-only link, using a protocol that is a superset of DVI, for connecting video paths within a DTV. This protocol handles not only standard 8-bit DVI, but also 10-, 12-, and 16-bit color depths. The protocol embeds an indicator of the current color depth within the TMDS stream allowing the iTMDS receiver to automatically switch to the correct format without any support microcontroller or software.

Serial Advanced Technology Attachment (SATA)

SATA is a computer bus primarily designed for transfer of data between a computer and mass storage devices such as hard disk drives and optical drives. The main advantages over the older parallel ATA interface are faster data transfer, ability to remove or add devices while operating (hot swapping), thinner cables that let air cooling work more efficiently, and more reliable operation with tighter data integrity checks.

SATA was designed as a successor to the Advanced Technology Attachment standard (ATA), and is expected to eventually replace the older technology (retroactively renamed Parallel ATA or PATA). Serial ATA adapters and devices communicate over a high-speed serial cable. The current SATA specification supports data transfer rates as high as 3.0 Gbit/s per device. SATA uses only 4 signal lines; cables are more compact and cheaper than PATA. SATA supports hot-swapping and NCQ. There is a special connector (eSATA) specified for external devices, and an optionally implemented provision for clips to hold internal connectors firmly in place.

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SATA Software

The preferred interface for SATA host controllers is Advanced Host Controller Interface (AHCI), which allows advanced features of SATA such as hot plug and Native Command Queuing (NCQ). If AHCI is not enabled by the motherboard and chipset, SATA controllers typically operate in “IDE emulation” mode. Windows device drivers that are labeled as SATA are usually running in IDE emulation mode unless they explicitly state that they are AHCI. While the drivers included with Windows XP do not support AHCI, we have implemented proprietary AHCI drivers to support the features of our advanced host controllers. Windows Vista and the current versions of Mac OS X and Linux have native support for AHCI.

Personal Entertainment Network (PEN)

PEN is a set of ultra light weight protocols designed to network consumer electronic equipment. The protocol suite is comprised of resource discovery, control messaging, streaming media and remote user interface components. The protocols are designed to be implemented 100% in silicon without the need for general purpose microprocessors thus allowing extremely cost effective IC implementations. PEN protocols incorporate a content protection scheme suitable for distribution of entertainment content and provide auto federation and interoperability for networked CE devices.

Because PEN protocols are designed to operate over IP networks they are suitable for any physical layer with sufficient speed and latency characteristics including MoCA, Ethernet, WiFi and power line. Using these protocols it is possible to stream media and data without the need for complex software (XML, HTML, Web Browsers, Java, etc.) in the receiver device.

Consumer Electronics Control (CEC)

CEC defines a control channel and protocol for controlling consumer electronic devices. The channel wiring is mandatory within the HDMI specification, although implementation of CEC in a product is optional. The CEC channel uses an industry standard protocol for remote control functions and is implemented as a one-wire bidirectional serial bus. CEC is used to allow a single remote control to command and control multiple CEC-enabled devices with a single remote control and individual CEC-enabled devices to command and control each other without user intervention.

An example of the latter is to allow the DVD player, when the drawer closes with a disk, to command the TV and the intervening A/V receiver (all with CEC) to power-up, select the appropriate HDMI ports, and auto-negotiate the proper video mode and audio mode. Similarly, the equipment can be commanded by the DVD player to return to sleep mode when the movie ends.

Mobile High Definition Link (MHL Technology)

Our MHL technology is a low pin count HD audio and video serial link specifically defined for connecting mobile devices to high definition TVs. MHL is based on the same technology used in DVI and HDMI but only requires single TMDS data pair to transmit video to MHL enabled TVs at resolutions up to 1080p. MHL uses 5 signal pins that can be used with a small low pin count standard MHL connector or a proprietary connector in mobile devices. Reduced pin count connectors are critical in small mobile devices because the available connector real estate is greatly limited compared to standard consumer electronic devices such as Blu-Ray players and set top boxes. The MHL specification also includes provision to have sink devices to provide power to the mobile device when connected thus preserving battery life.

Serial Port Memory Technology (SPMT)

SPMT is a new memory interface architecture that Silicon Image and other leading semiconductor companies are currently developing. SPMT is initially targeted for Dynamic Random Access Memory (DRAM) chips, that employs a serial interface architecture rather than a parallel interface architecture as commonly found in current memory offerings. This new architecture will enable greater bandwidth flexibility, significantly reduced pin count, lower power demand and savings on overall system cost. As consumers demand more rich features, mobile device manufacturers are faced with the challenge and expense of adding more processors to deliver this functionality – and that requires faster and denser memory. By shifting from parallel to serial interface technology, you can:

Reduce pin count by a minimum of 40 percent

Provide a bandwidth range from 3.2-6.4GB/s and higher

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Reduce input/output power by 50 percent or more over other currently available DRAM offerings

Provide the ability to use either a single port or multiple ports into a single SPMT-enabled memory chip

All of the above directly translate into lowering overall system cost.

