SILICON IMAGE INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - SILICON IMAGE INC	Financial_Report.xls
EX-10.01 - EXHIBIT 10.01 - SILICON IMAGE INC	exhibit_10-1.htm
EX-31.01 - EXHIBIT 31.01 - SILICON IMAGE INC	exhibit_31-01.htm
EX-32.01 - EXHIBIT 32.01 - SILICON IMAGE INC	exhibit_32-01.htm
EX-32.02 - EXHIBIT 32.02 - SILICON IMAGE INC	exhibit_32-02.htm
EX-31.02 - EXHIBIT 31.02 - SILICON IMAGE INC	exhibit_31-02.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended: March 31, 2012

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.

(Exact name of registrant as specified in its charter)

Delaware		77-0396307
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. Number)

1140 East Arques Avenue, Sunnyvale, California 94085

(Address of principal executive office)(Zip Code)

(408) 616-4000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o	Accelerated filer x

Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Shares Outstanding at April 25, 2012
Common Stock, $0.001 par value		83,248,756

SILICON IMAGE, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012

Table of Contents


Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011	4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011	5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	6
Notes to Condensed Consolidated Financial Statements	7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3 Quantitative and Qualitative Disclosures About Market Risk	28
Item 4 Controls and Procedures	29
Part II OTHER INFORMATION	29
Item 1 Legal Proceedings	29
Item 1A Risk Factors	29
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3 Defaults Upon Senior Securities	46
Item 4 Mine Safety Disclosures	46
Item 5 Other Information	46
Item 6 Exhibits	47
Signature	48

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (Unaudited)

SILICON IMAGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

	March 31, 2012			December 31, 2011
ASSETS
Current Assets:
Cash and cash equivalents	$	34,471		$	37,125
Short-term investments		116,842			124,301
Accounts receivable, net of allowances for doubtful accounts of $1,362 at March 31, 2012 and $1,382 at December 31, 2011		37,288			27,368
Inventories		12,223			10,062
Prepaid expenses and other current assets		7,900			9,101
Deferred income taxes		739			708
Total current assets		209,463			208,665
Property and equipment, net		13,074			12,772
Deferred income taxes, non-current		4,066			4,706
Intangible assets, net (Note 7)		11,419			11,915
Goodwill (Note 7)		18,646			18,646
Other assets		13,349			9,369
Total assets	$	270,017		$	266,073
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	17,322		$	10,133
Accrued and other current liabilities		22,204			26,116
Deferred margin on sales to distributors		11,251			7,809
Deferred license revenue		3,599			2,684
Total current liabilities		54,376			46,742
Other long-term liabilities		15,844			14,815
Total liabilities		70,220			61,557
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Convertible preferred stock, par value $0.001; 5,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, par value $0.001; 150,000,000 shares authorized; shares issued and outstanding: 83,131,329 at March 31, 2012 and 82,069,472 at December 31, 2011		98			98
Additional paid-in capital		511,276			505,191
Treasury stock, 17,918,244 shares at March 31, 2012 and 17,614,441 shares at December 31, 2011		(112,514	)		(111,049	)
Accumulated deficit		(199,176	)		(189,600	)
Accumulated other comprehensive income (loss)		113			(124	)
Total stockholders’ equity		199,797			204,516
Total liabilities and stockholders’ equity	$	270,017		$	266,073

See accompanying Notes to Condensed Consolidated Financial Statements.

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SILICON IMAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2012			2011
Revenue:
Product	$	43,024		$	38,057
Licensing		11,979			10,942
Total revenue		55,003			48,999
Cost of revenue and operating expenses:
Cost of product revenue (1)		23,099			19,872
Cost of licensing revenue		125			400
Research and development (2)		21,707			15,243
Selling, general and administrative (3)		16,137			13,051
Amortization of intangible assets		496			197
Restructuring expense (Note 8)		5			365
Total cost of revenue and operating expenses		61,569			49,128
Loss from operations		(6,566	)		(129	)
Interest income and other, net		538			377
Income (loss) before provision for income taxes and equity in net loss of an unconsolidated affiliate		(6,028	)		248
Income tax expense		2,948			1,068
Equity in net loss of an unconsolidated affiliate		600			-
Net loss	$	(9,576	)	$	(820	)

Net loss per share – basic and diluted	$	(0.12	)	$	(0.01	)
Weighted average shares – basic and diluted		82,722			78,724

(1) Includes stock-based compensation expense	$	218		$	180
(2) Includes stock-based compensation expense	$	1,160		$	573
(3) Includes stock-based compensation expense	$	1,910		$	1,132

See accompanying Notes to Condensed Consolidated Financial Statements.

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SILICON IMAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2012			2011
Net loss	$	(9,576	)	$	(820	)

Foreign currency translation adjustments, net of tax		48			143
Fair value of effective cashflow hedges, net of tax		15			71
Change in unrealized net gain (loss) on available-for-sale investments, net of tax		174			(9	)
Other comprehensive income		237			205

Comprehensive loss	$	(9,339	)	$	(615	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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SILICON IMAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(9,576	)	$	(820	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		1,591			1,659
Stock-based compensation expense		3,288			1,885
Amortization of investment premium		509			806
Tax benefits from employee stock-based transactions		310			923
Amortization of intangible assets		496			197
Excess tax benefits from employee stock-based transactions		(310	)		(923	)
Realized gain on sale of short-term investments		(45	)		(39	)
Equity in net loss of unconsolidated affiliate		600			-
Others		358			162
Changes in assets and liabilities:
Accounts receivable		(9,967	)		(4,261	)
Inventories		(2,161	)		(758	)
Prepaid expenses and other assets		969			(827	)
Accounts payable		6,483			(1,548	)
Accrued and other liabilities		(1,847	)		(4,322	)
Deferred margin on sales to distributors		3,442			5,224
Deferred license revenue		858			(725	)
Cash used in operating activities		(5,002	)		(3,367	)
Cash flows from investing activities:
Proceeds from maturities and sales of short-term investments		23,031			35,457
Purchases of short-term investments		(15,797	)		(30,076	)
Cash used in business acquisitions		-			(1,915	)
Purchases of property and equipment		(2,191	)		(1,924	)
Investment in a privately held company		(3,500	)		-
Advances for intellectual properties		-			(4,750	)
Other investing activities		(500	)		-
Cash provided by (used in) investing activities		1,043			(3,208	)
Cash flows from financing activities:
Proceeds from issuances of common stock		2,486			4,047
Excess tax benefits from employee stock-based transactions		310			923
Repurchases of restricted stock units for income tax withholding		(1,465	)		(1,069	)
Cash provided by financing activities		1,331			3,901
Effect of exchange rate changes on cash and cash equivalents		(26	)		(4	)
Net decrease in cash and cash equivalents		(2,654	)		(2,678	)
Cash and cash equivalents — beginning of period		37,125			29,942
Cash and cash equivalents — end of period	$	34,471		$	27,264
Supplemental cash flow information:
Cash payment for income taxes	$	(209	)	$	(1,625	)
Restricted stock units vested	$	3,929		$	2,735
Property and equipment and other assets purchased but not paid for	$	1,150		$	626
Unrealized gain (loss) on short term investments	$	174		$	(9	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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SILICON IMAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Silicon Image, Inc. (the “Company”, “Silicon Image”, “we” or “our”) included herein have been prepared on a basis consistent with our December 31, 2011 audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the condensed consolidated balance sheets of Silicon Image and our subsidiaries as of March 31, 2012 and December 31, 2011 and the related condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011, condensed consolidated statements of comprehensive income (loss) for three months ended March 31, 2012 and 2011, and the related condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011. All significant intercompany accounts and transactions have been eliminated. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Financial results for the three months ended March 31, 2012 are not necessarily indicative of future financial results.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates. Areas where significant judgment and estimates are applied include revenue recognition, stock-based compensation, short-term investments related to fair value hierarchy, inventory reserves, realization of long-lived assets, including goodwill and intangibles, income taxes, deferred tax assets and legal matters. The condensed consolidated financial statements include the accounts of Silicon Image, Inc. and its subsidiaries after elimination of all intercompany balances and transactions.

Summary of Significant Accounting Policies

There have been no changes to the Company significant accounting policies during the three months ended March 31, 2012 as compared to the significant accounting policies described in the Company audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 will require the Company to disclose information about offsetting related arrangements to enable users of the Company financial statements to understand the effect of those arrangements on its financial position. The new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required are to be applied retrospectively for all comparative periods presented. The Company does not expect that this standard will materially impact its disclosures included in condensed consolidated financial statements.

Recently Adopted Accounting Standards

Effective January 1, 2012, the Company adopted ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” The adoption of ASU 2011-04 did not have a significant impact on the Company’s consolidated financial position or results of operations.

