SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period ended March 31, 2005

OR

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

For the transition period from _________ to ___________.

Commission file number: 000-26887

Silicon Image, Inc.

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) Yes þ No o and (2) has been subject to such filing requirements for the past 90 days Yes þ No o

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

     The number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of April 29, 2005 was 79,049,674 shares.

Silicon Image, Inc.
Quarterly Report on Form 10-Q
Three Months Ended
March 31, 2005

Table of Contents

Part I. Financial Information (Unaudited)

Item 1. Financial Statements

Silicon Image, Inc.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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Silicon Image, Inc.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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Silicon Image, Inc.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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Silicon Image, Inc.

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements include those of Silicon Image, Inc. and our subsidiaries (collectively, the “Company”), after elimination of all significant intercompany accounts and transactions. The Company has prepared the accompanying unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended December 31, 2004. The interim financial information is unaudited but reflects all adjustments, normal and recurring in nature, and which are, in the opinion of management, necessary to fairly state the condensed consolidated balance sheets, and condensed consolidated statements of income and cash flows for the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2004 is derived from the December 31, 2004 audited financial statements. You should read these interim condensed consolidated financial statements in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2004.

2. Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS 123 (revised 2004), “Shared Based Payment”,SFAS 123R. The Statement is a revision of FASB 123 and supersedes APB No. 25. The Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange of goods or services that are based on the fair value of the entity’s equity instruments. It focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the period during which an employee is required to provide service for the award. The grant-date fair value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same of similar instruments are available. In addition, the Statement requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value and that the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R will be effective for the Company at the beginning of fiscal 2006. We have not determined the impact of this Statement on our financial statements at this time.

     In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 (“FAS 109-1”), “Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The AJCA introduces a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. We do not expect the adoption of these new tax provisions to have a material impact on our consolidated financial position, results of operations or cash flows.

     In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign

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earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. We do not expect the adoption of these new tax provisions to have a material impact on our consolidated financial position, results of operations or cash flows.

     Stock-Based Compensation

     We account for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method, if the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

     Had we recorded compensation expense for our stock options based on the grant-date fair value as prescribed by SFAS No. 123 and SFAS No. 148, our net income (loss) would have been as follows (in thousands, except per share amounts):

     The weighted average grant-date fair value was estimated using the Black-Scholes pricing model with the following assumptions:

     The weighted average grant-date fair value of stock purchase rights granted under our Employee Stock Purchase Plan was estimated using the Black-Scholes pricing model with the following assumptions:

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     The components of comprehensive income (loss) were as follows (in thousands):

     The only component of accumulated other comprehensive income is the change in the net unrealized gain on our available for sale investments. For the three-months ended March 31, 2004, comprehensive loss approximated reported net loss. Cumulative translation adjustments are immaterial for all periods presented.

3. 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, excluding shares subject to repurchase, 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):

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     The following is a reconciliation of the weighted-average common shares used to calculate basic net income per share to the weighted-average common shares used to calculate diluted net income per share for the three months ended March 31, 2005 (in thousands):

     Had we generated net income for the three month period ended March 31, 2004, the number of weighted average securities outstanding that would have been added to weighted average shares for purposes of calculating diluted earnings per share would have been (in thousands):

     As a result of our net loss for the three-months ended March 31, 2004, all common share equivalents would have been anti-dilutive and therefore, have been excluded from the diluted net loss per share calculation. The weighted average securities that were either out of the money or anti-dilutive and excluded from our calculation of diluted net income (loss) per share were approximately 5,277,000 and 20,411,000 for the three-month periods ended March 31, 2005 and 2004, respectively.

4. Cash and cash equivalents and short-term investments

     We consider all highly liquid investments maturing within three months from the date of purchase to be cash equivalents. All of our investments are categorized as available-for-sale at the consolidated balance sheet dates, and have been presented at fair value.

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     Cash and cash equivalents and short-term investments consisted of the following as of March 31, 2005 (in thousands):

     Cash and cash equivalents and short-term investments consisted of the following as of December 31, 2004 (in thousands):

     Market values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. With respect to our marketable equity securities, our policy is to review our equity holdings on a regular basis to evaluate whether or not such securities has experienced an other than temporary decline in fair value. Our policy

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includes, but is not limited to, reviewing the Company’s cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporary decline in value exists, it is our policy to write down these investments to the market value and record the related write-down in our consolidated statement of operations.

     As of March 31, 2005, the average maturity period of our debt securities was approximately 278 days.

5. Balance Sheet Components

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Warranty Accrual

     At the time of revenue recognition, we provide an accrual for estimated costs to be incurred pursuant to our warranty obligation. Our estimate is based primarily on historical experience. Warranty accrual activity for the three months ended March 31, 2005 and 2004 was as follows (in thousands):

6. Stock-Based Compensation

     Pro forma Net Income (Loss)

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

     The Company is required under SFAS 148 to disclose pro forma information regarding option grants made to its employees based on specified valuation techniques that produce estimated compensation charges. We provide pro forma net income (loss) and pro forma net income (loss) per share disclosures for stock-based awards made during the three-month period ended March 31, 2005 and March 31, 2004, as if the fair-value-based method defined in SFAS 123 had been applied. The fair value of the stock-based awards was estimated using the Black-Scholes model.

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

     The following table summarizes the components of our stock compensation expense (benefit) for the three months ended March 31, 2005 and 2004 (in thousands):

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     Option repricing resulted in a benefit for the three months ended March 31, 2005 as opposed to an expense in the three-month period ended March 31, 2004, as our average stock price during the three months ended March 31, 2005 was lower compared to an increase in the three months ended March 31, 2004.

7. Asset impairment and restructuring activities

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

     In connection with this program, during the third quarter of 2001 through the first quarter of 2003, we recorded restructuring expenses as a result of four workforce reductions by eliminating approximately 136 positions which consisted of both cash severance-related costs and non-cash severance-related costs representing the intrinsic value of modified stock options. In addition, restructuring expenses during this period were also a result of expected losses on leased facilities, fixed asset write-downs, impairment of goodwill, intangible assets and acquired technology offset by reversals of unearned compensation, a component of stockholders’ equity for unvested stock options that were cancelled in connection with employee terminations.

     Severance and benefits payments are substantially complete. Lease payments will be made in the form of cash through the end of the related lease term of November 2005. The following table presents restructuring activity for the three-month periods ended March 31, 2005 and 2004 (in thousands):

8. Debt Facility

     In October 2002, we entered into a $3.6 million term loan to refinance $3.1 million of debt acquired in connection with our acquisition of CMD and $500,000 of other bank debt. This loan bore interest at prime plus 0.25% and required monthly payments through its maturity of October 1, 2004. This loan was repaid in full in 2004. During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment. This term loan bore interest at 5% and required monthly payments through its maturity in February 2005. During the three-months ended March 31, 2005, this remaining balance on this loan was repaid in full. During the period ended March 31, 2004, we entered into an agreement to extend this debt facility by way of a revolving line of credit with an availability of up to $10.0 million, and an equipment line of credit of up to $3.0 million. Borrowings under the revolving line are limited to the lesser of $10.0 million or 80% of eligible accounts receivable as defined in the loan agreement. This revolving line of credit expires in May 2005 and bears interest at either prime plus 0.25% or LIBOR plus 2.75%, at our option. We are working actively to replace this existing line of credit. Quarterly and annual financial covenants are contained within this revised agreement. No amounts have been drawn down against this line of credit as of March 31,2005. As of March 31, 2005, we were in compliance with all covenants.

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     In November 2004, we leased certain capital equipment and as of March 31, 2005, the future capital lease obligations were approximately $355,000.

     In January 2005, we acquired certain capital equipment under a debt arrangement and as of March 31, 2005, the future debt obligations under this arrangement were approximately $80,000.

9. Legal Proceedings

     On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis Microchip, Inc. (collectively, “Genesis”) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the “Federal Suit”). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the importation of articles infringing our patent (the “ITC investigation”). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made and continues to make cash payments to the Court, it may not have made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On August 26, 2004, the parties completed the filing of their respective appeal briefs. On October 26, 2004, the Court of Appeals for the Federal Circuit issued an order setting an oral argument for the appeal on December 7, 2004. The hearing took place as scheduled. At the end of the hearing, the panel of Federal Circuit judges hearing the case stated that they believed that no final order had been issued by the trial court, and that therefore the Federal Circuit did not have jurisdiction to hear the appeal. The Federal Circuit issued its opinion on January 28, 2005 and, as expected, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the lower court’s order, which was based on the parties’ agreement to settle the case, was not “final” and appealable. The case was remanded by the Federal Circuit back to the lower court. The parties have been engaged in negotiating a stipulation by which the lower court can issue a new final judgment and such action is expected shortly.

     To date, we have not received any cash payments nor have we recognized any revenue associated with the matter. If the MOU is upheld in its present form after all appeals have been exhausted, Genesis will be granted a royalty-bearing license for the right to use certain non-necessary patent claims referred to in the DVI Adopters Agreement. In addition, upon Genesis’s becoming a signatory to the HDMI Adopters Agreement, Genesis will be granted a royalty-bearing license for the right to use these claims as part of their HDMI implementation. Genesis

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will also be granted a royalty-bearing license to expand use of certain DVI- related patent claims to the consumer electronics marketplace. We expect that an amended final, appealable order will be entered in the second quarter of 2005. We further expect that Genesis will refile its appeal. Through March 31, 2005, we have spent approximately $11.0 million on this matter and expect to continue to incur significant legal costs until the matter is resolved.

     Silicon Image, certain officers and directors, and Silicon Image’s underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all defendants were part of a scheme to manipulate the price of Silicon Image’s stock in the aftermarket following Silicon Image’s initial public offering in October 1999. Response to the complaint and discovery in this action on behalf of Silicon Image and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for the time being. In February 2003, the Court denied motions to dismiss brought by the underwriters and certain issuers and ordered that the case may proceed against certain issuers including against Silicon Image. A proposed settlement has been negotiated and has received preliminary approval by the Court. In the event that the settlement is granted final approval, we do not expect it to have a material effect on our results of operations or financial position. In the event that the settlement is not finally approved, we could not accurately predict the outcome the litigation, but we intend to defend this matter vigorously.