Concentrations

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 56.5% and 56.1% of our total revenue for the three and six months ended June 30, 2008, respectively, compared to 56.6% and 54.0% of our total revenue for the same periods of 2007, respectively. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEMs rely upon third party manufacturers or distributors to provide purchasing and inventory management services. For the three and six months ended June 30, 2008, 53.3% and 52.6% of our revenue, respectively, was generated through distributors, compared to 42.9% and 42.5% in the comparable periods of 2007, respectively.

A significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, generated 70.9% and 69.4% of our revenue in the three and six months ended June 30, 2008, respectively, compared to 73.2% and 71.9% for the same periods of 2007. The reason for the geographical concentration in Asia is that most of our products are components of consumer electronics, computer and storage products, 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 except for a relatively insignificant portion generated in Euros through our subsidiary in Germany.

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 condensed 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) allowance for doubtful accounts receivable, (3) inventories, (4) goodwill and intangible assets, (5) income taxes, (6) accrued liabilities, (7) stock-based compensation expense, and (8) 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, 2007.

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Results of Operations

REVENUE

	Three months ended June 30,							Six months ended June 30,
	2008		2007		Change			2008		2007		Change
	(dollars in thousands)							(dollars in thousands)
Product revenue	$	61,836	$	66,532		-7.1	%	$	119,023	$	122,871		-3.1	%
Licensing revenue		8,247		13,239		-37.7	%		18,173		26,019		-30.2	%
Total revenue	$	70,083	$	79,771		-12.1	%	$	137,196	$	148,890		-7.9	%

	Three months ended June 30,							Six months ended June 30,
	2008		2007		Change			2008		2007		Change
	(dollars in thousands)							(dollars in thousands)
Consumer Electronics (1)	$	50,310	$	63,036		-20.2	%	$	99,845	$	113,334		-11.9	%
Personal Computers (1)		11,758		9,475		24.1	%		22,927		19,297		18.8	%
Storage (1)		8,015		7,260		10.4	%		14,424		16,259		-11.3	%
Total revenue	$	70,083	$	79,771		-12.1	%	$	137,196	$	148,890		-7.9	%

____________

(1)	Includes licensing revenue

	Three months ended June 30,							Six months ended June 30,
	2008		2007		Change			2008		2007		Change
	(dollars in thousands)							(dollars in thousands)
Consumer Electronics	$	44,613	$	52,274		-14.7	%	$	87,065	$	94,516		-7.9	%
Personal Computers		10,970		8,518		28.8	%		20,977		16,967		23.6	%
Storage		6,253		5,740		8.9	%		10,981		11,388		-3.6	%
Licensing revenue		8,247		13,239		-37.7	%		18,173		26,019		-30.2	%
Total revenue	$	70,083	$	79,771		-12.1	%	$	137,196	$	148,890		-7.9	%

The decrease in product revenues for the three months as well as the six months ended June 30, 2008, respectively, is primarily due to declines in sales of our Consumer Electronics (“CE”) products partially offset by increase in revenues from our Personal Computers (“PC”) products. The decrease in CE product revenues compared to comparable periods in 2007 is primarily due to changes in product mix, decrease in revenues from our discrete receiver chips and input processors in our DTV business, the result of our previously announced product transition along with, increased competition of discrete and integrated solutions from other companies. We believe the weakening consumer demand due to concerns about the economy, also had an impact on our revenue for the current quarter. Revenue from our HDMI 1.3 products increased for both the three months and six months ended June 30, 2008. However, the decrease in overall CE revenues reflects a product transition wherein sales of our HDMI 1.1 and 1.2 products are decreasing, partially offset by increased sales of HDMI 1.3 products. We expect our CE business to follow normal seasonal patterns, increasing sequentially in the third quarter of 2008 and declining in the fourth quarter as compared to the third quarter of 2008.

There was an increase in PC revenues for three and six months ended June 30, 2008 over the comparable periods in 2007 primarily due to increasing adoption and sales of our HDMI products in multimedia notebook computers. Average selling prices ("ASPs") in the PC business decreased in the quarter ended June 30, 2008 as compared to in the corresponding period 2007 but for the half year ended June 30, 2008 ASPs registered a slight increase compared to the corresponding period in 2007 mainly due to mix changes. The increase in storage revenue for the three months ended June 30, 2008 was primarily due to growth in sales of our Steelvine processor chips which also resulted in an increase in storage product ASPs. While revenue for Storage products for the six months declined modestly year over year basis, we believe that our Steelvine storage processor business will increase and result in growth of our overall storage products in the second half of 2008 as compared to 2007.

Licensing revenues decreased for the three and six months ended June 30, 2008 as compared to comparable periods in 2007 due to decreased licensing activity attributable to the CE line of business and the timing of recognition of revenue development and licensing arrangements.