Effective January 1, 2012, the Company adopted ASU No. 2011-05, “Presentation of Comprehensive Income” and ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The adoption of ASU 2011-05 and 2011-12 concern presentation and disclosure only and did not have an impact on the Company’s consolidated financial position or results of operations.

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NOTE 2. NET LOSS PER SHARE

Basic net 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 loss per share is computed using the weighted-average number of common shares and dilutive equivalents outstanding during the period, if any, determined using the treasury stock method. There are no dilutive securities for the three months ended March 31, 2012 and 2011 due to the Company’s net losses. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended March 31,
	2012			2011
Numerator:
Net loss	$	(9,576	)	$	(820	)
Denominator:
Weighted average outstanding shares used to compute basic and diluted net loss per share		82,722			78,724

Net loss per share: – basic and diluted	$	(0.12	)	$	(0.01	)

As a result of the net loss for the three months ended March 31, 2012 and 2011, approximately 5.1 million and 5.6 million common stock equivalents for the three months ended March 31, 2012 and 2011, respectively, were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive.

NOTE 3. BALANCE SHEET COMPONENTS

The components of inventory, prepaid expenses and other current assets, property and equipment and other assets consisted of the following:

	March 31, 2012			December 31, 2011
	(In thousands)
Inventories:
Raw materials	$	5,298		$	5,104
Work in process		2,636			1,071
Finished goods		4,289			3,887
	$	12,223		$	10,062


Prepaid expense and other current assets:
Prepaid software maintenance	$	1,871		$	2,625
Interest receivable		1,051			910
Income tax receivable		210			1,012
Others		4,768			4,554
	$	7,900		$	9,101


Property and equipment:
Computers and software	$	21,574		$	21,233
Equipment		33,985			32,932
Furniture and fixtures		2,926			2,727
		58,485			56,892
Less: accumulated depreciation		(45,411	)		(44,120	)
Total property and equipment, net	$	13,074		$	12,772


Other assets:
Investment in an unconsolidated affiliate (Note 5)	$	5,920		$	6,520
Investment in a privately-held company (Note 5)		3,500			-
Advances for intellectual properties		2,412			1,848
Others		1,517			1,001
	$	13,349		$	9,369

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The components of accrued liabilities and other long-term liabilities were as follows:

	March 31, 2012		December 31, 2011
	(In thousands)
Accrued and other current liabilities:
Accrued payroll and related expenses	$	4,378	$	8,540
Accrued royalties		8,582		5,926
Accrued product rebate		2,404		2,389
Contingent consideration in connection with a business acquisition (Note 6)		1,304		1,304
Accrued restructuring (Note 8)		427		910
Accrued payables		3,362		5,522
Others		1,747		1,525
	$	22,204	$	26,116

Other long-term liabilities:
Non-current liability for uncertain tax positions	$	13,508	$	12,480
Non-current deferred license revenue		1,185		1,242
Others		1,151		1,093
	$	15,844	$	14,815

NOTE 4. FAIR VALUE MEASUREMENTS

The Company records its financial instruments that are accounted for under FASB Accounting Standard Codification (ASC) No. 320-10-25, “Recognition of Investments in Debt and Equity Securities,” and derivative contracts under FASB ASC No. 815, “Derivatives and Hedging,” at fair value. The determination of fair value is based upon the fair value framework established by FASB ASC No. 820-10-35, “Fair Value Measurements and Disclosures – Subsequent Measurement” (ASC 820-10-35). ASC 820-10-35 provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for such asset or liability. The carrying value of the Company’s financial instruments including cash and cash equivalents and short-term investments approximates fair market value due to the relatively short period of time to maturity. The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.

The Company’s cash equivalents and short term investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s Level 1 assets consist of money market fund securities and U.S. government and agency securities. These instruments are generally classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

The Company’s Level 2 financial assets include certificate of deposits, corporate securities and municipal securities and are valued by using a multi-dimensional relational model, the inputs, when available, are primarily benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

The Company’s Level 3 liabilities consist of contingent consideration in connection with a business acquisition. The Company makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at the end of each reporting period until the contingency is resolved. The fair value of this arrangement is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including the probability of achieving the milestone, revenue projections and discount rates. The fair value of the contingent consideration will increase or decrease according to the movement of the inputs. The amounts will vary based on the probability of the milestone achievement, the timing of the projected revenues, the timing of the expected payments and the discount rate used to calculate the present value of the expected payments. The Company does not expect the changes in these inputs to have a material impact on the Company’s consolidated financial statements.

The Company measures certain assets, including its cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. During the three months ended March 31, 2012 and 2011, the Company did not record any other-than-temporary impairments on those financial assets required to be measured at fair value on a nonrecurring basis.

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The following table presents the fair value of our financial instruments that are measured at fair value on a recurring basis as of March 31, 2012:

	Fair value measurements using							Assets (Liabilities)
	Level 1		Level 2		Level 3			at fair value
Assets:
Cash equivalents:
Money market funds	$	17,916	$	-	$	-		$	17,916
Corporate securities		-		9,324		-			9,324
Total cash equivalents	$	17,916	$	9,324	$	-		$	27,240
Short-term investments:
Certificate of deposits	$	-	$	10,261	$	-		$	10,261
Municipal securities		-		79,589		-			79,589
Corporate securities		-		26,992		-			26,992
Total short-term investments	$	-	$	116,842	$	-		$	116,842
Liabilities:
Contingent consideration in connection with a business acquisition (Note 6)	$	-	$	-	$	(1,304	)	$	(1,304	)

The cash equivalents in the above table exclude $7.2 million in cash held by the Company or in its accounts or with investment fund managers as of March 31, 2012.

The following table presents the fair value of our financial instruments that are measured at fair value on a recurring basis as of December 31, 2011:

	Fair value measurements using							Assets (Liabilities)
	Level 1		Level 2		Level 3			at fair value
Assets:
Cash equivalents:
Money market funds	$	24,781	$	-	$	-		$	24,781

Short-term investments:
Certificate of deposits	$	-	$	10,114	$	-		$	10,114
United States government agencies		8,027		-		-			8,027
Municipal securities		-		84,157		-			84,157
Corporate securities		-		22,003		-			22,003
Total short-term investments	$	8,027	$	116,274	$	-		$	124,301
Liabilities:
Contingent consideration in connection with a business acquisition (Note 6)	$	-	$	-	$	(1,304	)	$	(1,304	)

The cash equivalents in the above table exclude $12.3 million in cash held by the Company or in its accounts or with investment fund managers as of December 31, 2011.

The following table presents the changes in the Company’s Level 3 liabilities, which are measured at fair value on a recurring basis, during the three months ended March 31, 2012 and 2011 (in thousands):

	Fair Value Measurement Using Significant Unobservable Inputs
	Liabilities
	2012			2011
Beginning balance at January 1,	$	(1,304	)	$	-
Addition of contingent consideration from business acquisition (Note 6)					(1,481	)
Adjustment in the fair value of contingent consideration		-			-
Ending balance at March 31,	$	(1,304	)	$	(1,481	)

No gains or losses from these liabilities were recognized during the three months ended March 31, 2012 and 2011.

There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the quarter ended March 31, 2012.

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NOTE 5. INVESTMENTS

Equity Method Investment

On July 13, 2011, the Company purchased a 17.5% equity ownership interest in a privately-held company for $7.5 million in cash. The privately-held company develops and designs wireless video and audio semiconductor chips. The Company accounts for this investment under the equity method. To date, the Company had recorded $1.6 million of its proportionate share of the privately-held company’s net loss. As of March 31, 2012 and December 31, 2011, the remaining balance of this investment was $5.9 million and $6.5 million, respectively.

Concurrently with the equity investment, the Company entered into the following with the privately-held company: (a) call option agreement whereby the Company can acquire the privately-held company at $35.0 million plus earn-out payments on or before April 2012 or until January 2013 subject to certain conditions; (b) sales representative agreement whereby the privately-held company appointed the Company as sole and exclusive independent representative for the purposes of soliciting orders for and promoting their product to the Company’s prospects as listed in the agreement; and (c) technology and IP license agreement granting the Company a license to certain technology of the privately-held company upon occurrence of certain events in the future. The Company has not exercised its call option and discussions are ongoing.

The Company assesses the potential impairment of the equity method investment by considering available evidence such as the investee’s actual and forecasted operating results, liquidity and capital resources, the market for the investee’s products and services, and the overall progress the investee has made towards its business objectives. The Company has not recognized any impairment losses on this investment. There were no additional contributions made or dividends or distributions received in the three months ended March 31, 2012.