     In May 2003, Silicon Image, certain officers and directors, and Silicon Image’s underwriters were named as defendants in a securities class action lawsuit captioned Liu v. Credit Suisse First Boston Corp., et al., No. 03-20459 (S.D. Fla. 2003) and filed in Federal District Court for the Southern District of Florida. The action was filed on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The initial complaint alleged that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. Silicon Image was never served with a copy of the complaint. In June 2003, the action was transferred to the Federal District Court for the Southern District of New York. The plaintiff in this matter filed an amended complaint shortly thereafter, from which Silicon Image, and the named officers, were dropped as defendants. Plaintiffs have not amended their complaint or otherwise indicated that they intend to name Silicon Image or its officers or directors as defendants in the action since that time. We believe that these claims were without merit and, if revived, we would defend this matter vigorously.

     Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of California. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleges that the Company and certain of its officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated there under. Two individuals, not including named plaintiff Curry, have filed a motion to be designated by the court as lead plaintiffs. The Company intends to defend itself vigorously in this matter.

     On January 14, 2005, the Company received a notification that the Securities and Exchange Commission had commenced a formal, private investigation involving trading in the Company’s securities. The Company is fully cooperating with the investigation.

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

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10. Customer and Geographic Information

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

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

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

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

     For the three months ended March 31, 2005, one distributor generated 18% of our revenue and another distributor generated 10% of our revenue, and as of March 31, 2005, two distributors represent 13% and 11% of gross accounts receivable. For the three months ended March 31, 2004, one distributor generated 15% of our revenue and another distributor generated 11% of our revenue.

11. Guarantees and Indemnifications

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

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12. Intangible Assets, net

     Components of intangible assets are as follows (in thousands):

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

     Amortization of intangible assets for the three months ended March 31, 2005 and 2004 was $274,000 and $357,000, respectively.

13. Income taxes

     For the quarter ended March 31, 2005, we have recorded a provision for income taxes of $331,000. This primarily includes an estimated provision for U.S. alternative minimum taxes for the fiscal year ending December 31, 2005 and a provision relating to taxes in foreign jurisdictions where we operate based on expected annual estimated tax rates. At December 31, 2004, we had a net operating loss carry-forward for federal income tax purposes of approximately $99.7 million that expires in various years through 2024. These future tax benefits have not been recognized as an asset on our balance sheet due to uncertainties surrounding our ability to generate sufficient taxable income in future periods to realize these tax benefits. Under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating loss carry-forwards may be restricted or limited in certain circumstances.

14. Unrealized gain on equity investments

     In October 2000, as consideration for the transfer of certain technology, we received from Leadis Technology Inc. (Leadis), a development stage privately controlled enterprise, 300,000 shares of preferred stock and a derivative warrant to purchase 75,000 shares of the Company’s common stock. Initially these shares were valued at zero due to the early stage of Leadis’ development and other uncertainties as to the realization of this investment. During the quarter ended June 30, 2004, Leadis completed an initial public offering of its stock. In connection with the initial public offering the preferred stock was converted into common stock on a 1:1 basis. In connection with the initial public offering, we were subject to a lock-up agreement whereby we were restricted from selling the stock and the common stock underlying the warrant for a period of six months ending December 2004, (for the duration of the lock-up period we were also restricted from engaging in hedging or other transactions which would result in or lead to the sale or disposition of the shares underlying the derivative warrant). For the three and six month periods ended

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June 30, 2004, we valued the warrant using the Black-Scholes model and recorded a gain of approximately $990,000. On September 16, 2004, we net exercised the derivative warrant for equivalent shares of common stock (74,397 shares), and based on the price of the stock at that date, recorded a loss of $64,000 on these shares.

     As of March 31, 2005, we hold approximately 351,000 Leadis common shares that were marked to market (as an available for sale security, down from approximately 374,000 shares at December 31, 2004 as noted below), with any resulting gain/loss recorded as other comprehensive income (loss) until sold or considered impaired on other than a temporary basis. Our typical practice has been not to hold shares for investment purposes. In February 2005, we sold approximately 23,600 shares at a price range from $7.40 to $7.50. These shares related to the warrant shares and consequently in connection with this sale, we recorded a realized loss of approximately $120,000 for the three-month period ended March 31, 2005. The value of our common stock holding in Leadis was determined to be approximately $2.1 million as of March 31, 2005, based on Leadis’s closing market price of $5.98 at that date. This amount is classified as short-term investments.

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

This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-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,” “may,” “will”, “can”, “should”, “could”, “estimate”, based on”, “intended”, “would”, “projected”, “forecasted” and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any updates or revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-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.

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Overview

     Silicon Image is a leader in multi-gigabit semiconductor solutions for the secure transmission, storage and display of rich digital media. The Company’s mission is to be the leader in defining the architectures, intellectual property (IP) and semiconductor technology required to build secure digital content delivery systems. To ensure that rich digital content is available across devices, consumer electronics (CE), personal computers and displays (PC) and storage devices must be architected for content compatibility and interoperability.

     Silicon Image’s strategy entails establishing industry-standard, high-speed digital interfaces and building market momentum and leadership through its first-to-market, standards-based IC products. Further leveraging its IP portfolio, the Company broadens market adoption of the Digital Visual Interface (DVI), High-Definition Multimedia Interface™ (HDMI™) and Serial ATA (SATA) interfaces by licensing its proven IP cores to companies providing advanced system-on-a-chip solutions incorporating these interfaces. Licensing, in addition to creating revenue and return on engineering investment in market segments we choose not to address, creates products complementary and in some cases competitive to our own that expand the markets for our products and help to improve industry wide interoperability.

     Silicon Image is a leader in the global PC and digital display arena with its innovative PanelLink®-branded digital interconnect technology, which enables an all-digital connection between PC host systems, such as PC motherboards, graphics add-in boards, notebook PCs and digital displays such as LCD monitors, plasma displays and projectors. Silicon Image’s PanelLink technology serves as the basis for both the DVI standard as well as for the popular HDMI standard, designed for CE applications. Together, Silicon Image’s PanelLink DVI and HDMI solutions are the most popular DVI and HDMI implementation in the market with more than 80 million units shipped to date.

     In 2000, our PC business represented 96.1% of total revenue. We embarked upon a plan to diversify into the CE and storage markets for growth opportunities as well as to decrease our dependence on the PC business. Products sold into the PC market generated 24.6% and 27.0% of our revenue in the first three months of 2005 and 2004, respectively. If we include licensing revenues, these percentages were 25.0% and 27.0% for the first three months of 2005 and 2004, respectively.

     Leveraging our core technology and standards-setting expertise, Silicon Image is a leading force in advancing the adoption of HDMI, the digital audio and video interface standard for the consumer electronics market. Introduced in 2002 by founders Hitachi Ltd. (Hitachi), Matsushita Electric Industrial Co. (MEI or Panasonic), Philips Consumer Electronics International B.V. (Philips), Silicon Image, Sony Corporation (Sony), Thomson Multimedia, S.A. (Thomson or Thomson RCA) and Toshiba Corporation (Toshiba). HDMI enables the distribution of uncompressed, high-definition video and multi-channel audio in a single, all-digital interface that dramatically improves quality and simplifies cabling. Based on the same core technology used by the DVI standard, Silicon Image’s HDMI technology is also marketed under the PanelLink brand and includes High-bandwidth Digital Content Protection (HDCP), which is supported by Hollywood studios as the technology of choice for the secure distribution of premium content over uncompressed digital connections. Silicon Image shipped the first HDMI-compliant silicon to the market and currently remains the market leader for HDMI functionality.

     Products sold into the CE market have been increasing as a percentage of our total revenues and generated 43.9% and 31.7% of our total revenues for the first three months of 2005 and 2004, respectively. If we include licensing revenues, these numbers were 47.9% and 34.3% for the first three months of 2005 and 2004, respectively. Our CE products offer a secure interface for transmission of digital video and audio to consumer devices, such as digital TVs, HDTVs, A/V receivers, STBs, and DVD players. Demand for our products will be driven primarily by the adoption rate of the HDMI standard within these product categories.

     In the storage market, Silicon Image has assumed a leadership role in SATA, the new high-bandwidth, point-to-point interface that is replacing parallel ATA in desktop storage and making inroads in the enterprise arena due to its improved price/performance. Silicon Image is a leading supplier of discrete SATA devices with multiple motherboard and add-in-card design wins. Silicon Image’s SATALink™-branded solutions are fully SATA-compliant and offer advanced features and capabilities such as Native Command Queuing, port multiplier capability

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and ATAPI support. Silicon Image also supplies high-performance, low-power Fibre Channel Serializer/Deserializer (SerDes) to leading switch manufacturers.

     In September 2004, Silicon Image introduced its first products based on its SteelVine™ storage architecture that is expected to serve the storage needs of the SMB and consumer electronics markets with a system-on-a-chip implementation that includes a high-speed five-port switch, two micro-processors, firmware and the SATA interface, among other features. Products sold into the storage market, as a percentage of our total revenues, generated 23.5% and 30.7% of our revenue for the first three months of 2005 and 2004, respectively. If we include licensing revenues, these numbers were 27.0% and 38.8% for the first three months of 2005 and 2004, respectively. Demand for our storage semiconductor products is dependent upon the rate at which interface technology transitions from parallel to serial, market acceptance of our SteelVine™ architecture, and the extent to which SATA and Fibre Channel functionality are integrated into chipsets and controllers offered by other companies, which would make our discrete devices unnecessary. In the second quarter of 2005, we expect our legacy storage semiconductor business (Fibre Channel and parallel ATA) revenues to decrease and our Serial ATA and SteelVine revenues to increase.