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COST OF REVENUE AND GROSS PROFIT

	Three months ended June 30,									Six months ended June 30,
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)									(dollars in thousands)
Product cost of revenue (1)	$	28,615		$	35,587			-19.6	%	$	56,403		$	63,685			-11.4	%
Licensing cost of revenue		492			1,351			-63.6	%		841			4,011			-79.0	%
Total Cost of revenue (1)		29,107			36,938			-21.2	%		57,244			67,696			-15.4	%
Total gross profit		40,976			42,833			-4.3	%		79,952			81,194			-1.5	%
Gross profit margin		58.5	%		53.7	%					58.3	%		54.5	%

(1) Includes stock-based compensation expense	$	431		$	443					$	781		$	789

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. The $7.8 million and $10.4 million decreases in cost of revenue for three months and six months ended June 30, 2008, respectively, over the comparable periods in 2007 was primarily due to decreases in revenues, lower manufacturing and outside processing costs through negotiation and improved supply chain efficiencies, use of vendors offering lower pricing, increasing use of company-owned testing equipment, better inventory control, absence of integration expenses associated with the sci-worx acquisition, all slightly offset by higher shipping and warehousing fees as a result of increase in fuel prices. Stock-based compensation expense was relatively flat for the three and six months ended June 30, 2008 over the comparable periods of 2007.

Total gross profit decreased by $1.9 million and $1.2 million for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. Our gross profit margins of 58.5% and 58.3% for the three and six months ended June 30, 2008 increased from 53.7% and 54.5% for the same periods in 2007, primarily due to product mix and operational efficiencies. For the third quarter of 2008, we expect the gross margin percentage to be lower than the second quarter of 2008, as a result of seasonality in revenue and cost of revenue and changes in product mix.

OPERATING EXPENSES

Research and Development (“R&D”).

	Three months ended June 30,									Six months ended June 30,
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)									(dollars in thousands)
Research and development (1)	$	22,298		$	19,025			17.2	%	$	43,840		$	36,220			21.0	%
Percentage of total revenue		31.8	%		23.8	%					32.0	%		24.3	%

(1) Includes stock-based compensation expense	$	2,213		$	2,056					$	3,447		$	4,364

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, and costs associated with prototype materials. R&D expenses increased $3.3 million and $7.6 million for the three and six months ended June 30, 2008 as compared to the comparable periods in 2007, due to the higher compensation expenses caused by increased staffing and an overall increase in other R&D activities during the quarter and half year, which resulted in higher tape-out expenses, higher depreciation expenses, and an increase in software purchased solely for use in R&D. The increase in R&D expense for the six months ended June 30, 2008 compared to the same period in 2007 was partially offset by a decrease in stock-based compensation expense as a result of changes in our Black-Scholes fair value assumptions as described in Note 4 to the Condensed Consolidated Financial statements. We expect the R&D expenses to be relatively flat for the second half of fiscal year 2008 as compared to the second half of fiscal year 2007.

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

	Three months ended June 30,									Six months ended June 30,
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
Selling, general and administrative (1)	$	19,067		$	17,151			11.2	%	$	37,385		$	34,295			9.0	%
Percentage of total revenue		27.2	%		21.5	%					27.2	%		23.0	%

(1) Includes stock-based compensation expense	$	3,614		$	2,687					$	6,053		$	4,065

SG&A expense consists primarily of employee compensation, including stock-based compensation expense, sales commissions, professional fees, marketing and promotional expenses. The increase in SG&A expenses of $1.9 million and $3.1 million respectively for the three and six months ended June 30, 2008 as compared to similar periods in 2007, is primarily due to increased compensation expense partly due to increase in headcount, increased legal expense for litigation activities, an increase in stock based compensation expense as a result of grant of RSUs to employees and executives as discussed in Note 4 to the Condensed Consolidated Financial statements, partially offset by decrease in consultant expense due to a decrease in the use of consultants as a result of completion of projects and cost reduction efforts. We expect the SG&A expenses to be relatively flat for the second half of fiscal year 2008 as compared to the second half of fiscal year 2007.

Amortization of Intangible Assets.

	Three months ended June 30,									Six months ended June 30,
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
Amortization of intangible assets	$	1,587		$	537			195.5	%	$	3,174		$	1,152			175.5	%
Percentage of total revenue		2.3	%		0.7	%					2.3	%		0.8	%

Amortization of intangible assets was $1.6 million and $3.2 million, respectively, for the three and six months ended June 30, 2008, as compared to $537,000 and $1.2 million for the same period in 2007. The increase in the amortization of intangible assets was primarily caused by the commencement of amortization of the acquired Sunplus technology in the fourth quarter of 2007. See further discussion in Note 12 to the Condensed Consolidated Financial Statements.

Interest Income and other, net.

	Three months ended June 30,									Six months ended June 30,
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
Interest income and other, net	$	1,380		$	3,290			-58.1	%	$	3,296		$	6,316			-47.8	%
Percentage of total revenue		2.0	%		4.1	%					2.4	%		4.2	%

The interest income and other, net, which principally includes interest income, was $1.4 million and $3.3 million for the three and six months ended June 30, 2008, respectively, compared to $3.3 million and $6.3 million for the same periods of 2007. The decrease was primarily due to a switch to investments in tax exempt securities in 2008, which generally carry lower interest rates than similar taxable securities, a lower interest rate environment and lower average total cash balances as a result of the stock repurchase payments made during the first six months of 2008.