Cost Method Investment

In February 2012, the Company paid $3.5 million of cash to purchase a minority interest in a privately held company which designs and develops wireless semiconductor chips. This investment is accounted for using the cost method as the Company’s ownership percentage is minor and the Company does not exert significant influence over the investee.

NOTE 6. ACQUISITION

SiBEAM, Inc.

On May 16, 2011, the Company completed its acquisition of SiBEAM, Inc. (SiBEAM) pursuant to an Agreement and Plan of Merger dated April 13, 2011. SiBEAM is a privately-held, fabless semiconductor company headquartered in Sunnyvale, California and is a provider of high-speed wireless communication products for uncompressed HD video in consumer electronics and personal computer applications. The acquisition of SiBEAM supports the Company’s mission to be the leader in advanced video connectivity solutions. SiBEAM’s results of operations and the estimated fair value of assets acquired and liabilities assumed were included in the Company’s unaudited consolidated financial statements beginning May 16, 2011. The revenue and net loss of SiBEAM for the three months ended March 31, 2012 was approximately $0.6 million and $3.0 million, respectively. The acquisition costs, which were expensed as incurred, were approximately $920,000.

The fair value of the purchase price consideration consisted of the following (in thousands):

Cash	$	14,540
Fair value of shares of stock issued		10,429
Total purchase price	$	24,969

As part of the consideration, the Company issued 1,300,369 shares of its common stock to the former SiBEAM stockholders. The total fair value of the shares of stock issued of $10.4 million was determined based on the closing price of the Company’s stock on May 16, 2011 of $8.02 per share.

The preliminary purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company’s allocation of the total purchase price is as follows (in thousands):

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	Estimated Fair Value
Assets acquired:
Cash	$	546
Accounts receivable		564
Inventories		1,353
Other current assets		260
Fixed assets and other long-term assets		336
Intangible assets		8,500
Goodwill		18,483
Total assets acquired		30,042
Current liabilities assumed:
Accounts payable		(546	)
Accrued liabilities		(3,465	)
Line of credit		(523	)
Deferred license revenue		(417	)
Total current liabilities assumed		(4,951	)
Deferred income tax liability, non-current		(122	)
Total liabilities assumed		(5,073	)
Total purchase price	$	24,969

The following table presents details of the intangible assets acquired through the acquisition of SiBEAM (in thousands, except years):

	Asset Life in Years		Fair Value
In-process research and development	indefinite		$	4,500
Customer relationship		5		1,000
Trademark		5		3,000
			$	8,500

The Company does not believe there is any significant residual value associated with these intangible assets. The Company amortizes the intangible assets straight-line over their estimated useful lives. The Company’s management determined the fair values of the intangible assets with the assistance of a valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors, estimates of future revenues and costs.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The goodwill recognized in this acquisition was derived from expected benefits from future technology, cost synergies and knowledgeable and experienced workforce who joined the Company after the acquisition. Goodwill is not amortized, but is tested instead for impairment annually or more frequently if certain indicators of impairment are present. Goodwill is not expected to be tax deductible for income tax purposes.

Anchor Bay Technology

On February 2, 2011, the Company purchased the net assets Anchor Bay Technology (ABT), a San Jose, California based company involved in developing certain technology that is consistent with the Company’s long-term business strategy, for a total consideration of approximately $3.6 million in cash, subject to certain contingent milestone and earn-out payments as further described below. ABT designs and manufactures video processing semiconductor and system-level solutions. ABT offers advanced video processing chips for de-interlacing and format conversion applications, and video scaling chips for Blu-Ray players, HD set-top box, and AV receiver applications. The acquisition costs, which were expensed as incurred, were approximately $90,000.

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The total fair value of the purchase consideration for this acquisition consists of the following (in thousands):

	Estimated Fair Value
Cash consideration	$	1,916
Contingent payments:
First milestone		529
Second milestone		525
Earn-out payments		427
Settlement of pre-existing arrangements		249
Total purchase price	$	3,646

Contingent Considerations

First milestone – The Company will pay the former stockholders of ABT $590,000 in cash upon the successful release on or before March 31, 2012 of product samples being developed by the Company which incorporate certain of ABT’s technologies. The acquisition-date fair value of the first milestone payment was approximately $529,000.

Second milestone – The Company will pay the former stockholders of ABT $590,000 in cash upon the successful release on or before November 30, 2012 of production units being developed by the Company which incorporate certain of ABT’s technologies. The acquisition-date fair value of the second milestone payment was approximately $525,000.

Earn-out Payments – The former stockholders of ABT are entitled to (i) 50% of net licensing revenue to be derived from each initial ABT IP license entered into by the Company during the first 18 months from the acquisition date and (ii) 50% of support fees collected by the Company on ABT’s IP licenses in excess of 200% of the costs of providing the support services during the first 18 months from the acquisition date. The acquisition-date fair value of the earn-out payments was approximately $427,000.

The Company had considered the acquisition-date fair values of the milestone and earn-out payments as part of the purchase price. The Company’s management determined the fair values of the contingent payments with the assistance of a valuation firm. The estimation of the fair value of the contingent payments required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors and the probability of the achievement of the factors on which the contingency is based.

The Company re-evaluated the fair value of the earn-out payments from the date of acquisition and at the end of each reporting period until the contingency is resolved. The Company re-evaluated the fair values of the milestone considerations and earn-out payments for the three months ended March 31, 2012 and no changes to fair value of such contingent considerations were identified. The Company met the first milestone and paid $590,000 to former stockholders of ABT in April 2012.

Prior to this acquisition, the Company entered into a IP License Agreement with ABT in 2010 for the use of certain of its intellectual property in exchange for a payment of $249,000, which was included in “Other Assets” in the Company’s consolidated balance sheet as of December 31, 2010. The Company’s acquisition of ABT in February 2011 resulted in the acquisition of the IP licensed in this IP License Agreement and the effective settlement of that agreement. There was no gain or loss on such effective settlement. As a result, the payment made to ABT in connection with this IP License Agreement was considered part of the acquisition-date fair value of the total consideration transferred.

The allocation of the purchase consideration of this acquisition is summarized as follows (in thousands):

	Estimated Fair Value
Intangible assets acquired	$	5,000
Goodwill		163
Net liabilities assumed		(1,517	)
	$	3,646

The Company allocated $163,000 of the purchase price to goodwill which is deductible for tax purposes. The goodwill recognized in this acquisition was derived from expected benefits from future technology, cost synergies and knowledgeable and experienced workforce who joined the Company as part of the acquisition.

The accompanying condensed consolidated financial statements for the three months ended March 31, 2011 include the operations of the aforementioned acquisition, commencing on February 2, 2011, the acquisition date. No supplemental pro-forma information is presented for this acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.

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The following table presents details of the intangible assets acquired through the acquisition of ABT (in thousands, except years):

	Estimated Fair		Estimated Useful
	Value		Life (in Years)
Intellectual property	$	1,600		6
Core technology		1,600		3
Trade name		600	indefinite
Customer relationship		500		2
System technology		400		3
In-process research and development		300	indefinite
Total	$	5,000

NOTE 7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The table below summarizes the Company's goodwill activities (in thousands):

	March 31, 2012			December 31, 2011
Gross amount of goodwill	$	37,856		$	37,856
Accumulated impairment		(19,210	)		(19,210	)
Carrying value at end of quarter	$	18,646		$	18,646

There were no additions or impairments of goodwill during the three months ended March 31, 2012.

Purchased Intangible Assets

The following table presents the Company’s purchased intangible assets as of March 31, 2012 (in thousands):

			Gross Carrying Amount						Accumulated Amortization									Net
	Useful Life		Dec 31,				Mar 31,		Dec 31,						Mar 31,			Mar 31,		Dec 31,
	(years)		2011		Addition		2012		2011			Addition			2012			2012		2011
Intangible assets with finite lives
Intellectual Property		6	$	1,600	$	-	$	1,600	$	(245	)	$	(67	)	$	(312	)	$	1,288	$	1,355
Core Technology		3		1,600		-		1,600		(489	)		(133	)		(622	)		978		1,111
Trademark		5		3,000		-		3,000		(375	)		(150	)		(525	)		2,475		2,625
System Technology		3		400		-		400		(122	)		(33	)		(155	)		245		278
Customer Relationship		2-5		1,500		-		1,500		(354	)		(113	)		(467	)		1,033		1,146
Total intangible assets with finite lives				8,100		-		8,100		(1,585	)		(496	)		(2,081	)		6,019		6,515

Intangible assets with indefinite lives				-				-
Trade Name	indefinite			600		-		600		-			-			-			600		600
In-process R&D	indefinite			4,800		-		4,800		-			-			-			4,800		4,800
Total intangible assets with indefinite lives				5,400		-		5,400		-			-			-			5,400		5,400
Total purchased intangible assets			$	13,500	$	-	$	13,500	$	(1,585	)	$	(496	)	$	(2,081	)	$	11,419	$	11,915

Amortization of purchased intangible assets which was presented as “Amortization of intangible assets” in the consolidated statements of operations for the three months ended March 31, 2012 and 2011 was $496,000 and $197,000, respectively.