     License revenue is recognized when an agreement with a licensee exists, the price is fixed or determinable, delivery or performance has occurred, and collection is reasonably assured. Generally, we expect to meet these criteria and recognize revenue at the time we deliver the agreed-upon items. However, we may defer recognition of revenue until cash is received if collection is not reasonably assured at the time of delivery. A number of our license agreements require customer acceptance of deliverables, in which case we would defer recognition of revenue until the licensee has accepted the deliverables and either payment has been received or is expected within approximately 90 days of acceptance. Certain licensing agreements provide for royalty payments based on agreed upon royalty rates. Such rates can be fixed or variable depending on the terms of the agreement. The amount of revenue we recognize is determined based on a time period or on the agreed-upon royalty rate, extended by the number of units shipped by the customer. To determine the number of units shipped, we rely upon actual royalty reports from our customers when available and rely upon estimates in lieu of actual royalty reports when we have a sufficient history base of receiving royalties from a specific customer to make an estimate based on available information from the licensee such as quantities held, manufactured and other information. These estimates for royalties necessarily involve the application of management judgment. As a result of our use of estimates, period-to-period numbers are “trued-up” in the following period to reflect actual units shipped. To date, such “true-up” adjustments have not been significant. In cases where royalty reports and other information are not available to allow us to estimate royalty revenue, we recognize revenue only when royalty payments are received. Development revenue is recognized when project milestones have been completed and acknowledged by the other party to the development agreement and collection is reasonably assured. In certain instances, we recognize development revenue using the lesser of non-refundable cash received or the results of using a proportional performance measure.

     Our licensing activity is complementary to our product sales and it helps us to monetize our intellectual property and accelerate market adoption curves associated with our technology. Most of our licenses include a field of use restriction that prevents the licensee from building a chip in direct competition with those market segments we have chosen to pursue. Revenue from development for licensees, licensing and royalties accounted for 7.9% and 10.6% of our revenues for the first three months in 2005 and 2004, respectively. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances Although we attempt to make these factors predictable, many of these factors require significant judgment. License revenue has been lumpy over time, and is expected to continue to be lumpy for the foreseeable future, resulting in considerable fluctuation in the amount of revenue recognized in a particular quarter.

Outlook

     We expect a 12-16% sequential growth in overall revenues in the second quarter of 2005. In our storage business, we expect that storage IC revenues will be flat to up five percent. In addition, we expect that revenue from our new SteelVine system products will grow significantly during the second quarter of 2005. These products contributed $0.2 million to our revenue in the first quarter of 2005, and we anticipate that they will contribute total revenues in 2005 of $8-$10 million. Furthermore, we expect SteelVine™ chip sales to grow throughout the year and to make a meaningful contribution to our storage IC revenue. We expect our PC revenues to decline sequentially by 5-

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     15% during the second quarter of 2005. We expect the CE business to strengthen in the second quarter of 2005 and expect revenue growth of 25-35% sequentially.

     In the first quarter of 2005, we achieved licensing revenues of $3.5 million. We expect licensing revenues to be approximately $4.0 million for the second quarter of 2005.

     We expect overall gross margins to be flat as a percentage of revenue, in the second quarter of 2005, assuming that we do not experience any significant expense or benefit from stock compensation. We are unable to predict any such expense or benefit, as they are dependent on changes in our stock price and volatility. We anticipate that cost improvements already in inventory, combined with planned second quarter improvements, will offset the effect of ASP erosion and product mix.

     We cannot forecast operating expenses in the second quarter of 2005, due to the substantial impact of stock compensation, which fluctuates from quarter to quarter with changes in our stock price. Stock compensation provided a benefit in the first quarter of 2005, reducing operating expenses by $9.3 million. In addition to the effect of any changes resulting from stock compensation which is unknown, we expect our operating expenses in the second quarter of 2005 to reflect an increase of $1.2 to $2.0 million as a result of head count increases, lower non-recurring engineering credits, higher commissions and higher project related expenses without taking into account stock compensation expense.

     We expect to incur substantial non-cash stock compensation expense in 2005 and future periods as a result of previous stock option repricings, stock options assumed in connection with our prior acquisitions, the issuance of stock options to consultants, and modifications to stock options. We may also incur non-cash stock compensation expense in connection with future acquisitions. The amount of stock compensation expense as well as any potential benefit will fluctuate each period with changes in our stock price and volatility.

     We will also incur legal fees in 2005 in conjunction with our patent infringement lawsuit against Genesis, and other outstanding litigation, including those items noted in our subsequent events to our footnotes and related to Item 4. The amount of legal fees incurred will depend on the duration of the litigation, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur with respect to this matter; however, we do expect to incur substantial amounts through at least the fourth quarter of 2005.

Commitments, Contingencies and 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 49% of our revenue in the first quarter of 2005 and 47% of our revenue in 2004. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEM’s rely upon third party manufacturers or distributors to provide purchasing and inventory management functions. In the first quarter of 2005, 48% of our revenue was generated through distributors, compared to 45% in 2004. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases faster than product revenues, we would expect a decrease in the percentage of our total revenues generated through distributors.

     A significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, generated 68% and 71% of our revenue in the first quarter of 2005 and 2004, respectively. The reason for our geographical concentration in Asia is that most of our products are part of flat panel displays, graphic cards and motherboards, the majority of which are manufactured in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our geographic revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has been denominated in U.S. dollars.

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

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warrant to purchase 285,714 shares of our common stock at $0.18 per share. The estimated fair value of this warrant at March 31, 2005 would be $2.8 million.

Critical Accounting Policies

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. We believe the following accounting policies 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) long-lived assets, (5) goodwill, (6) deferred tax assets, (7) accrued liabilities, (8) stock-based compensation expense, and (9) 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, 2004.

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Results of Operations for the Three Months Ended March 31, 2005 as compared to Results of Operations for the Three Months Ended March 31, 2004

REVENUE (dollars in thousands):

REVENUE (with development, licensing and royalty revenues by product line, dollars in thousands):

Revenue was $44.3 million for the first quarter of 2005, an increase of 23.6 % from the first quarter of 2004. The increase in revenues is due to increased sales of our consumer electronics and personal computer products, which contributed an additional $8.1 million ($ 9.0 million including licensing), and $1.3 million ($1.4 million including licensing) of revenue, respectively, offset by a decrease in sales of storage products in the amount of $0.6 million ($1.9 million including licensing). Our overall licensing revenue also declined by approximately $0.3 million. The increase in the CE product line is primarily attributable to the transition of these markets to high-definition and consequently, an increased demand for our HDMI based products. CE product sales declined sequentially, reflecting seasonal patterns. The increase in the PC product line is primarily attributable to the increased demand of DVI receiver sales offset by a decline in transmitter sales. The decrease in our storage business is primarily attributable to the expected decline in revenues from our fibre-channel and parallel ATA product lines offset by an increase in revenues from our storage IC business which are primarily driven by the demand for our serial ATA controllers. We license our technology in each of our areas of business, but usually limit the scope of the license to market areas that are complementary to our products sales and that do not directly compete with our direct product offerings. Development, licensing and royalty revenues declined as a percentage of total revenues from 10.6% in the first quarter of 2004 to 7.9% in the first quarter of 2005, reflecting the inherently uneven nature of our licensing

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revenues, as a small number of transactions can represent a large portion of licensing revenues and changes in the number or timing of these transactions can have a significant impact on licensing revenues. License revenue has been lumpy over time, and is expected to continue to be lumpy for the foreseeable future, resulting in considerable fluctuation in the amount of revenue recognized in a particular quarter. Overall, we expect a sequential growth in revenues in the range of 12-16% during the second quarter of 2005.

COST OF REVENUE AND GROSS MARGIN

     Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, as well as related overhead costs. Gross margin (revenue minus cost of revenue, as a percentage of revenue) was 65.0% and 59.5% for the three month periods ended March 31, 2005 and 2004, respectively, and includes non-cash stock compensation expense (benefit) of ($1.2) million and $1.2 million, respectively. Overall, gross margin increased substantially due to the effect of the stock benefit year over year ($2.4 million effect or 5.9%), offset in part by a marginal decline of 0.4% attributable to the effect of lower average selling prices and slightly lower licensing revenues.

     Relative to the first quarter, gross margins are expected to remain flat during the second quarter, assuming that we do not experience any expense or benefit from stock compensation. We are unable to predict any such expense or benefit, as they are dependent on changes in our stock price and volatility.

OPERATING EXPENSES

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     Research and Development. R&D expense consists primarily of compensation and related costs for employees, fees for independent contractors, the cost of software tools used for designing and testing our products, and costs associated with prototype materials. Our R&D expense decreased 51.6% from the first quarter of 2004, as a result of non-cash stock compensation which provided a $4.4 million benefit to our research and development expense in the first quarter of 2005 as compared to a $6.2 million stock compensation expense in the first quarter of 2004. The effect of this change was partially offset by a $2.0 million increase in other research and development expenditures primarily due to an increase in the number of R&D projects to support the multiple markets in which we operate.

     Selling, General and Administrative. SG&A expense consists primarily of employee compensation and benefits, sales commissions, and marketing and promotional expenses. Our SG&A expense decreased 66.5% from the first quarter of 2004, as a result of non-cash stock compensation which provided a $3.7 million benefit to our SG&A expense in the first quarter of 2005 compared to a $4.7 million stock compensation expense in the first quarter of 2004. The effect of this change was partially offset by a $0.6 million increase in compensation included in our SG&A resulting from increased headcount to support the increased rate of growth of the Company.

     Stock Compensation. Stock compensation expense (benefit) included in the functional expense amounts was ($9.3) million or (21.0)% of revenue for the first quarter of 2005 and $12.1 million or 33.7% of revenue for the three month period ended March 31, 2004. The decrease in total stock compensation can be primarily attributed to the effect of a lower stock price during the first quarter of 2005, compared to the fourth quarter of 2004, relative to our repriced options offset by a charge relating to other options subject to variable accounting. These expenses are included in cost of sales, research and development and selling and general administrative costs, and are shown here for the reader to better understand the composition of these expenses and reasons these expenses change from period to period.

     We may incur substantial non-cash stock compensation expense in future periods as a result of (1) the issuance of, or modifications to, restricted stock awards and stock option grants to employees and consultants, (2) the stock option repricing programs we implemented in 2000 and 2001, (3) amortization of our existing unearned compensation balance, and (4) the impact on the adoption of SFAS 123R. Since the expense associated with our stock option repricings and stock options issued to non-employee consultants is dependent on our stock price and volatility, stock compensation expense (or benefit) may fluctuate significantly from period to period. To date, we have recognized over $23 million of expense in connection with our stock option repricings, and this may become an even more significant component of our stock compensation expense in future periods depending on our weighted average stock price and the number of such repriced options that continue to remain outstanding. Approximately 1.7 million stock options were outstanding as of March 31, 2005 that were repriced in 2001 and 2000. For these repriced options, the Company will continue to mark-to-market options that are vested and outstanding, until they are exercised, cancelled or are forfeited. In future periods, to the extent that the market price of our stock exceeds or is lower than the market price as of March 31, 2005, we could incur an expense or a benefit, respectively, pertaining to these outstanding options and an incremental charge for options that vest and become outstanding in those periods.