Provision (benefit) for income taxes.

	Three months ended June 30,									Six months ended June 30,
	2008			2007			Change			2008			2007			Change
	(dollars in thousands)
Provision (benefit) for income taxes	$	(134	)	$	5,038			-102.7	%	$	(127	)	$	8,555			-101.5	%
Percentage of total revenue		-0.2	%		6.3	%					-0.1	%		5.7	%

Provision (benefit) for Income Taxes. For the three and six months ended June 30, 2008, we recorded a benefit for income taxes of ($134,000) and ($127,000), respectively. The effective tax rate for the three and six months ended June 30, 2008 was 22.5% and 11.0%, respectively and was based on our projected taxable income for 2008, plus certain discrete items recorded during the quarter.

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The difference between the provision (benefit) for income taxes and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to various forecasted items including tax exempt income, state taxes and foreign taxes, adjusted for certain discrete items recorded during the quarter. We currently expect a tax rate of 30-35%, before discrete items for the three quarters and full year 2008.

For the three and six months ended June 30, 2007, we recorded a provision for income taxes of $5.0 million and $8.6 million, respectively. The effective tax rate for the three and six months ended June 30, 2007 was 53.5% and 54.0% respectively. The effective tax rate was based on projected taxable income for 2007. The effective tax rate for the three months ended June 30, 2007 of 53.5% was comprised of 41.4%, 1.0% and 11.1% for federal, state and foreign, respectively. The difference between the provision for income taxes and the income tax determined by applying the combined statutory rate 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. The new global structure is designed to better align asset ownership and business functions with our expectations related to the sources, timing and amounts of future revenues and profits.

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 11: Provision (benefit) for income taxes” in the Notes to Condensed Consolidated Financial Statements under Part I Item I of this report for further discussion.

Recent Accounting Pronouncements

See Note 2, “Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements under Part I Item I of this report.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

The following sections discuss the effects of changes in our balance sheet and cash flows, contractual obligations, other commitments, and the stock repurchase program on our liquidity and capital resources.

Cash and Cash Equivalents and Investments.

	Six months ended June 30,
	2008			2007			Change
	(dollars in thousands)
Total cash, cash equivalents and short-term investments	$	185,456		$	202,912			-8.6	%

Cash provided by operating activities	$	11,533		$	4,080			182.7	%
Cash provided by in investing activities		28,122			14,329			96.3	%
Cash used in financing activities		(70,945	)		(20,644	)		243.7	%
Effect of exchange rate changes on cash & cash equivalents		13			(125	)		-110.4	%
Net decrease in cash and cash equivalents	$	(31,277	)	$	(2,360	)		1225.3	%

The decrease in cash and cash equivalents of $31.3 million for the six months ended June30, 2008, was primarily due to payment of $68.2 million in connection with our accelerated stock repurchase program, payment of $6.2 million to Sunplus and Oracle in connection with the investment in intangibles and software and $4.6 million investments in property, plant and equipment, partially offset by cash received on sale of the investments, net of purchases, of $32.7 million, cash received on exercise of stock options and for purchases of stock by employees under the ESPP of $3.0 million, and cash generated from operations of $11.5 million.

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Accounts Receivable, Net.

	June 30,		December 31,
	2008		2007		Change
	(dollars in thousands)
Accounts receivable, net	$	28,636	$	21,254		34.7	%

Net accounts receivable as of June 30, 2008 represents 37 days of sales outstanding. This compares to 22 days of sales outstanding on December 31, 2007. The accounts receivable balance as of December 31, 2007 was lower due to a high level of collections at year end. The increase in accounts receivable of $7.4 million was in line with our expectations and reflects increased invoicing activity in the month of June 2008 as compared to December 2007.

Inventory.

	June 30,		December 31,
	2008		2007		Change
	(dollars in thousands)
Inventory	$	17,686	$	20,198		-12.4	%

Our inventories are accounted for at the lower of cost or market. Inventory is written down based on excess and obsolete inventories determined primarily by future demand forecasts. Inventory write downs are measured as the difference between the cost of the inventory and market, based upon assumptions about future demand, and is charged to the provision for inventory, which is a component of our cost of sales. Inventory decreased primarily due to lower manufacturing and outside processing costs through negotiation, use of vendors offering better pricing, increasing use of company-owned testing equipments, implementation of enhanced tools enabling better inventory control, all resulting in lower inventory balance.

Financial Outlook

The following is Silicon Image’s current financial outlook for the third quarter of 2008:

Revenue: $75 million - $77 million

Gross margin: 56% - 57%

Operating expenses: $43 million - $44 million

Interest Income: $0.9 million - $1.0 million

Effective tax rate: 30% - 35%

Diluted shares outstanding: approximately 75 million

For the full year of 2008, Silicon Image expects

Revenue: $284 million - $289 million

Gross margin: 57% - 58%

Operating expenses: $171 million - $173 million

Effective tax rate: 30% - 35%

Diluted shares outstanding: approximately 75 million on December 31, 2008

Commitments and Contractual Obligations

See Note 9. Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements under Part I Item I of this report.