There were no impairment charges with respect to the purchased intangible assets arising from business acquisitions during the three months ended March 31, 2012 and 2011.

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The intangible assets related to the in-process research and development will be amortized over the estimated useful life of the technology upon completion of its development. After initial recognition, acquired in-process research and development assets are accounted for as indefinite-lived intangible assets until the completion of the related development. Development costs incurred after acquisition on acquired development projects are expensed as incurred. Upon completion of development, acquired in-process research and development assets are considered amortizable finite-lived assets. If the in-process research and development project is abandoned, the Company will record an impairment charge in the period in which it is abandoned. As of March 31, 2012, the related in-process research development projects were not yet completed.

The estimated future amortization expense of purchased intangible assets with finite lives for future periods is as follows (in thousands):

Year ending December 31,	Amount
2012 (remaining 9 months)	$	1,488
2013		1,754
2014		1,122
2015		1,067
2016		567
Thereafter		21
Total	$	6,019

NOTE 8. RESTRUCTURING CHARGES

For the three months ended March 31, 2012, the Company recorded and paid restructuring expense of approximately $97,000 related to the sublease portion of quarterly rent payments on an exited facility. This charge was offset by the reversal of accrued severance and benefits of $92,000 resulting from a change in estimates of costs incurred for prior restructuring activities.

For the three months ended March 31, 2011, the Company recorded restructuring expense of approximately $365,000 which consisted of $268,000 of severance and benefits for terminated employees and $97,000 related to operating lease commitments on exited facilities.

The table below summarizes the Company’s restructuring activities for the three months ended March 31, 2012 (in thousands):

	Employee Severance and Benefits			Operating Lease			Total
Accrued restructuring balance as of January 1, 2012	$	786		$	124		$	910
Additional accruals/adjustments		(92	)		97			5
Cash payments		(345	)		(143	)		(488	)
Accrued restructuring balance as of March 31, 2012	$	349		$	78		$	427

As of March 31, 2012, the restructuring plan for the Company’s storage business is substantially complete. Operating lease commitment relating to SiBEAM acquisition will expire in September 2012.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On December 7, 2001, the Company and certain of its officers and directors were named as defendants along with the Company’s underwriters in a securities class action lawsuit, captioned “Gonzalez v. Silicon Image, Inc.” The lawsuit alleges that the defendants participated in a scheme to inflate the price of the Company’s stock in the Company’s initial public offering and in the aftermarket through a series of misstatements and omissions associated with the offering. The lawsuit is one of several hundred similar cases pending in the Southern District of New York that have been consolidated by the Court. In February 2003, the District Court issued an order denying a motion to dismiss by all defendants on common issues of law. In July 2003, the Company, along with over 300 other issuers named as defendants, agreed to a settlement of this litigation with plaintiffs. While the parties’ request for court approval of the settlement was pending, in December 2006 the United States Court of Appeals for the Second Circuit reversed the District Court’s determination that six focus cases could be certified as a class action. In April 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but acknowledged that the District Court might certify a more limited class. At a June 26, 2007 status conference, the Court terminated the proposed settlement as stipulated among the parties. Plaintiffs filed an amended complaint on August 14, 2007. On September 27, 2007, plaintiffs filed a motion for class certification in the six focus cases. The class certification motion is not expected to be resolved until after April, 2008. On November 13, 2007, defendants in the six focus cases filed a motion to dismiss the complaint for failure to state a claim, which the District Court denied in March 2008. Plaintiffs, the issuer defendants (including the Company), the underwriter defendants, and the insurance carriers for the defendants, have engaged in mediation and settlement negotiations. The parties have reached a settlement agreement, which was submitted to the District Court for preliminary approval on April 2, 2009. As part of this settlement, the Company’s insurance carrier has agreed to assume the Company’s entire payment obligation under the terms of the settlement. On June 10, 2009 the District Court granted preliminary approval of the proposed settlement agreement. After September 10, 2009 hearing, the District Court gave final approval to the settlement on October 5, 2009, Several objectors have filed notices of appeal to the United States Court of Appeals for the Second Circuit from the district court’s October 5, 2009 order approving the settlement. All but two of the objectors withdrew their appeals, and Plaintiff moved to dismiss the remaining appeals, one for violation of the Second Circuit’s rules and one for lack of standing. On May 17, 2011, the Second Circuit granted the motion to dismiss one objector’s appeal for violations of the Court’s rules and remanded the other appeal to the District Court to determine whether objector Hayes was a class member. On August 25, 2011, the District Court issued its decision determining that Hayes was not a class member. On September 30, 2011, objector Hayes filed a notice of appeal from the District Court’s decision. On January 9, 2012, objector Hayes dismissed his appeal with prejudice. No other appeals are pending, the order approving the settlement is final, and the matter is now concluded.

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On July 31, 2007, the Company received a demand letter dated July 31, 2007, demanding on behalf of alleged shareholder Vanessa Simmonds that the Company’s board of directors prosecute a claim against the underwriters of the Company’s initial public offering, in addition to certain unidentified officers, directors and principal shareholders as identified in the Company’s IPO prospectus, for violations of sections 16(a) and 16(b) of the Securities Exchange Act of 1934. In October 2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Ms. Simmonds against certain of the underwriters of the Company’s initial public offerings, captioned “Vanessa Simmonds v. Credit Suisse Group, et al.” The plaintiff alleges that the underwriters engaged in short-swing trades and seeks disgorgement of profits in amounts to be proven at trial from the underwriters. On February 25, 2008, Ms. Simmonds filed an amended complaint. The suit names the Company as a nominal defendant, contains no claims against the Company and seeks no relief from the Company. This lawsuit is one of more than fifty similar actions filed in the same court. On July 25, 2008, the underwriter defendants in the various actions filed a joint motion to dismiss the complaints for failure to state a claim. In addition, certain issuer defendants in the various actions filed a joint motion to dismiss the complaints for failure to state a claim. The parties entered into a stipulation, entered as an order by the Court that the Company is not required to answer or otherwise respond to the amended complaint. Accordingly, the Company did not join the motion to dismiss filed by certain issuers. On March 12, 2009, the court dismissed the complaint in the lawsuit with prejudice. On April 10, 2009, the plaintiff filed a notice of appeal of the District Court’s order, and thereafter the underwriter defendants’ filed a cross appeal to a portion of the District Court’s order that dismissed thirty (30) of the cases without prejudice following the moving issuers’ motion to dismiss. On June 22, 2009 the Ninth Circuit issued an order granting the parties’ joint motion to consolidate the 54 appeals and 30 cross-appeals. Oral argument was heard in the Ninth Circuit on October 5, 2010, and the Court issued its written opinion on December 2, 2010. The Ninth Circuit affirmed the District Court’s decision that the demand letters submitted to the other 24 issues (including the Company) were sufficiently similar as also to require dismissal with prejudice. The Ninth Circuit reversed the District Court’s decision in favor of the underwriter defendants on the statute of limitations grounds. On December 16, 2010, plaintiff and the underwriter defendants separately petitioned for a rehearing and a rehearing en banc, which petitions were denied on January 18, 2011. On January 25 and 26, 2011, the Ninth Circuit granted the motions of the underwriter defendants and of the plaintiff to stay the issuance of the courts’ mandate pending those parties’ respective petitions for writ of certiorari to the United States Supreme Court. On April 5 and 15, 2011, respectively, plaintiff and the underwriter defendants filed their petitions for review in the Supreme Court. On June 27, 2011, the Supreme Court granted the petition of the underwriter defendants and denied the petition of the plaintiff. On November 29, 2011 the Supreme Court heard oral argument. On March 26, 2012 the Supreme Court reversed the Ninth Circuit’s ruling that plaintiff’s claim was not barred by the applicable statute of limitations, and remanded further proceedings on plaintiff’s alternative claim that the statute of limitations was extended by the doctrine of equitable tolling. The District Court had determined that equitable tolling did not apply, but the Ninth Circuit had not considered that issue.

In the fourth quarter 2011, the Company was notified that a customer’s product incorporating one of the Company’s chipsets did not pass compliance testing in connection with certain technology implemented in the Company’s product. The Company is in discussions regarding this matter with the customer and the entity responsible for the licensing and administration (including compliance testing) of the technology at issue. As no claim has been made against the Company, it is premature to form a conclusion as to the potential outcome of such a claim, if made, or the range of possible loss to the Company.