     Amortization of Intangible Assets. Amortization of intangible assets was $274,000 and $357,000 for the first quarters of 2005 and 2004, respectively, relating to intangible assets on our balance sheets, pursuant to our acquisition of Transwarp Netwoks, Inc. during the second quarter of 2003.

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

     In connection with this program, during the third quarter of 2001 through the first quarter of 2003, we recorded restructuring expenses as a result of four workforce reductions by eliminating approximately 136 positions which consisted of both cash severance-related costs and non-cash severance-related costs representing the intrinsic value of modified stock options. In addition, restructuring expenses during this period were also a result of expected loss on leased facilities, fixed asset write-downs, impairment of goodwill, intangible assets and acquired technology,

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

     Severance and benefits payments are substantially complete. Lease payments will be made in the form of cash through the end of the related lease term of November 2005. The following table presents restructuring activity for the three-month periods ended March 31, 2005 and 2004 (in thousands):

     Patent Assertion Costs. Patent assertion costs which are included in selling, general and administration expenses were $0.1 million for the first quarter of 2005 as compared to $0.2 million during the same period in 2004. Patent assertion costs are related to the lawsuit we filed against Genesis in April 2001. The decrease in 2005 compared to 2004 is attributable to a lower level of activity during the first quarter of 2005. However, we expect to incur significant patent assertion costs through at least the fourth quarter of 2005. The amount of legal fees incurred will depend on the duration of the litigation, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur.

     Interest Income and Other, Net. This principally includes interest income and interest expense. The net amount was $498,000 for the first quarter of 2005, compared to $84,000 for the first quarter of 2004. The increase is principally due to substantially higher cash balances and higher interest rates.

     Provision for Income Taxes. For the quarter ended March 31, 2005, we have recorded a provision for income taxes of $331,000. This primarily includes an estimated provision for U.S. alternative minimum taxes for the fiscal year ending December 31, 2005 and a provision relating to taxes in foreign jurisdictions where we operate based on expected annual estimated tax rates. At December 31, 2004, we had a net operating loss carry forward for federal income tax purposes of approximately $99.7 million that expires in various years through 2024. These future tax benefits have not been recognized as an asset on our balance sheets due to uncertainties surrounding our ability to generate sufficient taxable income in future periods to realize these tax benefits. Under the Tax Reform Act of 1986, the amounts of, and benefits from, net operating loss carry forwards may be restricted or limited in certain circumstances.

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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

     Since our inception, we have financed our operations through a combination of private sales of convertible preferred stock, our initial public offering, lines of credit, capital lease financing and cash flows from operations. At March 31, 2005, we had $107.5 million of working capital and $100.4 million of cash and cash equivalents and short-term investments. If we are not able to generate cash from operating activities, stock option exercises, and proceeds from sales of shares under our employee stock purchase plan, we will liquidate short-term investments or, to the extent available, utilize credit arrangements to meet our cash needs.

     Working Capital

     Net accounts receivable increased to $22.1 million at March 31, 2005 from $19.4 million at December 31, 2004. The increase is primarily due to the timing of the receivables. Our days sales outstanding (“DSO”) was 45 days at March 31, 2005, compared to 38 days at December 31, 2004. The increase in DSO is consistent with the timing of shipments near the end of the quarter. We expect the DSO days to be in the 43-47 days range during the second quarter of 2005.

     Inventories decreased to $12.1 million at March 31, 2005 from $13.9 million at December 31, 2004. The decrease is attributable to increased business volume and an effort to reduce overall inventory, especially wafer starts. Our inventory turn rate increased to 5.5 as at March 31, 2005 from 4.8 as at December 31, 2004. Inventory turns are computed on an annualized basis, and are a measure of the number of times inventory is replenished during the year. Our inventory turns increased primarily due to higher business volume during the first quarter of 2005 and lower inventory balances as at March 31, 2005. We expect this measure to be at the 5.3 to 5.6 level during the second quarter of 2005.

     Accounts payable increased to $7.2 million and accrued liabilities decreased to $9.8 million, respectively, at March 31, 2005 from $6.8 million and $13.4 million, respectively, at December 31, 2004. The increase in accounts payable was due to the timing associated with internal check processing, and the decrease in accrued liabilities is primarily from payments made in this quarter for year-end bonuses and commissions offset by quarterly accruals.

     Deferred license revenue increased to $3.0 million at March 31, 2005 from $2.1 million at December 31, 2004. The increase is principally due to the timing of when the deferred license revenue will be recognized as revenue.

     Operating Activities

     Operating activities generated $5.7 million of cash during the first quarter of 2005. For the first quarter of 2005, our net income excluding non-cash items for depreciation and amortization, stock compensation expense (benefit), amortization of intangible assets was $9.1 million. Decreases in inventories, accrued liabilities and other assets, offset by increases in accounts receivable, prepaid expenses, accounts payable, deferred revenue and deferred margin on sales to distributors was a net use of cash of $3.4 million. Operating activities contributed $9.0 million of cash during the first quarter of 2004. During the first quarter of 2004, our net income excluding non-cash items for depreciation, stock compensation expense, and amortization of intangible assets was $5.7 million, which accounts for some of the cash provided by operating activities. Decreases in inventories, prepaid expenses, and other assets offset by increases in accounts receivable, accounts payable, accrued liabilities and deferred license revenue and deferred margin on sales to distributors contributed $3.2 million.

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     Investing and Financing Activities

     Investing activities used $17.6 million and provided $0.5 million of cash during the three months ended March 31, 2005 and 2004, respectively. For the three-months ended March 31, 2005, the application of cash related to the purchases of short-term investments and capital expenditures. For the three-month period ended March 31, 2004, the source of cash was net proceeds from sales of short-term investments, partially offset by capital expenditures.

     We generated $4.2 million and $4.6 million from financing activities during the three months ended March 31, 2005 and 2004. Cash provided by financing activities in both periods was primarily from stock option exercises and proceeds from sales of shares under our employee stock purchase plan, partially offset by repayments of our capital leases and other obligations.

     Debt and Lease Obligations

     In October 2002, we entered into a $3.6 million term loan to refinance $3.1 million of debt acquired in connection with our acquisition of CMD and $500,000 of other bank debt. This loan bore interest at prime plus 0.25% and required monthly payments through its maturity of October 1, 2004. This loan was repaid in full in 2004. During the three months ended March 31, 2003, we borrowed $383,000 to finance certain capital equipment. This term loan bore interest at 5% and required monthly payments through its maturity in February 2005. During the three-months ended March 31, 2005, this remaining balance on this loan was repaid in full. During the period ended March 31, 2004, we entered into an agreement to extend this debt facility by way of a revolving line of credit with an availability of up to $10.0 million, and an equipment line of credit of up to $3.0 million. Borrowings under the revolving line are limited to the lesser of $10.0 million or 80% of eligible accounts receivable as defined in the loan agreement. This revolving line of credit expires in May 2005 and bears interest at either prime plus 0.25% or LIBOR plus 2.75%, at our option. We are working to put in place a new line of credit to replace the existing line that expires in May 2005. Quarterly and annual financial covenants are contained within this revised agreement. No amounts have been drawn down against this line of credit as at March 31,2005. As of March 31, 2005, we were in compliance with all covenants.

     In November 2004, we leased certain capital equipment and as of March 31, 2005, the future capital lease obligations were approximately $355,000.

     In January 2005, we acquired certain capital equipment under a debt arrangement and as of March 31, 2005, the future debt obligations under this arrangement were approximately $80,000.

     Future minimum payments for our operating leases, debt and inventory related purchase obligations outstanding at March 31, 2005 are as follows (in thousands):

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     Future minimum lease payments under operating leases have not been reduced by expected sublease rental income or by the amount of our restructuring accrual that relates to leased facilities.

     We plan to spend approximately $8.5 to $9.5 million during the remainder of the 2005 fiscal year for equipment, furniture and software.

     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 development, licensing and royalty revenues, 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.

Factors Affecting Future Results

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

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

     The revenue and income potential of our business and the markets we serve are early in their lifecycle and are difficult to predict. The Digital Visual Interface (DVI) specification, which is based on technology developed by us and used in many of our products, was first published in April 1999. We completed our first generation of consumer electronics and storage IC products in mid-to-late 2001. In addition, the preliminary serial ATA specification was first published in August 2001 and the High Definition Multimedia Interface (HDMI) specification was first released in December 2002. Accordingly, we face risks and difficulties frequently encountered by companies in new and rapidly evolving markets. If we do not successfully address these risks and difficulties, our results of operations could be negatively affected.

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

For the three months ended March 31, 2005, we have a net income of $16.6 million. However, prior to this quarter, we have incurred net losses in each fiscal year since our inception. We incurred losses of $0.3 million and $12.8 million for the years ended December 31, 2004 and 2003, respectively. While our operations were profitable in the three months ended March 31, 2005, we may not sustain profitability.

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

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

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	•	the growth, evolution and rate of adoption of industry standards for our key markets, including digital-ready PCs and displays, consumer electronics and storage devices 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 lumpy over time, and is expected to continue to be lumpy 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;
	•	the cost of components for our products and prices charged by the third parties who manufacture, assemble and test our products;
	•	fluctuations in the price of our common stock, which drive a substantial portion of our non-cash stock compensation expense; and
	•	the nature and extent of litigation activities, particularly relating to our patent infringement suit against Genesis Microchip, and any subsequent legal proceedings related to the matters raised in that suit; and class action lawsuits against us that were initiated in early 2005;

     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.

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

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

	•	our ability to manage product introductions and transitions, develop necessary sales and marketing channels, and manage other matters necessary to enter new market segments;
	•	our ability to successfully manage our business in multiple markets such as PC, storage and CE; which may involve additional research and development, marketing or other costs and expenses;
	•	our ability to close 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.