We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by us or that establish the parameters defining our requirements. In certain instances, these agreements allow us the

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option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. Consequently, only a portion of our reported purchase commitments arising from these agreements are firm, non-cancelable, and unconditional commitments.

Liquidity and Capital Resource Requirements

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 12 months. 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 licensing revenue, investments in inventory 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, 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 June 30, 2008. 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%
$315,000	$630,000	$940,000

Foreign Currency Exchange Risk

A majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, certain operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the Euro, British Pound, the South Korean Won, Taiwan Dollar and the Chinese Yuan. The effect of any adverse changes in foreign currency exchange rates may impact our future operating results or cash flows as any such changes in our currency exchange rate may result in increased ongoing research and development or sales and marketing costs in our foreign operations. Additionally, some of our foreign distributors price our products in the local currency of the countries in which they sell. Therefore, significant strengthening or weakening of the U.S. dollar relative to those foreign currencies could result in reduced demand or lower U.S. dollar prices or vice versa, for our products, which would negatively affect our operating results. Subsequent to the end of the second quarter, we entered into forward contracts to hedge a portion of our foreign currency expenses incurred in Euros, Japanese Yen and British Pounds.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our second quarter of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

Please refer to Note 9 to our financial statements under Part I Item I financials statements.

Item 1A. Risk Factors

A description of the risk factors associated with our business is set forth below. You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our common stock. These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business. The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment.

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

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

•

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

•

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

•

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

•

competitive pressures, such as the ability of competitors to successfully introduce products that are more cost-effective or that offer greater functionality than our products, including integration into their products of functionality offered by our products, the prices set by competitors for their products and the potential for alliances, combinations, mergers and acquisitions among our competitors;

•

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

•

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

•

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

•

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 based on how well we manage our business. Some of these factors include the following:

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•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

our ability to manage expenses and inventory levels; and

•

our ability to successfully maintain certain structural and various compliance activities in support of our global structure which in the long run, will result in certain operational benefits as well as achieve an overall lower tax rate.

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

Our business may be significantly impacted by a downturn in the economy.

Our CE product revenue, which comprised of approximately 63.7% and 63.5% of total revenue for the three and six months ended June 30, 2008 respectively, is dependent on continued demand for consumer electronics, including but not limited to, DTVs, STBs, DVDs and game consoles. Demand for consumer electronics business is a function of the health of the economies in the United States and around the world. If the US economy or other economies around the world move into recession, we expect that the demand for overall consumer electronics will be adversely affected and therefore, demand for our CE, PC and storage products and our operating results will be adversely affected as well.

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

Part of our business strategy is to license intellectual property (IP) through agreements with companies whereby companies incorporate our IP into their respective technologies that address markets in which we do not want to directly participate. There can be no assurance that additional companies will be interested in purchasing these virtual products on commercially favorable terms or at all. We also cannot ensure that companies who purchase 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. The IP agreements 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 a particular period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin content, the sales of these virtual products can have a disproportionate impact on gross profit and profitability. Also, generating revenue from these 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 these 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.

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

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, current or 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 and Texas Instruments and CE manufacturers, such as Hitachi, Matsushita, Philips, 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.

We operate in rapidly evolving markets, which makes it difficult to evaluate our future prospects.

The markets in which we compete are characterized by rapid technological change, evolving customer needs and frequent introductions of new products and standards. As we adjust to evolving customer requirements and technological advances, we may be required to further reposition our existing offerings and to introduce new products and services. We may not be successful in developing and marketing such new offerings, or we may experience difficulties that could delay or prevent the development and marketing of such new offerings. Moreover, new standards that compete with DVI and HDMI have been and in the future may be introduced from time to time, which could impact our success. Accordingly, we face risks and difficulties frequently encountered by companies in new and rapidly evolving markets. If we do not successfully address these risks and difficulties, our results of operations could be negatively affected.

Our success depends on demand for our new products.

Our future growth and success depends on our ability to develop and bring to market on a timely basis new products, such as our HDTV input processors and MHL products, which we have recently introduced into the market. There can be no assurance that we will be successful in developing and marketing these new or other future products, such as our Personal Entertainment Network (PEN) products under development. Moreover, there is no assurance that our new or future products will achieve the desired level of market acceptance in the anticipated timeframes or that any such new or future products will contribute significantly to our revenue. Our new products face significant competition from established companies that have been selling competitive products for longer periods of time than we have.

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

Our success in the HDMI 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 consumer electronics 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

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receiver (“AVR”) to displays (such as an HDTV) over HDMI with HDCP represents a combination of new technologies working in concert. 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. 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 affected by changes in 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 following interfaces 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, the European Industry Association for Information Systems, Communication Technologies and Consumer Electronics (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, the Cable and Satellite Broadcasting Association of Asia (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 VOD, 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.

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. The annual fees collected by our subsidiary HDMI Licensing, LLC are recognized as revenues by us. 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. In addition, during 2007, at a founders meeting, the founders decided to share the HDMI adopter’s royalty revenues among the various founders. Our subsidiary no longer receives 100% of the HDMI adopter royalty revenues.