In addition, the Company has been named as a defendant in a number of judicial and administrative proceedings incidental to its business and may be named again from time to time. Moreover, from time to time, the Company receive notices from licensees of its technology and adopters of the standards for which the Company serve as agent disputing the payment of royalties and sometimes requesting a refund of royalties allegedly overpaid.

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

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Guarantees

Certain of the Company’s licensing agreements indemnify its customers for any expenses or liabilities resulting from claimed infringements of third party patents, trademarks or copyrights by its 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, the Company has not paid any such claims or been required to defend any lawsuits with respect to any such claim.

Contractual Obligations and Off-Balance Sheet Arrangements

Operating Leases

The Company’s future operating lease commitments at March 31, 2012 were as follows (in thousands):

Year ending December 31,	Amount
2012 (remaining 9 months)	$	1,996
2013		2,104
2014		1,785
2015		1,535
2016		1,661
Thereafter		2,707
Total	$	11,788

NOTE 10. STOCK-BASED COMPENSATION

The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers and non-employee board members. This program includes incentive and non-statutory stock option grants and restricted stock units (RSUs) for employees, and an automatic grant program for non-employee board members pursuant to which such individuals will receive grants at designated intervals over their period of board service. These awards are granted under the stockholder approved 2008 Equity Incentive Plan. Grants under the discretionary grant program generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each month over the next 36 months of continued service. Stock option grants to non-employee members of our board vest monthly, over periods not to exceed four years. Some options provide for accelerated vesting if certain identified milestones are achieved, upon a termination of employment or upon a change in control of the Company. RSU grants generally vest over a one to four-year period. Additionally, our Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at the lower of 85% of the fair market value on the commencement date of the six-month offering period or on the last day of the six-month offering period.

Valuation and Expense Information Under Stock-based Compensation

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

	Three Months Ended March 31,
	2012			2011
Employee stock option plans:
Expected life in years		4.0			4.0
Expected volatility		70.4	%		69.4	%
Risk-free interest rate		0.6	%		1.6	%
Expected dividends	none			none
Weighted average fair value	$	2.43		$	3.75

Employee Stock Purchase Plan:
Expected life in years		0.5			0.5
Expected volatility		68.3	%		71.1	%
Risk-free interest rate		0.1	%		0.2	%
Expected dividends	none			none
Weighted average fair value	$	1.85		$	3.04

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Amortization method — The value of options and RSUs are amortized to expense, net of estimated forfeitures, on a straight line basis over the vesting period.

Expected Life — The expected life of the options represents the estimated period of time until exercised and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules, and expectations of future employee behavior. The expected term for the ESPP is based on the term of the purchase period.

Expected Volatility — The volatility rate is based on the Company’s historical common stock volatility derived from historical stock price data for historical periods commensurate with the options’ expected life.

Risk-Free Interest Rate —The risk-free interest rate is based on the implied yield currently available on United States Treasury zero-coupon issues with a term equal to the expected life at the date of grant of the options.

Expected Dividend — The expected dividend is based on our history and expected dividend payouts. The expected dividend yield is zero as the Company has historically paid no dividends and does not anticipate dividends to be paid in the future.

For the three months ended March 31, 2012 and 2011, 517,610 and 514,111 shares of common stock were purchased under the ESPP program, respectively. At March 31, 2012, the Company had $570,000 of total unrecognized compensation expense, net of estimated forfeitures under the ESPP program. The unamortized compensation expense will be amortized on a straight-line basis over a remaining period of approximately 4.5 months.

Stock Option Activity

The following is a summary of activity under the Company’s stock option plans during the three months ended March 31, 2012, excluding RSUs (in thousands, except weighted average exercise price and contractual term):

				Weighted		Weighted
				Average		Average
				Exercise		Remaining		Aggregate
	Number of			Price per		Contractual		Intrinsic
	Shares			Share		Terms in Years		Value
At January 1, 2012		5,937		$	6.05
Granted		75			4.64
Forfeitures and cancellations		(77	)		6.45
Exercised		(32	)		4.16
At March 31, 2012		5,903		$	6.04		5.01	$	6,321
Vested and expected to vest at March 31, 2012		5,330		$	6.13		4.87	$	5,631
Exercisable at March 31, 2012		3,218		$	6.84		3.93	$	2,879

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on March 31, 2012. The aggregate intrinsic value is the difference between the Company's closing stock price on the last trading day of the quarter ended March 31, 2012 and the exercise price, multiplied by the number of outstanding or exercisable in-the-money options. The aggregate intrinsic value excludes the effect of stock options that have a zero intrinsic value. The total pre-tax intrinsic value of options exercised, representing the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option, for the three months ended March 31, 2012 and 2011 was $51,000 and $2.3 million, respectively, respectively.

At March 31, 2012, the total unrecognized pre-tax stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 2.56 years, was $4.5 million, net of estimated forfeitures.

Restricted Stock Units

The RSUs that the Company grants to its employees typically vest ratably over a certain period of time, subject to the employee’s continuing service to the Company over that period. RSUs granted to non-executive employees typically vest over a four-year period. RSUs granted to executive officers typically vest over a period of between one and four years.

RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. The cost of the RSUs is determined using the fair value of the Company’s common stock on the date of the grant. Compensation is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures. Each RSU award granted from the Company’s 2008 Equity Incentive Plan will reduce the number of options available for issuance by 1.5 shares.

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A summary of activity with respect to the Company’s RSUs during the three months ended March 31, 2012 is as follows: (in thousands):

	Number of Units			Weighted- Average Grant Date Fair Value Per Share
Outstanding at January 1, 2012		2,983		$	5.59
Granted		131		$	5.16
Vested		(816	)	$	4.88
Forfeitures and cancellations		(65	)	$	6.04
Outstanding at March 31, 2012		2,233		$	5.81

Of the 2,233,023 RSUs outstanding as of March 31, 2012, approximately 1,743,598 units are expected to vest after considering the applicable forfeiture rate.

At March 31, 2012, the total unrecognized pre-tax stock-based compensation expense related to non-vested RSUs, which the Company expects to recognize over the remaining weighted-average vesting period of 2.32 years, was $7.3 million, net of estimated forfeitures.

During the three months ended March 31, 2012 and 2011, the Company repurchased 303,803 and 121,637 shares of stock, respectively, for an aggregate value of $1.5 million and $1.1 million, respectively, from the employees upon the vesting of their RSUs to satisfy the employees’ minimum statutory tax withholding requirement. The Company will continue to repurchase shares of stock from employees as their RSUs vest to satisfy the employees’ minimum statutory tax withholding requirement.

NOTE 11. DERIVATIVE INSTRUMENTS

Silicon Image is a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company has operations in the United States, Europe and Asia, however, a majority of its revenue, costs of revenue, expense and capital purchasing activities are being transacted in U.S. Dollars. As a corporation with international as well as domestic operations, the Company is exposed to changes in foreign exchange rates. These exposures may change over time and could have a material adverse impact on the Company’s financial results. Periodically, the Company uses foreign currency forward contracts to hedge certain forecasted foreign currency transactions relating to operating expenses. The Company does not enter into derivatives for speculative or trading purposes. The Company uses derivative instruments primarily to manage exposures to foreign currency fluctuations on forecasted cash flows and balances primarily denominated in Chinese Yuan. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. These derivatives are designated as cash flow hedges and have maturities of less than one year.

The Company accounts for derivative instruments in accordance with the provisions of FASB ASC No. 815-20-25, “Derivatives and Hedging – Hedging Recognition.” The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company’s derivatives are designated as cash flow hedges. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain (loss) is reported immediately in other income (expense) on the Company’s consolidated statements of operations.

The derivatives expose the Company to credit and non performance risks to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting the counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

The amount of net gain recognized in other comprehensive income (OCI) on effective cash flow hedges as of March 31, 2012 and December 31, 2011 was insignificant. The amount of gain or loss reclassified from accumulated OCI to operating expenses for the three months ended March 31, 2012 and 2011, and the amount of gain or loss recognized in income on ineffective cash flow hedges for the three months ended March 31, 2012 and 2011 were insignificant. The fair value of the cash flow hedges as of March 31, 2012 and December 31, 2011 was insignificant.

As of March 31, 2012 and December 31, 2011, the outstanding foreign currency forward contracts had a total notional value of approximately $4.5 million and $3.6 million, respectively.

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NOTE 12. PROVISION FOR INCOME TAXES

The Company recorded an income tax expense of $2.9 million for the three months ended March 31, 2012. The effective tax rates for the three months ended March 31, 2012 was (48.9%). The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to foreign taxes (including foreign withholding taxes), a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital, and state taxes.