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

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

     Part of our business strategy is to license certain of our Company’s technology to companies that address markets in which we do not want to directly participate. We signed our first license contract in December 2001 and have limited experience marketing and selling our technology on a licensing basis. There can be no assurance that additional companies will be interested in licensing our technology on commercially favorable terms or at all. We also cannot ensure that companies who license our technology will introduce and sell products incorporating our technology, will accurately report royalties owed to us, will pay agreed upon royalties, will honor agreed upon market restrictions, will not infringe upon or misappropriate our intellectual property and will maintain the confidentiality of our proprietary information. Licensing contracts are complex and depend upon many factors including completion of milestones, allocation of values to delivered items, and customer acceptances. Many of these factors require significant judgments. Licensing revenues could fluctuate significantly from period to period because they are heavily dependent on a few key deals being completed in a particular period, the timing of which is difficult to predict. Because of their high margin content, licensing revenues can have a disproportionate impact on gross margins and profitability. Also, generating revenue from licensing arrangements is a lengthy and complex process that may last beyond the period in which efforts begin, and once an agreement is in place, the timing of revenue recognition may be dependent on customer acceptance of deliverables, achievement of milestones, our ability to track and report progress on contracts, customer commercialization of the licensed technology, and other factors. In addition, in any period, our expectation of licensing revenue is or may be dependent on one or a few licenses being completed. Licensing that occurs in connection with actual or contemplated litigation is subject to risk that the adversarial nature of the transaction will induce non-compliance or non-payment. The accounting rules associated with recognizing revenue from licensing transactions are increasingly complex and subject to

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interpretation. Due to these factors, the amount of license revenue recognized in any period may differ significantly from our expectations.

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

     The PC, CE and storage markets in which we operate are intensely competitive. These markets are characterized by rapid technological change, evolving standards, short product life cycles and declining selling prices. Our display products face competition from a number of sources, including analog solutions, DVI-based solutions, dual (analog and DVI based) solutions and other digital interface solutions. We expect competition in the display market to increase. For example, Analog Devices, ATI, Broadcom, Chrontel, Genesis Microchip, Explore Tech, National Semiconductor, Novatek, nVidia, Philips, Pixelworks, SIS, Smart ASIC, ST Microelectronics, Sunplus, Texas Instruments, Thine, and Weltrend, are shipping products or have announced intentions to introduce products and/or other digital interface solutions that we expect will compete with our PanelLink products. Other companies have announced DVI-based solutions and we expect that additional companies are likely to enter the market. Current or potential customers, including our own licensees, may also develop solutions that could compete with us, directly or indirectly, such as the integration of a DVI transmitter into a graphics processing chip or integration of a DVI receiver into a panel monitor controller.

     In the CE market, our digital interface products are used to connect cable set-top boxes, satellite set-top boxes and DVD players to digital televisions. These products incorporate DVI and High-bandwidth Digital Content Protection (HDCP), or HDMI with or without HDCP support. Companies that have announced or are shipping DVI-HDCP solutions include Texas Instruments (TI), Toshiba, Panasonic, Mstar, Thine, Broadcom and Genesis Microchip (Genesis). In addition, our video processing products face competition from products sold by AV Science, Broadcom, Focus Enhancements, Genesis, Mediamatics, Micronas Semiconductor, Oplus, Philips, Pixelworks, Zoran, ATI and Trident. We also compete, in some instances, against in-house developed solutions designed by large original equipment manufacturers and or customers with captive in-house semiconductor capabilities. We expect competition for HDMI products from the other HDMI founders and adopters, including Hitachi, Matsushita, Philips, Sony, Thomson, Toshiba, MStar, and Analog Devices. Toshiba and Matsushita have working HDMI solutions.

     Silicon Image has several other licensees and smaller partnerships of a similar nature. The effect of these “partnerships” over time should accelerate growth and lower research and development expenses. While the products developed in these partnerships may return lower gross margins for Silicon Image, they will fuel higher revenues with less investment in development expenses; thus these products are expected to contribute to the bottom line in a similar fashion to the contribution we receive from higher gross margin, non- partnership related products.

     In the storage market, our Fibre Channel products face competition from companies selling similar discrete products, including PMC Sierra, ServerWorks and Vitesse, from other Fibre Channel Serializer-Deserializer (SerDes) providers who license their core technology, such as LSI Logic, and from companies that sell Host Bus Adapters (HBA) controllers with integrated SerDes, such as QLogic and Agilent. In the future, our current or potential customers may also develop their own proprietary solutions that may include integration of SerDes.

     Our SATA products compete with similar products from Marvell and Promise. In addition, other companies such as Adaptec, APT, ATI, Intel, LSI Logic, ServerWorks and Vitesse have developed or announced intentions to develop SATA controllers. We also compete against Intel and other motherboard chipset makers that have integrated SATA functionality into their chipsets.

     Our parallel ATA products compete with similar products from Promise and Highpoint.

     Our SteelVine products compete with similar products from Adaptec, IQStor and Xyratex.

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

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

     Our success in the consumer electronics market is largely dependent upon the rapid and widespread adoption of the HDMI specification, which combines high-definition video and multi-channel audio in one digital interface and uses our patented underlying transition minimized differential signaling (TMDS^® ) technology, and optionally Intel’s HDCP technology, as the basis for the interface. Version 1.0 of the specification was published for adoption in December 2002 and version 1.1 of the specification was published for adoption in May 2004. We cannot predict the rate at which manufacturers will adopt the HDMI specification. Adoption of the HDMI specification may be affected by the availability of consumer products, such as DVD players and televisions, and of computer components that implement this new interface. Other competing specifications may also emerge that could adversely affect the acceptance of the HDMI specification. Delays in the widespread adoption of the HDMI specification could reduce acceptance of our products, limit or reduce our revenue growth and increase our losses.

     We believe that the adoption of our CE products may be affected in part by U.S. and international regulations relating to digital television, cable, satellite and over-the-air digital transmissions, specifically regulations relating to the transition from analog to digital television. The Federal Communications Commission (FCC) has adopted rules governing the transition from analog to digital television, which include rules governing the requirements for television sets sold in the United States designed to speed the transition to digital television. The FCC has delayed such requirements and timetables for phasing in digital television in the past. We cannot predict whether the FCC will further delay its rules relating to the digital television requirements and timetables. In the event that additional regulatory activities, either in the United States or internationally, delay or postpone the transition to digital television beyond the anticipated time frame, that could reduce the demand for our CE products.

     In addition, we believe that the rate of HDMI adoption may be accelerated by FCC rules requiring that after July 2005 high-definition STBs distributed by cable operators include a DVI or HDMI interface and that as of certain phase-in dates televisions marketed or labeled as “digital cable ready” include a DVI or HDMI interface. However, we cannot predict whether these rules will be amended prior to phase in or that their phase-in dates will not be pushed back or otherwise delayed. In the event that the phase-in dates are postponed or otherwise delayed the demand for our products could be reduced, which would adversely affect our business. In the event that mandatory use of a DVI or HDMI interface in STBs distributed by cable operators were to be delayed beyond the currently anticipated time frame or not required at all, that could reduce the demand for our CE products, which would adversely affect our business. 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.

     We believe that the adoption of HDMI may be affected by the availability of high-quality digital content to devices equipped with HDMI or DVI interfaces. Typically high quality digital content is made available to devices equipped with HDMI or DVI interfaces through high-definition television or digital television distribution channels. To the extent that the availability of such content is delayed or not made available by the content owners or broadcasters and distributors of such content then demand for HDMI products could be delayed or reduced.

     Transmission of audio and video from source devices (such as a DVD player or STB) to sink devices (such as an HDTV) over HDMI with HDCP represents a combination of new technologies working in concert. Cable and satellite system operators are just beginning to require transmissions of digital video with HDCP between

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source and sink devices in consumer homes, and DVD players incorporating this technology have only recently come to market. Complexities with these technologies and the variability in 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.

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

     Our success is largely dependent upon the rapid and widespread adoption of the DVI specification, which defines a high-speed data communication link between computers and digital displays. We cannot predict the rate at which manufacturers of computers and digital displays will adopt the DVI specification. The adoption of DVI has been slower than we originally anticipated. Reportedly, the 2004 DVI adoption rate in the PC market was approximately in the range of 45-50%. The DVI adoption rate in the PC market was reported to be approximately 25% and 12% in 2003 and 2002, respectively. Adoption of the DVI specification may be affected by the availability of computer components able to communicate DVI-compliant signals, such as transmitters, receivers, connectors and cables necessary to implement the specification. Other specifications may also emerge that could adversely affect the acceptance of the DVI specification. For example, a number of companies have promoted alternatives to the DVI specification using other interface technologies, such as low voltage differential signaling, or LVDS. Further delays in the widespread adoption of the DVI specification could reduce acceptance of our products, limit or reduce our revenue growth and increase our losses.

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

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

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

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

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

     A large portion of our revenue is directly or indirectly related to the PC industry and the adoption of new or emerging technologies within the PC industry. Accordingly, we are highly dependent on the adoption of new or emerging technologies within the PC industry, which experienced a slowdown in growth during the second half of 2000 that has continued into the first quarter of 2005. We cannot predict the duration or severity of the downturn in the PC and display market, or in the general economy, or its effect on our revenue and operating results, including

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the adoption of these new or emerging technologies. If the market for PCs and PC-related displays continues to grow at a slow rate or contracts whether due to reduced demand from end users, macroeconomic conditions or other factors, our business and results of operations could be negatively affected.

     Although we have broadened our product offerings to include more products in the consumer electronics and storage markets, there can be no guarantee that we will achieve long-term success in these markets. To date, we have achieved reasonable success, but if we fail to consistently achieve design wins in the consumer electronics and storage markets, we would become more dependent on our PC related products for the PC industry.

     In general, the demand for our products in the PC market is highly dependent upon Intel’s continued integration of SDVO and PCI-Express into its PC chipset platforms. Although Intel has included SDVO and PCI-Express in its Grantsdale platform, there is no assurance that Intel will continue to include DVI support in its future platforms. Our revenue generated from sales of DVI transmitters and SATA host controllers is highly dependent upon the ability of such transmitters to work with existing Intel PC chipset platforms. If Intel fails to integrate SDVO and PCI-Express or some other convenient method to interface to our products in its future PC chipset platforms, then the demand for our DVI transmitters could be adversely affected. Demand for our DVI receiver products is also highly dependent upon Intel’s integration of serial interfaces into its PC chipset platform because of Intel’s dominant market share in the PC business. If Intel were to discontinue support for serial interfaces, then the number of available PCs with a DVI port could significantly decrease, thus reducing demand for our DVI receivers.