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 is very 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

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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 six 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 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 June 30, 2008, shipments to World Peace Industrial, Microtek Corporation, and Innotech Corporation generated 15.3%, 12.3% and 12.2% of our revenue, respectively. For the six months ended June 30, 2008, shipments to World Peace Industrial, Microtek Corporation, and Innotech Corporation generated 14.9%, 12.3% and 11.6% of our revenue, respectively. For the three months ended June 30, 2007, shipments to Innotech Corporation, Microtek Corporation and World Peace Industrial, generated 18.3%, 12.5% and 11.7% of our revenue, respectively. For the six months ended June 30, 2007, shipments to Innotech Corporation, Microtek Corporation and World Peace Industrial, generated 16.6%, 13.2%, 10.5% of our revenue respectively. In addition, an end-customer may buy our products 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:

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

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

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one or more significant customers selects products manufactured by one of our competitors for inclusion in their future product generations.

While our participation in multiple markets, has broadened our customer base, 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 end customers, therefore reducing our ability to forecast sales and increasing the complexity of our business.

Many original equipment manufacturers (“OEM”) rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors generated 53.3% and 52.6% of our revenue for the three and six months ended June, 2008 ,respectively. Distributors generated 42.9% and 42.5% of our revenue for the three and six months ended June 30, 2007, respectively. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

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manage a more complex supply chain;

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

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

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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 distributor 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 products and will continue to introduce new 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:

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

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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;

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

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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;

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timely completion and introduction of new product designs;

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management of product life cycles;

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use of leading-edge foundry processes, when use of such processes are required and achievement of high manufacturing yields and low cost testing;

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market acceptance of new products; and

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market acceptance of new architectures such as our input processors.

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 constraints, the inability to license third-party technology or other factors. Competitors and customers may integrate the functionality of our products into their own products, thereby reducing 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

In 2006, we implemented a global strategy that involves maintaining operations in various countries around the world. We believe that, in the long run, we will realize certain operational benefits from this global strategy as well as achieve an overall lower tax rate. However, the effectiveness of the strategy requires, in addition to maintaining and increasing profitability, maintenance of a certain corporate structure and various compliance activities required by foreign jurisdictions in support of the structure. Should management fail to adhere to the these compliance requirements or fail to maintain supportive processes, our ability to realize the expected benefits of our global strategy may be jeopardized, which may adversely affect our business, operating results or financial condition.

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. Acquisitions 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, now Silicon Image, GmbH. We may acquire additional companies or technologies in the future. Acquisitions involve numerous risks, including, but not limited to, the following:

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

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disruption of our ongoing business;

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

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

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inability to commercialize acquired technology; and

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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.

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

We acquired sci-worx, now Silicon Image, GmbH, 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 exposes us to complexities of operating in Germany, a country in which we had not previously had significant operations and whose regulatory framework with which we have only recently become familiar and of difficulties in managing and integrating approximately 172 employees, as of the date of acquisition, 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 this acquisition 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:

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improve operational and financial systems;

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train and manage our employee base;

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

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

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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:

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

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

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

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

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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 sub-contractors have no obligation to supply products to us for any specific period of time, in any specific quantity or at any specific price, except as set forth in a particular purchase order. Our requirements represent a small portion of the total production capacity of our outside foundries, assembly and test facilities and our sub-contractors may reallocate capacity to other customers even during periods of high demand for our products. These foundries may allocate or move production of our products to different foundries under their control, even in different locations, which may be time consuming, costly and difficult, have an adverse affect on quality, yields and costs and require us and/or our customers to re-qualify the products, which could open up design wins to competition and result in the loss of design wins and design-ins. If our 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, they are complex and may contain defects and errors. In the past we have encountered defects and errors in our products. Because our products are sometimes integrated with products from other vendors, it can be difficult to identify the source of any particular problem. Delivery of products with defects or reliability, quality or compatibility problems, may damage our reputation and our ability to retain existing customers and attract new customers. In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, warranty and product liability claims against us that may not be fully covered by insurance. Any of these circumstances could substantially harm our business.

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 and six months ended June 30, 2008, approximately 83.3% and 81.8% of our revenue, respectively was generated from customers and distributors located outside of the United States, primarily in Asia. We anticipate that sales outside of the United States will continue to account for a substantial portion of our revenue in future periods. In addition, we undertake various sales and marketing activities through regional offices in several other countries and 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:

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political, social and economic instability;

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

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natural disasters and public health emergencies;

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nationalization of business and blocking of cash flows;

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trade and travel restrictions

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the imposition of governmental controls and restrictions;

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burdens of complying with a variety of foreign laws;

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

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unexpected changes in regulatory requirements;

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foreign technical standards;

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changes in taxation and tariffs;

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difficulties in staffing and managing international operations;

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fluctuations in currency exchange rates;

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

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

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exposure to possible litigation or claims in foreign jurisdictions; and

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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.

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Our participation in working groups for the development and promotion of industry standards in our target markets, including the Digital Visual Interface 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 and a founder in the working group that develops and promotes the HDMI specification. In connection with our participation in such working groups:

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

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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.