The Company continued to maintain a valuation allowance as a result of uncertainties related to the realization of its net deferred tax assets at March 31, 2012. The valuation allowance was established as a result of weighing all positive and negative evidence, including the Company’s cumulative loss over the past three years. The valuation allowance reflects the conclusion of management that it is more likely than not that benefits from certain deferred tax assets will not be realized. If actual results differ from these estimates or these estimates are adjusted in future periods, the valuation allowance may require adjustment which could materially impact the Company’s financial position and results of operations.

The Company recorded an income tax expense of $1.1 million for the three months ended March 31, 2011. The effective tax rate for the three months ended March 31, 2011 was 431% and was based on the Company’s projected taxable income for 2011, plus certain discrete items recorded during the quarter. The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to state taxes, foreign taxes and a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. The Company had interest and penalties of $53,000 and $51,000 for the three months ended March 31, 2012 and 2011, respectively. The Company conducts business globally and, as a result, the Company and its subsidiaries file income tax returns in various jurisdictions throughout the world including with the U.S. federal and various U.S. state jurisdictions as well as with various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world.

NOTE 13. CUSTOMER AND GEOGRAPHIC INFORMATION

The Company operates in one reportable operating segment, semiconductors and IP solutions for the secure storage, distribution and presentation of high-definition content. The Company’s Chief Executive Officer, who is considered to be the Company’s chief operating decision maker, reviews financial information presented on one operating segment basis for purposes of making operating decisions and assessing financial performance. The Company had only one operating segment in each of the three months ended March 31, 2012 and 2011 and it operates in only one reportable operating segment, semiconductor and IP solutions for high-definition content.

Revenue

Revenue by geographic area based on bill to location was as follows (in thousands):

	Three Months Ended March 31,
	2012		2011
United States	$	21,046	$	10,777
Taiwan		12,173		12,382
Japan		9,462		15,512
Europe		3,975		2,820
China		3,928		4,507
Korea		4,014		2,513
Others		405		488
Total revenue	$	55,003	$	48,999

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Revenue by geographic area based on customers’ headquarters location was as follows (in thousands):

	Three Months Ended March 31,
	2012		2011
Korea	$	22,022	$	9,760
Taiwan		12,179		12,382
Japan		9,462		15,938
Europe		3,975		2,629
China		3,917		4,407
United States		3,048		3,404
Others		400		479
Total revenue	$	55,003	$	48,999

The Company’s revenue by its primary markets was as follows (in thousands):

	Three Months Ended March 31,
	2012		2011
Mobile	$	22,256	$	6,171
Consumer Electronics		16,511		26,255
Personal Computers		4,257		5,631
Total product revenue		43,024		38,057
Licensing		11,979		10,942
Total revenue	$	55,003	$	48,999

The Company’s revenue by customers was as follows (in percentage):

	Three Months Ended March 31,
	2012			2011
Customer A		34.3	%		13.1	%
Customer B					13.4	%
Customer C					10.8	%
Customer D					10.5	%
Customer E					10.0	%

At March 31, 2012, four customers each represented 18.3%, 16.0%, 13.2% and 12.1% of net accounts receivable. At March 31, 2011, three customers each represented 20.8%, 15.0% and 13.7% of net accounts receivable. The Company’s top five customers, including distributors, generated 62.8% and 57.7% of the Company’s revenue for three months ended March 31, 2012 and 2011, respectively.

Property and Equipment

The table below presents the net book value of the property and equipment by their physical location (in thousands):

	March 31, 2012		December 31, 2011
United States	$	6,431	$	7,114
China		3,797		3,184
Taiwan		1,565		1,912
Others		1,281		562
Net book value	$	13,074	$	12,772

NOTE 14. SUBSEQUENT EVENT

In April 2012, the Company’s Board of Directors authorized a $50 million stock repurchase program. The repurchases may occur from time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company's management, based on its evaluation of market conditions, cash on hand and other factors and may be made under a stock repurchase plan. The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. The program does not obligate the Company to acquire any particular amount of stock and purchases under the program may be commenced or suspended at any time, or from time to time, without prior notice. Further the stock repurchase program may be modified, extended or terminated by the Board at any time. No repurchases have been made through May 2, 2012

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

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

Silicon Image and the Silicon Image logo are trademarks, registered trademarks or service marks of Silicon Image, Inc. in the United States and other countries. All other trademarks and registered trademarks are the property of their respective owners.

Company Overview

Silicon Image is a leading provider of wireless and wired connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for mobile, consumer electronics (CE) and personal computing (PC) markets. We deliver our technology via semiconductor and intellectual property (IP) products and services that are compliant with global industry standards and feature market leading Silicon Image innovations such as InstaPort™ and InstaPrevue™. Silicon Image’s products are deployed by the world’s leading electronics manufacturers in devices such as smart phones, tablets, digital televisions (DTVs), Blu-ray Disc™ players, audio-video receivers, as well as desktop and notebook PCs. Silicon Image’s current growth is being driven by its mobile solutions supporting the latest mobile HD video connectivity standard, Mobile High-Definition Link (MHL™). Silicon Image has also driven the creation of the highly successful High-Definition Multimedia Interface (HDMI®) and Digital Visual Interface (DVI™) industry standards. We have also established Serial Port Memory Technology (SPMT™), a memory interface standard for mobile devices and are actively involved with the standard for 60GHz wireless HD video/ audio – WirelessHD®. Via its wholly-owned subsidiary, Silicon Image offers manufacturers comprehensive product interoperability and standards compliance testing services from Simplay Labs, LLC. Founded in 1995, we are headquartered in Sunnyvale, California, with regional engineering and sales offices in China, Japan, Korea, Taiwan and India.

We are a Delaware corporation headquartered in Sunnyvale, California. Our Internet website address is www.siliconimage.com.

Our mission is to be the leader in advanced HD connectivity solutions for mobile, CE, and PC markets to enhance the consumer experience. Our “standards plus” business strategy is to grow the available market for our products and IP solutions through the development, introduction and promotion of market leading products which are based on industry standards but also include Silicon Image innovations that our customers value. We believe that our innovation around our core competencies, establishing industry standards and building strategic relationships, positions us to continue to drive change in the emerging world of high quality digital media storage, distribution and presentation.

Our customers are product manufacturers in each of our target markets —mobile, CE, and PC. Because we leverage our technologies across different markets, certain of our products may be incorporated into our customers’ products used in multiple markets. We sell our products to original product manufacturers (OEMs) throughout the world using a direct sales force and through a network of distributors and manufacturer’s representatives. Our revenue is generated principally by sales of our semiconductor products, with other revenues derived from IP core/design licensing and royalty and adopter fees from our standards licensing activities. We maintain relationships with the eco-system of companies that make the products that drive digital content creation, distribution and consumption, including major Hollywood studios, service providers, consumer electronics companies and retailers. Through these and other relationships, we have formed a strong understanding of the requirements for distributing and presenting HD digital video and audio in the home and mobile environments. We have also developed a substantial IP base for building the standards and products necessary to promote opportunities for our products.

Historically, we have grown our business by introducing and promoting the adoption of new technologies and standards and entering new markets. We collaborated with other companies to jointly develop the DVI and HDMI standards. Our first DVI products addressed the PC market. We then introduced products for a variety of CE market segments, including the set top box (STB), game console and DTV markets. In 2011, we began selling products in the mobile device market using our innovative interconnect core technology. In May 2011, we acquired SiBEAM, Inc., a provider of high-speed wireless communication products for uncompressed HD video in consumer electronics and personal computer applications. With this acquisition, we became a promoter of the WirelessHD standard for transmitting HD content using 60GHz wireless technology. SiBEAM’s 60GHz wireless technology enables us to rapidly bring the highest quality of wirelessly transmitted HD video and audio to market.

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Concentrations

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our largest customer generated 34.3% of our first quarter revenues. In addition, our top five customers, including distributors, generated 62.8% and 57.7% of our revenue for the three months ended March 31, 2012 and 2011, respectively. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEMs rely upon third party manufacturers or distributors to provide purchasing and inventory management services. For the three months ended March 31, 2012 and 2011, 36.2% and 58.5% of our revenue, respectively, was generated through distributors. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases faster than product revenue, we would expect a decrease in the percentage of our total revenue generated through distributors.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and accompanying notes. 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, 2011.