Our success depends in part on new strategic relationships.

     We have recently entered into several strategic partnerships with third parties. Examples include our licensing arrangements with Sunplus, under which Sunplus licenses our technology and we and Sunplus jointly develop products for manufacture and supply, our licensing arrangements with MediaTek, under which we licensed our HDMI transmitter technology to MediaTek for incorporation into their DVD player chipsets. We have several other smaller licenses and partnerships of a similar nature. While these arrangements 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 arrangements will be successful. Negotiating and performing under these arrangements involves significant time and expense, we may not realize anticipated increases in revenues, standards adoption or cost savings, and these arrangements may make it easier for the third parties to compete with us, any of which may have a negative affect our business and results of operations.

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

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

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

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improvement to existing storage interface technologies such as parallel ATA and SCSI, or the introduction of other new storage interface technologies, either of which may decrease consumer demand for our storage products.

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

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

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

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

     With respect to our product offerings based upon the SteelVine architecture, there can be no assurance such product offerings will achieve the desired level of market acceptance in the anticipated timeframes or that such product offerings will be successful. Furthermore, there can be no assurance that we will be able to introduce these products into the marketplace on a timely basis or that we will be successful in achieving the necessary partners and channels to be successful in the marketplace. Our inability to be timely in product introductions and or have adequate partners and channels may adversely impact our ability to be successful with this line of products and would adversely affect our business. It is anticipated that the products based upon the SteelVine architecture will be sold into markets where we have limited experience. Furthermore, there is no established market for these products. There can be no assurance that we will be able to successfully market and sell the products based upon the SteelVine architecture and failure to do so would adversely affect our business.

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

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

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

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

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

     Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For the three months ended March 31, 2005, shipments to World Peace International, an Asian distributor, generated 18% of our revenue and shipments to Microtek, a distributor, generated 10% of our revenue. For the year ended December 31, 2004, shipments to World Peace International, generated 15% of our revenue, and shipments to Microtek generated 12% of our revenue. In addition, an end-customer may buy through multiple distributors, contract manufacturers, and/or directly, which could create an even greater concentration. We cannot be certain that customers and key distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to sell our products and generate revenue. As a result of this concentration of our customers, our results of operations could be negatively affected if any of the following occurs:

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

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

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

     Many original equipment manufacturers rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors generated 48% of our revenue for the three months ended March 31, 2005, 45% of our revenue for the year ended December 31, 2004, and 42% of our revenue for the year ended December 31, 2003. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

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

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

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

     The development of new products is highly complex, and we have experienced delays, some of which exceeded one year, in the development and introduction of new products on several occasions in the past. We have recently introduced new storage products for the consumer and small to medium business markets and we expect to introduce new consumer electronics, storage and PC products in the future. As our products integrate new, more advanced functions, they become more complex and increasingly difficult to design, manufacture and debug. Successful product development and introduction depends on a number of factors, including, but not limited to:

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

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market acceptance of new products.

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

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

     Our growth depends upon market growth and our ability to enhance our existing products and introduce new products on a timely basis. One of the ways we develop new products and enter new markets is through acquisitions. In 2001, we completed the acquisitions of CMD and SCL. In April 2003, we acquired TWN. We may acquire additional companies or technologies. Acquisitions involve numerous risks, including, but not limited to, the following:

	•	difficulty and increased costs in assimilating employees, including our possible inability to keep and retain key employees of the acquired business;
	•	disruption of our ongoing business;
	•	discovery of undisclosed liabilities of the acquired companies and legal disputes with founders or shareholders of acquired companies;
	•	inability to successfully incorporate acquired technology and operations into our business and maintain uniform standards, controls, policies and procedures;
	•	inability to commercialize acquired technology; and
	•	the need to take impairment charges or write-downs with respect to acquired assets.

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

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

     In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. For example, demand in the semiconductor industry rose to record levels in 1999, and then declined until beginning to show signs of recovery during 2003 and 2004. The industry has also experienced significant fluctuations in anticipation of changes in general economic conditions. This cyclicality has led to

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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. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide conditions.

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

     We do not own or operate a semiconductor fabrication facility. We rely on Taiwan Semiconductor Manufacturing Company (TSMC), an outside foundry, to produce the vast majority all of our semiconductor products. We also rely on Kawasaki, UMC and Atmel for outside foundry services, and on Amkor and ASE to test certain of our semiconductor products. Our reliance on independent foundries, assembly and test facilities involves a number of significant risks, including, but not limited to:

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

     In addition, our semiconductor products are assembled and tested by several independent subcontractors. We do not have a long-term supply agreement with 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.

If a fire occurs at any one of our third-party sub-contractors, this can adversely affect our assembly and/or test capacity potentially delaying product shipments to our customers.

     On May 1, 2005, one of our sub-contractor’s packaging and test facilities experienced damage from a fire. While none of our products were directly affected by the fire, this sub-contractor’s packaging and test capacity have been temporarily reduced. We are working with this sub-contractor to determine the extent of the potential impact we may experience as a result of their temporary reduction in capacity. Since we use multiple packaging and testing sub-contractors, we are currently exploring alternatives for additional capacity should the affected sub-contractor be unable to fill our assembly and test needs.

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

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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, and for the three months ended March 31, 2005, 68% of our revenue, and for the years ended December 31, 2004 and 2003, 72% and 74% 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. Accordingly, we are subject to international risks, including, but not limited to:

	•	difficulties in managing from afar;
	•	political and economic instability, including international tension in Iraq, Korea and the China Strait and lack of normal diplomatic relationships between the United States and Taiwan;
	•	less developed infrastructures in newly industrializing countries;
	•	susceptibility of foreign areas to terrorist attacks;
	•	susceptibility to interruptions of travel, including those due to international tensions (including the war in and occupation of Iraq), medical issues such as the SARS and Avian Flu epidemics (particularly affecting the Asian markets we serve), and the financial instability and bankruptcy of major air carriers;
	•	bias against foreign, especially American, companies;
	•	difficulties in collecting accounts receivable;
	•	expense and difficulties in protecting our intellectual property in foreign jurisdictions;
	•	difficulties in complying with multiple, conflicting and changing laws and regulations, including export requirements, tariffs, import duties, visa restrictions, environmental laws and other barriers;
	•	exposure to possible litigation or claims in foreign jurisdictions; and
	•	competition from foreign-based suppliers and the existence of protectionist laws and business practices that favor these suppliers, such as withholding taxes on payments made to us.

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

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

     We rely on a combination of patent, copyright, trademark, mask work and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies. We have been issued patents and have a number of pending patent applications. However, we cannot assure you that any patents will be issued as a result of any applications or, if issued, that any claims allowed will protect our technology. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. It may be possible for a third-party, including our licensees, to misappropriate our copyrighted material or trademarks. It is possible that existing or future patents may be challenged, invalidated or circumvented and effective patent, copyright, trademark and trade secret protection may be unavailable or limited in foreign countries. It may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive, and the outcome often is not predictable. As a result, despite our efforts and expenses, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business. In addition, practicality also limits our assertion of intellectual property rights. Patent litigation is expensive and its results are often unpredictable. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers, and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.

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

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

	•	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.

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

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

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

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

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

Our success depends on managing our relationship with Intel.

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

	•	Intel has been an investor of ours;
	•	Intel and we have been parties to a business cooperation agreement;
	•	Intel and we are parties to a patent cross-license;
	•	Intel and we worked together to develop HDCP;
	•	an Intel subsidiary has the exclusive right to license HDCP, of which we are a licensee;
	•	Intel and we were two of the original founders of the Digital Display Working Group (DDWG);
	•	Intel is a promoter of the serial ATA working group, of which we are a contributor;
	•	Intel is a supplier to us and a customer for our products;
	•	we believe that Intel has the market presence to drive adoption of DVI and serial ATA by making them widely available in its chipsets and motherboards, which could affect demand for our products;
	•	we believe that Intel has the market presence to affect adoption of HDMI by either endorsing the technology or promulgating a competing standard, which could affect demand for our products;
	•	Intel may potentially integrate the functionality of our products, including Fibre Channel, Serial ATA, DVI, or HDMI into its own chips and chipsets, thereby displacing demand for some of our products;
	•	Intel may design new technologies that would require us to re-design our products for compatibility, thus increasing our R&D expense and reducing our revenue;
	•	Intel’s technology, including its 845G chipset, may lower barriers to entry for other parties who may enter the market and compete with us; and
	•	Intel may enter into or continue relationships with our competitors that can put us at a relative disadvantage.

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

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

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

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

     Securities class action suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if merit less, can result in substantial costs to us and could divert the attention of our management. We and certain of our officers and directors, together with certain investment banks, have been named as defendants in a securities class action suit filed against us on behalf of purchasers of our securities between October 5, 1999 and December 6, 2000. It is alleged that the prospectus related to our initial public offering was misleading because it failed to disclose that the underwriters of our initial public offering had solicited and received excessive commissions from certain investors in exchange for agreements by investors to buy our shares in the aftermarket for predetermined prices. Due to inherent uncertainties in litigation, we cannot accurately predict the outcome of this litigation; however, a proposed settlement has been negotiated and has received preliminary approval by the Court. In the event that the settlement is not granted final approval, we believe that these claims are without merit and we intend to defend vigorously against them. We and certain of our officers, together with certain investment banks and their current or former employees, were named as defendants in a securities class action suit filed against us on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The lawsuit alleges that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. The plaintiff in this matter has filed an amended complaint in which Silicon Image, and the named officers, was dropped as defendants. We believe that the settlement described above, if approved, would encompass the claims in this case. We believe that these claims were without merit and, if revived, and not subject to the settlement, we intend to defend vigorously against them.

     Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of California. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleges that the Company and certain of its officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Two individuals, not including named plaintiff Curry, have filed a motion to be designated by the court as lead plaintiffs. The Company intends to defend itself vigorously in this matter.