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 adopters’ 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 during which we received all of the royalties associated with HDMI adopters’ agreements, in 2007, the HDMI founders reallocated the royalties to reflect each founder’s relative contribution of intellectual property to the HDMI specification. We no longer receive 100% of these royalties.

We intend to promote and continue to be involved and actively participate in other standard setting initiatives. For example, we also recently joined the Serial Port Memory Technology Working Group (SPMTWG) to develop and promote a new memory technology. 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. This 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 and expect to continue to enter into, strategic partnerships with third parties. In February 2007, we entered into a licensing agreement with Sunplus Technology, which grants us the rights to use and further develop advanced intellectual property (“IP”) technology. We believe that the IP licensed under this agreement will enhance our ability to develop DTV technology and other consumer product offerings. but the success of the arrangement depends upon our successful integration of the operations of the former sci-worx, which will be critical to our ability to develop products based on the licensed IP. The success of this strategic relationship also depends upon the continued market acceptance of our HDTV and consumer products. There is no assurance that we will be successful in integrating the operations of sci-worx or in developing successful products based on the Sunplus technology. While our relationship with Sunplus and other strategic partners are designed to drive revenue growth and adoption of our technologies and industry standards promulgated 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.

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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:

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

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

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Intel and Silicon Image worked together to develop HDCP;

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

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

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

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

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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;

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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;

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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;

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

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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

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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

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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.

On June 11, 2008, Analogix filed a lawsuit in the United States District Court for the Northern District of California against Silicon Image alleging violations of the Sherman Act Sections 1 and 2, Cartwright Act, and Section 17200 of the California Business and Professions Code. The complaint seeks monetary damages and injunctive relief. The complaint alleges that Silicon Image, and co-defendants HDMI Licensing, LLC and Simplay Labs, LLC, conspired with the founders of the HDMI Consortium in violation of the antitrust laws. Specifically, the complaint claims that the defendants and the founders of the HDMI Consortium have created certain structural advantages and engaged in anti-competitive conduct for the purpose of monopolizing the markets for HDMI Solutions and Discrete HDMI Solutions. Silicon Image believes the HDMI Consortium is pro-competitive, bringing critical technology to the market and enabling hundreds of adopters to supply HDMI-enabled products. We intend to vigorously contest Analogix’s claims. The court has yet to set a trial date.

This and other litigation initiated by us may be expensive and time-consuming and may divert our resources and the attention of our executives.

Any potential intellectual property litigation against us or in which we become involved 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

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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

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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. 123R, 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 had a material weakness in internal control over financial reporting in 2005 which was remediated in 2006. We cannot assure you that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to report on, our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. In addition, we may reassess the implementation or testing of certain of our current controls as a result of the 2007 release of Public Company Accounting Oversight Board Auditing Standard No. 5, which may lead to modifications in such controls. These modifications could affect the overall effectiveness or evaluation of the control system in the future by us or our

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independent registered public accounting firm. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

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:

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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.

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

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

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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.

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

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

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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.

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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.

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

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

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

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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.

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

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

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

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•

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.

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

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

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

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

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

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

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

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

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In April 2007, Rob Valiton resigned from his position as vice president of worldwide sales and Sal Cobar was appointed as his successor.

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

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In October 2007, Robert Freeman resigned from his position as chief financial officer and Harold Covert was appointed as his successor.

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. On December 7, 2001, we and certain of our officers and directors were named as defendants along with the underwriters of the Company’s initial public offering, 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. Plaintiffs filed an amended complaint on August 14, 2007. On September 27, 2007, plaintiffs filed a motion for class certification in the six focus cases. The court has not yet decided the class certification motion. On November 13, 2007 defendants in the six focus cases field a motion to dismiss the complaint for failure to state a claim, which the district court denied on March 8, 2008.

We and certain of our officers have also been 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 violated securities laws and made alleged misstatements of material facts. For more information, please see Part I, Item I of this report. Uncertainties inherent in litigation prevent us from predicting the outcome of this

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litigation and while it remains pending it may divert management attention, cause us to incur unanticipated expenses and consume other resources.

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. TSMC, the outside foundry that produces the majority of our semiconductor products, is located in Taiwan. Siliconware Precision Industries Co. Ltd (“SPIL”), Advanced Semiconductor Engineering, or ASE, one of the subcontractors that assemble and test our semiconductor products, is also located in Taiwan. For the three and six months ended June 30, 2008, customers and distributors located in Japan generated 29.8% and 30.5% of our revenue, respectively and customers and distributors located in Taiwan generated 19.5% and 20.0% of our revenue, respectively. For the three and six months ended June 30, 2007, customers and distributors located in Japan generated 34.7% of our revenue in each period and customers and distributors located in Taiwan generated 19.9% and 18.9% 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.