Results of Operations

REVENUE

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Product revenue
Mobile	$	22,256			6,171			260.7	%
Consumer Electronics		16,511		$	26,255			-37.1	%
Personal Computers		4,257			5,631			-24.4	%
Total product revenue		43,024			38,057			13.1	%
Percentage of total revenue		78.2	%		77.7	%
Licensing revenue		11,979			10,942			9.5	%
Percentage of total revenue		21.8	%		22.3	%
Total revenue	$	55,003		$	48,999			12.3	%

Product Revenue

Our consolidated total revenue for the three months ended March 31, 2012 was $55.0 million, an increase of $6.0 million, or 12.3%, from the same period in 2011. The increase in product revenue was primarily due to increased demand for our mobile products offset in part by lower CE and PC revenue. Revenue from our mobile products during the three months ended March 31, 2012 increased by $16.1 million or 260.7% as compared to the same period in 2011. The increase in our mobile products was primarily due to the successful launch of our MHL product line. These products were introduced in the latter part of fiscal year 2010. Since then, we have seen increased shipments of these products quarter after quarter for these products. Our MHL products have represent the majority of our mobile revenue mix. Revenue from our CE market for the three months ended March 31, 2012 decreased by $9.7 million or 37.1% compared to the CE revenue generated in the same period in 2011. The decrease in our CE revenue was primarily the result of a broad-based decrease in demand for both DTV and HT products sold in this end market. Revenue from our PC market for the three months ended March 31, 2012 decreased by $1.4 million or 24.4% as compared to the same period in 2011. Our PC revenues continue to decline as we are no longer making any investments in these legacy products.

Licensing Revenue

Our licensing activity is complementary to our product sales and helps us to monetize our intellectual property and accelerate market adoption curves associated with our technology. Revenue from licensing accounted for 21.8% and 22.3% of our total revenue for the three months ended March 31, 2012 and 2011, respectively. Licensing revenue during the three months ended March 31, 2012 increased by $1.0 million or 9.5% when compared to the same period in 2011. The increase in IP revenues are primarily the result of increased royalty revenues earned and collected in the quarter.

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COST OF REVENUE AND GROSS PROFIT

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Cost of product revenue (1)	$	23,099		$	19,872			16.2	%
Product gross profit		19,925			18,185			9.6	%
Product gross profit margin		46.3	%		47.8	%

(1) Includes stock-based compensation expense	$	218		$	180

Cost of licensing revenue	$	125		$	400			-68.8	%
Licensing gross profit		11,854			10,542			12.4	%
Licensing gross profit margin		99.0	%		96.3	%

Total cost of revenue	$	23,224		$	20,272			14.6	%
Total gross profit		31,779			28,727			10.6	%
Total gross profit margin		57.8	%		58.6	%

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, and to license our technology which involves modification, customization or engineering services, as well as other overhead costs relating to the aforementioned costs, including stock-based compensation expense. Total cost of revenue for the three months ended March 31, 2012 increased by $3.0 million or 14.6%, when compared to the total cost of revenue in the same periods in 2011. The increase in the total cost of revenue was primarily due to the growth in revenue volume during the same comparative periods.

Product Gross Margin

Our product gross profit as a percentage of product revenue for the three months ended March 31, 2012 was 46.3%, compared to 47.8% for the same period in 2011. Product gross profit margin for the three months ended March 31, 2012 was 1.5% lower than the product gross profit margin in the same period in 2011 primarily the result of unfavorable production variance, partially offset by favorable production scrap, favorable purchase variance and lower operation overhead due to lower depreciation expense from fully depreciated testers.

Licensing Gross Margin

Our licensing gross profit margin for the three months ended March 31, 2012 was 99.0%, compared to 96.3% for the three months ended March 31, 2011. Licensing gross margin during the three months ended March 31, 2012 increased by 2.7%, compared to the same period in 2011 primarily due to higher revenue and lower mix of IP customization projects during the three months ended March 31, 2012 compared to the same period in 2011.

OPERATING EXPENSES

Research and Development (R&D)

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Research and development (1)	$	21,707		$	15,243			42.4	%
Percentage of total revenue		39.5	%		31.1	%

(1) Includes stock-based compensation expense	$	1,160		$	573

R&D expense consists primarily of employee compensation and benefits, including stock-based compensation, fees for independent contractors, the cost of software tools used for designing and testing our products and costs associated with prototype materials. R&D expense for the three months ended March 31, 2012 increased by $6.5 million, or 42.4%, when compared to the same period in 2011, primarily due to an increase in compensation related expenses of $2.4 million as a result of the SiBEAM acquisition in May 2011 and annual merit increases given to employees during the three months ended March 31, 2012, hiring fees paid to hire 75 engineers in India of approximately $1.5 million, an increase in the tape out and project related expenses of approximately $1.2 million and an increase in stock-based compensation expense of approximately $0.6 million.

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Selling, General and Administrative (SG&A)

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Selling, general and administrative (1)	$	16,137		$	13,051			23.6	%
Percentage of total revenue		29.3	%		26.6	%

(1) Includes stock-based compensation expense	$	1,910		$	1,132

SG&A expense consists primarily of compensation and benefits, including stock-based compensation, sales commissions, professional fees, and marketing and promotional expenses. SG&A expense during the three months ended March 31, 2012 was $16.1 million or 23.6% higher than what was incurred in the same period in 2011 primarily due to an increase in compensation related expenses of $1.5 million driven by the annual merit increases given during the three months ended March 31, 2012, an increase in stock-based compensation expense of approximately $0.8 million, and an increase in consulting, travel legal and accounting expenses of approximately $1.2 million, partially offset by lower commission and facilities expenses.

Amortization of Intangible Assets

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Amortization of intangible assets	$	496		$	197			151.8	%
Percentage of total revenue		0.9	%		0.4	%

The increase in the amortization of intangible assets was primarily due to amortization of the intangible assets acquired from the acquisition of SiBEAM in May 2011.

Restructuring Expense

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Restructuring expense	$	5		$	365			-98.6	%
Percentage of total revenue		0.0	%		0.7	%

For the three months ended March 31, 2012, we recorded and paid restructuring expense of approximately $97,000 related to the sublease portion of quarterly rent payments on an exited facility, offset by the reversal of accrued severance and benefits of $92,000 resulting from a change in estimates of costs incurred for prior restructuring activities. For the three months ended March 31, 2011, we recorded storage business restructuring expenses and the sublease portion of quarterly rent payments on exited facilities.

Interest Income and Other, net

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Interest income and other, net	$	538		$	377			42.7	%
Percentage of total revenue		1.0	%		0.8	%

The interest and other income for the three months ended March 31, 2011 includes an unfavorable foreign currency translation adjustment from our wholly owned subsidiary in Germany whose facilities and offices had been substantially liquidated of $132,000. There were no such expenses for the three months ended March 31, 2012.

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Provision for Income Taxes

	Three Months Ended March 31,
	2012			2011			Change
	(dollars in thousands)
Income tax expense	$	2,948		$	1,068			176.0	%
Percentage of total revenue		5.4	%		2.2	%

We recorded income tax expense of $2.9 million for the three months ended March 31, 2012. The effective tax rates for the three months ended March 31, 2012 was (48.9%). The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to foreign taxes (including foreign withholding taxes), a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital, and state taxes.

We recorded income tax expense of $1.1 million for the three months ended March 31, 2012. The effective tax rate for the three months ended March 31, 2011 was 431% and was based on our projected taxable income for 2011, plus certain discrete items recorded during the quarter. The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to state taxes, foreign taxes and a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital.

Recent Accounting Pronouncements

See Note 1, “Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements under Part I Item 1 of this report.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

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

Cash and Cash Equivalents, Short-term Investments and Working Capital. The table below summarizes our cash and cash equivalents, investments and working capital and the related movements (in thousands).

	March 31, 2012			December 31, 2011			Change
Cash and cash equivalents	$	34,471		$	37,125		$	(2,654	)
Short term investments		116,842			124,301			(7,459	)
Total cash, cash equivalents and short term investments	$	151,313		$	161,426		$	(10,113	)
Percentage of total assets		56.0	%		60.7	%

Total current assets	$	209,463		$	208,665		$	798
Total current liabilities		(54,376	)		(46,742	)		(7,634	)
Working capital	$	155,087		$	161,923		$	(6,836	)

At March 31, 2012, we had $155.1 million of working capital including $151.3 million of cash, cash equivalents and short-term investments. Cash and cash equivalents and short-term investments decreased by $10.1 million from $161.4 million as of December 31, 2011 to $151.3 million as of March 31, 2012 primarily due to $3.5 million cash used for investment in a privately-held company, $2.2 million cash used for capital expenditures, $0.5 million cash used for certain business strategic initiatives and net cash used in operations partially offset by net cash provided by operations during the three months ended March 31, 2012 and proceeds from stock option exercises and purchases under our employee stock purchase program totaling to approximately $2.5 million. As of March 31, 2012, $2.2 million of the $34.5 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

The significant components of our working capital are cash and cash equivalents, short-term investments, accounts receivable, inventories and prepaid expenses and other current assets, reduced by accounts payable, accrued and other current liabilities, deferred license revenue and deferred margin on sales to distributors.