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

     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,

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

     On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp, and Genesis Microchip, Inc. (collectively,“Genesis”) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action.: CA-01-266-R) (the “Federal Suit”). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the importation of articles infringing our patent (the “ITC investigation”). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court , it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made cash payments to the Court, it may not have made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On August 26, 2004, the parties completed the filing of their respective appeal briefs. On October 26, 2004, the Court of Appeals for the Federal Circuit issued an order setting an oral argument in the appeal on December 7, 2004. The hearing took place as scheduled. At the end of the hearing, the panel of Federal Circuit judges hearing the case stated that they believed that no final order had been issued by the trial court, and that therefore the Federal Circuit did not have jurisdiction to hear the appeal. The Federal Circuit issued its opinion on January 28, 2005 and as expected, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the parties’ agreement to settle the case, as embodied in the MOU that was found by the lower court to be valid and enforceable, requires that Genesis pay us a portion of the settlement as a condition to dismissing the case. Because the lower court allowed Genesis to pay the amount into escrow instead of directly to us, the Federal Circuit held that the underlying claims asserted below remain pending, and therefore that the judgment below was not “final” and was not appealable. The case was remanded by the

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Federal Circuit back to the lower court. The parties have negotiated a stipulation by which the lower court can enter a new final judgment which is likely to result in a new appeal by Genesis to the Federal Circuit by Genesis.

     There can be no assurance that Genesis will not undertake further efforts to avoid its obligations under the MOU, and that further proceedings (lawsuits, contempt citations, etc.) against Genesis, and certain of its executives, its counsel, and others may not be required to obtain compliance or to obtain redress for non-compliance. There can be no assurance that an appellate court will uphold the Court’s rulings or the MOU. There can be no assurance that further delays or noncompliance will not occur. The Court’s rulings of July 15, 2003 and December 19, 2003 indicate that Genesis violated certain provisions of the MOU, and of the protective order in the case, including disclosure of confidential information to Pixelworks. On August 5, 2003, Genesis and Pixelworks issued a joint press release terminating their proposed merger. In that press release, Genesis and Pixelworks jointly stated, “Pixelworks has confirmed that prior to signing the merger agreement, it reviewed the Memorandum of Understanding that purported to settle the lawsuit between Genesis Microchip and Silicon Image, Inc.” While this litigation, including the appeal or any possible derivative proceedings, is pending, Genesis may use the technology covered by these patents to develop products that might compete with ours. If we are unsuccessful in this litigation, we could be unable to prevent Genesis or others from using the technology covered by these patents. Even if we prevail in this litigation, uncertainties regarding the outcome prior to that time may reduce demand for our products, or Genesis’s use of our technology in products that compete with our products may reduce demand or pricing for our products. In addition, even if the MOU is upheld on appeal, future disputes may occur, including those regarding whether and what intellectual property licenses were granted and the scope of any such licenses and the royalty rates and payment terms for such licenses, whether the MOU was breached, whether consent was fraudulently obtained, and whether a merger partner may succeed to the rights and/or the obligations under the MOU. These disputes may result in additional costly and time-consuming litigation or the license of additional elements of our intellectual property for free.

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

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

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

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

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

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

     Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. Although we have entered into a limited number of employment contracts with certain executive officers, we generally do not have employment contracts with our key employees. We do not have key person life insurance for any of our key personnel. Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our location. This makes it difficult to retain our key personnel and to recruit highly qualified personnel. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees. 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, new regulations adopted by The NASDAQ National Market requiring shareholder approval for all stock option plans, as well as new 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. There have been several proposals on whether and/or how to account for stock options. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.

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

We have experienced management and director transitions in the past, which disrupt our management, operations and controls, and may continue to do so in the future.

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

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

     Past and future transitions with respect to our board and executives have resulted, and may continue to result in disruptions in our management, internal controls and operations and in additional costs.

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We face additional risks and costs, and potential delisting from Nasdaq, as a result of the resignation of most of our independent outside directors.

     In April 2005, four of our 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. Currently, our Board consists of one independent outside director, David Hodges (who is the only member of our Audit, Compensation and Governance and Nominating Committees), and three employee directors. As a result of these resignations, we are no longer in compliance with the marketplace rules of the Nasdaq Stock Market requiring that a majority of our Board consist of independent outside directors and that our Audit Committee consist of three independent outside directors, one of whom has requisite financial sophistication. In addition, we are no longer in compliance with rules of the SEC requiring that our Audit Committee consist of three independent directors, one of whom is a financial expert. We have notified the Nasdaq Stock Market of these non-compliance matters. In response, the Nasdaq Stock market has notified us that the Nasdaq staff believes that we are not in compliance with the aforementioned marketplace rules. In addition, Nasdaq has raised concerns regarding the circumstances of the resignations of our independent directors, our history of independent director resignations, and our recent executive management turnover, and regarding our succession planning and our board of directors’s ability to act independently of management.

     In April 2005, we filed a Form 10-K/A for the fiscal year ended December 31, 2004 to include corrected certifications of our principal executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2002. The certifications included with the original Form 10-K filing inadvertently omitted language required for fiscal 2004 certifications. The Form 10-K/A did not include the entire body of the original Form 10-K. The Nasdaq Stock Market has notified us that the Nasdaq staff believes that we are not in compliance with another marketplace rule due to the failure to include the body of the original Form 10-K in the Form 10-K/A. As a result, our trading symbol has been changed by the Nasdaq Stock Market from “SIMG” to “SIMGE”.

     We have expanded and intensified our ongoing search for additional independent outside directors in order to fill the vacancies on the Board and Board committees created by the resignations and remedy our non-compliance with the Nasdaq Stock Market marketplace rules as soon as reasonably practicable. However, we cannot predict when and if we will able to identify and appoint additional independent outside directors with the requisite qualifications. We will incur additional monetary costs associated with this search and this search may also divert the Board and management’s attention and resources from our ongoing business operations. In addition, we cannot predict what actions the Nasdaq Stock Market will take as a result of our non-compliance, which could include a delisting of our common stock from the Nasdaq National Market, suspension of trading in our common stock on the Nasdaq National Market and/or investigations or hearings involving the Nasdaq staff regarding any of the foregoing.

     Finally, the resignations from our Board of Directors has adversely affected our internal controls over financial reporting. See Item 4, Controls and Procedures for further discussion of the effect of the resignations on our internal controls.

Industry cycles may strain our management and resources.

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

	•	improve operational and financial systems;
	•	train and manage our employee base;
	•	successfully integrate operations and employees of businesses we acquire or have acquired;

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	•	attract, develop, motivate and retain qualified personnel with relevant experience; and
	•	adjust spending levels according to prevailing market conditions.

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

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

     Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes, and the operations of CMD, which we acquired, are based in the Los Angeles area, which is also susceptible to earthquakes. TSMC and UMC, the outside foundries that produce the majority of our semiconductor products, are located in Taiwan. Advanced Semiconductor Engineering, or ASE, one of the subcontractors that assembles and tests our semiconductor products, is also located in Taiwan. For the three months ended March 31, 2005, and the years ended December 31, 2004 and 2003, customers and distributors located in Taiwan generated 26%, 25%, and 34% of our revenue, respectively, and customers and distributors located in Japan generated 17%, 20%, and 15% 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.

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

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

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

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

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

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

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

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

	•	actual or anticipated changes in our operating results;
	•	changes in expectations of our future financial performance;
	•	changes in market valuations of 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.

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

     The United States has taken, and continues to take, military action against terrorism and has engaged in war with Iraq and currently has an occupation force there 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

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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.

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

     We have recently established offices in Japan, South Korea, Taiwan and the United Kingdom. Accordingly, we are subject to risks, including, but not limited to:

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

We indemnify certain of our licensing customers against infringement.

     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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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

Foreign Currency Exchange Risk

     All of our sales are denominated in U.S. dollars, and substantially all of our expenses are incurred in U.S. dollars, thus limiting our exposure to foreign currency exchange risk. We currently do not enter into forward exchange contracts to hedge exposures denominated in foreign currencies and do not use derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in foreign currency

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exchange rates should not have a material effect on our future operating results or cash flows; however, a long term change in foreign currency rates would likely result in increased wafer, packaging, assembly or testing costs.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

     We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required financial disclosures.

     As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule13a-15(e). Based upon, and as of the date of this evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that our disclosure controls and procedures were ineffective because of the material weakness in our internal control over financial reporting described below. In light of the material weakness described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

(b) Changes in Internal Control over Financial Reporting

     The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-5(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We identified the following material weakness in our internal control over financial reporting as of March 31, 2005:

     Additionally, this control deficiency could result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness. Because of this material weakness, we have concluded that the Company did not maintain effective internal control over financial reporting as of March 31, 2005, based on the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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     Except as noted above, there have not been any changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Remediation of Material Weakness

     The Company is actively seeking additional qualified Board of Directors and Audit Committee members who will provide effective oversight of the Company’s external financial reporting and internal control over financial reporting. and who will satisfy the independence and financial experience requirements of NASDAQ and the SEC. The Company’s remaining outside director, Mr. David Hodges, has taken responsibility on behalf of the Company to lead its efforts in identifying qualified Board members to serve on the Company’s Audit Committee and to fulfill the Company’s corporate governance requirements.

     To date, a number of potential candidates have been identified and under Mr. Hodges’ leadership, interviews, background checks, and other actions are in process. While the Company is actively seeking new Board and Audit Committee members, there can be no assurance, when or if, the Company’s efforts will be successful.