Terrorist attacks or war could lead to 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 the OEM’s products that incorporate our products. Disruptions and instability in the general economy could reduce demand for our products or disrupt the operations of our customers, suppliers, distributors and contractors, many of whom are located in Asia, which would in turn adversely affect our operations and results of operations. Disruptions and instability in financial markets could adversely affect our stock price. Armed hostilities or war in South Korea could disrupt the operations of the research and development contractors we utilize there, which would adversely affect our research and development capabilities and ability to timely develop and introduce new products and product improvements.

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 “green” which means that the products need to be lead free and be free of certain banned substances. All of our products are available to customers in a green 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;

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•

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;

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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 comparable companies in our markets;

•

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

•

changes in our key executives and technical personnel; and

•

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

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

We held our 2008 Annual Meeting of Stockholders on May 21, 2008. The first matter voted upon at the meeting was the election of two Class III directors to serve until the 2011 Annual Meeting of Stockholders. At the meeting, Steve Tirade and William Raduchel were elected as Class III directors, in an uncontested election, by the following vote:

Name	Shares for		Shares Against		Shares Abstaining		Shares Witheld		Broker Non Votes
Steve Tirado		62,083,055		-		-		4,992,599		-
William Raduchel		61,915,201		-		-		5,160,453		-

Our board of directors consists of seven members and is divided into three classes, with each class serving staggered three-year terms. The term of the Class I directors, currently Peter Hanelt and William George, will expire at the 2009 Annual Meeting of Stockholders and the term of the Class II directors, currently Masood Jabbar and John Hodge, will expire at the 2010 annual meeting of stockholders.

The second matter voted upon at the meeting was the approval of the 2008 Equity Incentive Plan to replace the 1999 Equity Incentive Plan. The 2008 Equity Incentive Plan term commences on May 21, 2008 and will terminate on May 21, 2018. At the meeting, the 2008 Equity Incentive Plan was approved by the following vote:

		Shares for				Shares Against				Shares Abstaining				Shares Witheld				Broker Non Votes
2008 Equity Incentive Plan			24,735,080				9,483,053				224,419				-				32,633,102

The third matter voted upon at the meeting was the approval of the amendment of the 1999 Employee Stock Purchase Plan to extend term of the plan to August 15, 2018. The extension of the plan was approved by the following vote:

		Shares for				Shares Against				Shares Abstaining				Shares Witheld				Broker Non Votes
1999 Employee Stock Purchase Plan			32,676,038				1,620,533				145,981				-				32,633,102

The fourth matter voted upon at the meeting was the ratification of the appointment of Deloitte & Touche LLP as Silicon Image’s independent registered public accounting firm for the fiscal year ending December 31, 2008. At the meeting, the appointment of Deloitte & Touche LLP as independent accountants was ratified by the following vote:

		Shares for				Shares Against				Shares Abstaining				Shares Witheld				Broker Non Votes
Appointment of Deloitte & Touche LLP			66,071,222				639,624				364,808				-				-

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

(a) Exhibits

10.01*	Employee Bonus plan (Incorporated by reference to Exhibit 99.01 to the Registrant’s current report on Form 8-K filed on April 29, 2008).
10.02*	2008 Equity Incentive plan (Incorporated by reference to Exhibit 4.07 to the Registrant’s current report on Form S-8 filed on May 23, 2008).
10.03*	ESPP 1999 Plan Document including UK Sub-Plan As Amended (Incorporated by reference to Exhibit 4.05 to the Registrant’s current report on Form S-8 filed on May 23, 2008).
10.04*	Enrollment forms, subscription agreements, notice of suspension, notice of withdrawal and joint election (for UK employees) related to the Employee Stock Purchase Pla (incorporated by reference to Exhibit 10.04 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2008).
10.05*	Forms of notice of grant of stock options and awards, notice of grant of stock bonus award, notice of grant of stock appreciation right award, employee and non-employee director of stock option agreement related to the 2008 Equity Incentive Plan.
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 a management contract or compensatory plan or arrangement.

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

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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.

Date: July 25, 2008	/s/ Harold L. Covert
	Harold L. Covert Chief Financial Officer (Principal Financial Officer)

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Exhibit Index

10.01*	Employee Bonus plan (Incorporated by reference to Exhibit 99.01 to the Registrant’s current report on Form 8-K filed on April 29, 2008).
10.02*	2008 Equity Incentive plan (Incorporated by reference to Exhibit 4.07 to the Registrant’s current report on Form S-8 filed on May 23, 2008).
10.03*	ESPP 1999 Plan Document including UK Sub-Plan As Amended (Incorporated by reference to Exhibit 4.05 to the Registrant’s current report on Form S-8 filed on May 23, 2008).
10.04*	Enrollment forms, subscription agreements, notice of suspension, notice of withdrawal and joint election (for UK employees) related to the Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.04 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 27, 2008).
10.05*	Forms of notice of grant of stock options and awards, notice of grant of stock bonus award, notice of grant of stock appreciation right award, employee and non-employee director of stock option agreement related to the 2008 Equity Incentive Plan.
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 arbanes-Oxley Act of 2002.

____________

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

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

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Legalese
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Readability	H.S. freshman Good

Silicon Image (SIMG) Inactive 10-Q2008 Q2 Quarterly report

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