Part II. Other Information

Item 1. Legal Proceedings

     On April 24, 2001, we filed suit in the U.S. District Court for the Eastern District of Virginia against Genesis Microchip Corp. and Genesis Microchip, Inc. (collectively, “Genesis”) for infringement of our U.S. patent number 5,905,769 (USDC E.D. Virginia Civil Action No.: CA-01-266-R) (the “Federal Suit”). On April 24, 2001, we also filed a complaint against Genesis with the International Trade Commission of the United States government (ITC) for unlawful trade practices related to the importation of articles infringing our patent (the “ITC investigation”). The actions sought injunctions to halt the importation, sale, manufacture and use of Genesis DVI receiver chips that infringe our patent, and monetary damages. We voluntarily moved to dismiss the ITC investigation, with notice that we would proceed directly in the Federal Suit. Our motion to dismiss was granted on February 7, 2002. We filed an amended complaint in the Federal Suit as of February 28, 2002, adding a claim for infringement of our U.S. patent number 5,974,464. In April 2002, Genesis answered and made counterclaims against us for non-infringement, license, patent invalidity, fraud, antitrust, unfair competition and patent misuse. Also in April 2002, we filed a motion to dismiss certain of Genesis’s counterclaims. In addition, we filed a motion to bifurcate trial of the counterclaims to the extent the court does not dismiss them. In May 2002, the Court granted our motion to dismiss certain of the counterclaims, with leave to amend. Genesis re-filed counterclaims against us for fraud and patent misuse. We filed another motion to dismiss these counterclaims, which the Court granted with prejudice on August 6, 2002. In December 2002, the parties entered into a memorandum of understanding (MOU) to settle the case. When the parties failed to reach agreement on a final, definitive agreement as required by the MOU, in January 2003, the parties filed motions with the Court to enforce their respective interpretations of the MOU. On July 15, 2003, the Court granted our motion to interpret the MOU in the manner we requested, and ruled that Genesis had engaged in efforts to avoid its obligations under the MOU. On August 6, 2003, the Court entered a final judgment based on its July 15, 2003 ruling. Under the final judgment order, Genesis was ordered to make a substantial cash payment, and to make royalty payments; although Genesis has made a cash payment to the Court, it has not made all the payments that are required under the final judgment order. We filed motions for reimbursement of some of our expenses, including some of our legal fees, and for modification and/or clarification of certain items of the judgment, and to hold Genesis in contempt of Court for breaching the protective order in the case by disclosing secret information to at least one of our competitors. On December 19, 2003, the Court granted our motions in part and denied them in part: the court issued an amended judgment, and held Genesis in contempt of Court for breaching the protective order. Under the amended judgment, Genesis was ordered to make a substantial cash payment, royalty payments, and interest; although Genesis has made cash payments to the Court, it may not have made all the payments that are required under the amended judgment. On January 16, 2004, Genesis filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit. On August 26, 2004, the parties completed the filing of their respective appeal briefs. On October 26, 2004, the Court of Appeals for the Federal Circuit issued an order

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setting an oral argument in for the appeal on December 7, 2004. The hearing took place as scheduled. At the end of the hearing, the panel of Federal Circuit judges hearing the case stated that they believed that no final order had been issued by the trial court, and that therefore the Federal Circuit did not have jurisdiction to hear the appeal. The Federal Circuit issued its opinion on January 28, 2005 and, as expected, the Federal Circuit dismissed Genesis’ appeal for lack of jurisdiction. The Federal Circuit held that the parties’ agreement to settle the case, as embodied in the MOU that was found by the lower court to be valid and enforceable, requires that Genesis pay us a portion of the settlement as a condition to dismissing the case. Because the lower court allowed Genesis to pay the amount into escrow instead of directly to us, the Federal Circuit held that the underlying claims asserted below remain pending, and therefore that the judgment below was not “final” and was not appealable. The case was remanded by the Federal Circuit back to the lower court. The parties have negotiated a stipulation by which the lower court can enter a new final judgment which is likely to result in a new appeal by Genesis to the Federal Circuit by Genesis.

     To date, we have not received any cash payments nor have we recognized any revenue associated with the matter. If the MOU is upheld in its present form after all appeals have been exhausted, Genesis will be granted a royalty-bearing license for the right to use certain non-necessary patent claims referred to in the DVI Adopters Agreement. In addition, upon Genesis’s becoming a signatory to the HDMI Adopters Agreement, Genesis will be granted a royalty-bearing license for the right to use these claims as part of their HDMI implementation. Genesis will also be granted a royalty-bearing license to expand use of certain DVI- related patent claims to the consumer electronics marketplace. We expect that an amended final, appealable order will be entered in Q2 2005. We further expect that Genesis will refile its appeal. Through March 31, 2005, we have spent approximately $11 million on this matter and expect to continue to incur significant legal costs until the matter is resolved.

     Silicon Image, certain officers and directors, and Silicon Image’s underwriters have been named as defendants in a securities class action lawsuit captioned Gonzales v. Silicon Image, et al., No. 01 CV 10903 (SDNY 2001) pending in Federal District Court for the Southern District of New York. The lawsuit alleges that all defendants were part of a scheme to manipulate the price of Silicon Image’s stock in the aftermarket following Silicon Image’s initial public offering in October 1999. Response to the complaint and discovery in this action on behalf of Silicon Image and individual defendants has been stayed by order of the court. The lawsuit is proceeding as part of a coordinated action of over 300 such cases brought by plaintiffs in the Southern District of New York. Pursuant to a tolling agreement, individual defendants have been dropped from the suit for the time being. In February 2003, the Court denied motions to dismiss brought by the underwriters and certain issuers and ordered that the case may proceed against certain issuers including against Silicon Image. A proposed settlement has been negotiated and has received preliminary approval by the Court. In the event that the settlement is granted final approval, we do not expect it to have a material effect on our results of operations or financial position. In the event that the settlement is not finally approved, we could not accurately predict the outcome the litigation, but we intend to defend this matter vigorously.

     In May 2003, Silicon Image, certain officers and directors, and Silicon Image’s underwriters were named as defendants in a securities class action lawsuit captioned Liu v. Credit Suisse First Boston Corp., et al., No. 03-20459 (S.D. Fla. 2003) and filed in Federal District Court for the Southern District of Florida. The action was filed on behalf of a putative class of shareholders who purchased stock from some or all of approximately 50 issuers whose public offerings were underwritten by Credit Suisse First Boston. The initial complaint alleged that Silicon Image and certain officers were part of a scheme by Credit Suisse First Boston to artificially inflate the price of Silicon Image’s stock through the dissemination of allegedly false analysts’ reports. Silicon Image was never served with a copy of the complaint. In June 2003, the action was transferred to the Federal District Court for the Southern District of New York. The plaintiff in this matter filed an amended complaint shortly thereafter, from which Silicon Image, and the named officers, were dropped as defendants. Plaintiffs have not amended their complaint or otherwise indicated that they intend to name Silicon Image or its officers or directors as defendants in the action since that time. We believe that these claims were without merit and, if revived, we would defend this matter vigorously.

     Silicon Image and certain of its officers were named as defendants in a securities class action litigation captioned “Curry v. Silicon Image, Inc., Steve Tirado, and Robert Gargus, No. C05 00456 MMC”, commenced on January 31, 2005 and pending in the United States District Court for the Northern District of California. Plaintiffs filed the action on behalf of a putative class of shareholders who purchased Silicon Image stock between October 19, 2004 and January 24, 2005. The lawsuit alleges that the Company and certain of its officers and directors made alleged misstatements of material facts and violated certain provisions of Sections 20(a) and 10(b) of the Exchange Act of

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1934 and Rule 10b-5 promulgated thereunder. Two individuals, not including named plaintiff Curry, have filed a motion to be designated by the court as lead plaintiffs. The Company intends to defend itself vigorously in this matter.

     On January 14, 2005, the Company received a notification that the Securities and Exchange Commission had commenced a formal, private investigation involving trading in the Company’s securities. The Company is fully cooperating with the investigation.

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

     The amount of legal fees we incur with respect to the litigation matters described above will depend on the duration of our litigation matters, as well as the nature and extent of the litigation activities. We are not able to accurately estimate the amount of legal fees we will incur in 2005 with respect to the litigation matters described above, however, we do expect to incur substantial amounts through fourth quarter of 2005.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

     Not applicable.

Item 3. Defaults Upon Senior Securities

     Not applicable.

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

     Not applicable

Item 5. Other Information

     On April 20, 2005, Mr. Darrel Slack was appointed as the Company’s chief financial officer, succeeding Mr. Robert C. Gargus, who resigned as of the same date, as planned.

     On April 24, 2005, four members of the Company’s board of directors resigned. As a result of these resignations, the Company notified The NASDAQ Stock Market, Inc. (NASDAQ), that the Company fails to comply with NASDAQ Marketplace Rules— requiring that a majority of the board consist of independent directors and requiring that the audit committee consist of three independent directors, one of whom has requisite financial sophistication —due to the vacancies on the board and its audit committee. The Company is actively seeking directors who will satisfy the independence and financial experience requirements of NASDAQ and the Securities and Exchange Commission and are willing to serve with a view to remedying the noncompliance.

     On April 25, 2005, Mr. David Lee notified the Board that he would not stand for reelection at the 2005 annual meeting of stockholders and would accept the position of chairman emeritus (a non-voting position).

     On April 25, 2005, the Board, then consisting of Mr. Steve Tirado, Mr. Lee and Mr. David Hodges, appointed Mr. Slack as a Class I director and Mr. Patrick Reutens, the chief legal officer of the Company, as a Class II director to fill two of the vacancies created by the resignations above. At that meeting, the Board reduced the number of directors from eight to four. Immediately after the vote, Mr. Reutens resigned from the board. The

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remaining directors appointed Mr. Hodges, the lone remaining independent director and a member of the governance and nominating committee, to also serve on the audit and compensation committees.

     On May 4, 2005, we announced that the NASDAQ Listing Qualifications Hearings Department notified Silicon Image by letter dated May 2, 2005, that Silicon Image was not in compliance with certain NASDAQ Marketplace Rules because its Form 10-K filed with the Securities and Exchange Commission on March 16, 2004 for the year ended December 31, 2004 was incomplete. The Section 302 certifications of its principal executive officer and principal financial officer was the same form as had been used for the preceding year, and inadvertently omitted additional language required for certifications for 2004. The Company subsequently filed an amendment to the Form 10-K that contained only a corrected certification. This amendment was deemed incomplete because it did not include the body of the entire Form 10-K, as previously filed, with the corrected certification. In addition, due to the resignations of four independent directors from the Board, the Company is not in compliance with NASDAQ Marketplace Rules requiring that a majority of the board consist of independent directors and requiring that the audit committee consist of three independent directors, including at least one director with requisite financial sophistication.

     The Hearings Department also notified the Company by letter dated May 3, 2005, that due to the incomplete filing of its Form 10-K for the year ended December 31, 2004, described above, the Company’s trading symbol will change from “SIMG” to “SIMGE” commencing on May 5, 2005.

     The Company intends to take appropriate steps to seek to bring the Company into compliance with the NASDAQ Marketplace Rules in a timely manner. However, there can be no assurance that NASDAQ will allow the continued listing of the Company’s common stock on the NASDAQ National Market.

Item 6. Exhibits

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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.

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EXHIBIT INDEX