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Working capital at March 31, 2012 decreased by approximately $6.8 million compared to the working capital at December 31, 2011 primarily due to a $7.6 million net increase in operating liabilities, partially offset by a $0.8 million net increase in operating assets. The $0.8 million net increase in operating assets was primarily due to a $10.0 million increase in accounts receivable and $2.2 million increase in inventory, partially offset by the previously mentioned $10.1 million decrease in total cash and cash equivalents and short-term investments and $1.0 million decrease in prepaid expenses and other assets. The increase in accounts receivable was primarily due to the increase in billings over collections during the three months ended March 31, 2012. The increase in inventory was primarily due to inventory build-up in preparation for second quarter shipments. The decrease in prepaid expenses and other current assets was primarily due to amortization of software maintenances. The $7.6 million increase in operating liabilities was mainly due to $6.5 million increase in accounts payable, $3.4 million increase in deferred margin on sales to distributors and $0.9 million increase in deferred license revenue, partially offset by $2.5 million decrease in accrued and other current liabilities. The increase in accounts payable was primarily due to increase in inventory. The increase in deferred margin on sales to distributors was mainly due to the increasing activities with our distributors driven by the acceleration of demand for our products while the $2.5 million decrease in accrued and other current liabilities was mainly attributable to the payment of 2011 bonus in the first quarter of 2012 and purchase of employee stock purchase plan.

We believe that our current cash, cash equivalents and short-term investment balances together with income derived from sales of our products and licensing will be sufficient to meet our liquidity requirements for at least the next twelve months.

Summary of Cash Flows. The table below summarizes the cash and cash equivalents provided by (used in) in our operating, investing and financing activities (in thousands).

	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Cash used in operating activities	$	(5,002	)	$	(3,367	)
Cash provided by (used in) investing activities		1,043			(3,208	)
Cash provided by financing activities		1,331			3,901
Effect of exchange rate changes on cash and cash equivalents		(26	)		(4	)
Net decrease in cash and cash equivalents	$	(2,654	)	$	(2,678	)

During the three months ended March 31, 2012, cash and cash equivalents decreased by approximately $2.7 million primarily because of $5.0 million cash used in our operating activities , partially offset by the cash generated from our investing and financing activities of $1.0 million and $1.3 million, respectively.

Operating Activities

The $5.0 million cash used in our operating activities during the three months ended March 31, 2012 was primarily due to the increase in operating assets, such as accounts receivable and inventories and decrease in operating liabilities, such as accrued and other current liabilities.

The increase in accounts receivable was primarily due to the increase in billings over collections during the three months ended March 31, 2012. The increase in inventories was mainly due to inventory build-up in preparation for the second quarter shipments. The decrease in accrued and other current liabilities was mainly attributable to the payment of 2011 bonuses in the first quarter of 2012 and purchase of employee stock purchase plan.

Investing Activities

The $1.0 million cash generated from our investing activities during the three months ended March 31, 2012 was due primarily to $7.2 million net proceeds from the sales and maturities of short-term investments, partially offset by $3.5 million cash used for investment in a privately-held company, $2.2 million cash used for capital expenditures and $0.5 million cash used for certain business strategic initiatives. During the three months ended March 31, 2012, we sold $23.0 million and purchased $15.8 million worth of short-term investments.

We held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities. We are not a capital-intensive business. Our purchases of property and equipment relate mainly to testing equipment, leasehold improvements and information technology infrastructure.

Financing Activities

The $1.3 million cash generated from our financing activities during the three months ended March 31, 2012 was primarily due to the proceeds from issuances of common stock of approximately $2.5 million and to the excess tax benefits from employee stock-based transactions of approximately $0.3 million, partially offset by $1.5 million cash used to repurchase restricted stock units for minimum statutory income tax withholding.

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Contractual Obligations

Information regarding our operating lease obligations and other commitments is provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on our Form 10-K for the fiscal year ended December 31, 2011. There have been no material changes in our contractual obligations since December 31, 2011.

Our contractual obligations as of March 31, 2012 were as follows (in thousands):

	Payments Due In
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Contractual Obligations:
Operating lease obligations	$	11,788	$	1,996	$	3,889	$	3,196	$	2,707

Liquidity and Capital Resource Requirements

Based on our estimated cash flows, we believe our existing cash and cash equivalents and short-term investments are sufficient to meet our capital and operating requirements for at least the next 12 months.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including government and corporate securities and money market funds. These securities are classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss). We also limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines of our fixed income portfolios. The guidelines also establish credit quality standards, limits on exposure to any one issuer and limits on exposure to the type of instrument. Due to the limited duration and credit risk criteria established in our guidelines we do not expect the exposure to interest rate risk and credit risk to be material. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. As of March 31, 2012, we had an investment portfolio of securities as reported in short-term investments, including those classified as cash equivalents of approximately $144.1 million. A sensitivity analysis was performed on our investment portfolio as of March 31, 2012. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, 100, or 150 basis points over a twelve-month time horizon.

0.5%		1.0%		1.5%
$447,000		$894,000		$1,341,000

As of December 31, 2011, we had an investment portfolio of securities as reported in short-term investments, including those classified as cash equivalents of approximately $149.1 million. These securities are subject to interest rate fluctuations. The following represents the potential change to the value of our investments given a shift in the yield curve used in our sensitivity analysis.

0.5%		1.0%		1.5%
$483,000		$965,000		$1,448,000

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and short-term investments and accounts receivable. A majority of our cash and investments are maintained with a major financial institutions headquartered in the United States. As part of our cash and investment management processes, we perform periodic evaluations of the credit standing of the financial institutions and we have not sustained any credit losses from investments held at these financial institutions. The counterparties to the agreements relating to our investment securities consist of various major corporations and financial institutions of high credit standing.

We perform on-going credit evaluations of our customers’ financial condition and may require collateral, such as letters of credit, to secure accounts receivable if deemed necessary. We maintain an allowance for potentially uncollectible accounts receivable based on our assessment of collectability.

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Foreign Currency Exchange Risk

A majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, certain operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the Chinese Yuan and Japanese Yen. Additionally, many of our foreign distributors price our products in the local currency of the countries in which they sell. Therefore, significant strengthening or weakening of the U.S. dollar relative to those foreign currencies could result in reduced demand or lower U.S. dollar prices or vice versa, for our products, which would negatively affect our operating results. Cash balances held in foreign countries are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States. The following represents the potential impact of a change in the value of the U.S. dollar compared to the foreign currencies which we use in our operations. The following represents the potential impact on our cash flows of a change in the value of the U.S. dollar compared to the Chinese Yuan, Japanese Yen, Euro, British Pound, Taiwan Dollar and Korean Won for the three months ended March 31, 2012 and 2011. This sensitivity analysis aggregates our activity in these currencies for the three months ended March 31, 2012 and 2011, translated to U.S. dollars, and applies a change in the U.S. dollar value of 5%, 7.5% and 10% (in thousands).

	March 31, 2012		March 31, 2011		March 31, 2012		March 31, 2011		March 31, 2012		March 31, 2011
		5%		5%		7.50%		7.50%		10%		10%
China (Yuan)	$	216	$	103	$	324	$	154	$	432	$	205
Japan (Yen)		57		94		86		141		115		188
Others		89		47		134		71		178		94
Total	$	362	$	244	$	544	$	366	$	725	$	487

Derivative Instruments

As of March 31, 2012, the outstanding foreign exchange contracts had a total notional value of $4.5 million. See Note 11 in our notes to condensed consolidated financial statements of this report for more detailed discussions on derivative transactions.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our first quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

Please refer to Note 9 to our financial statements under Part I Item 1 financial statements.

Item 1A. Risk Factors

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

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Our success depends on our ability to develop and bring to market innovative new semiconductor products and on the demand for these new semiconductor products. We may not be able to develop and bring to such products in a timely manner because the process of developing high-performance semiconductor products is complex and costly.

Our future growth and success depends on our ability to continuously develop and bring to market new and innovative semiconductor products on a timely basis - such as semiconductor products supporting the Mobile High-Definition Link (MHL) and WirelessHD standards. There can be no assurance that we will be successful in developing and marketing these new or other future products. Moreover, there is no assurance that our new or future products will incorporate the innovations, features or functionality or be available at the price points necessary to achieve the desired level of market acceptance in the anticipated timeframes or that any such new or future products will contribute significantly to our revenue. We face significant competition from startups having the resources, flexibility and ability to innovate faster than we can. We also face competition from established companies having greater financial resources and greater breadth of product line than we have, providing them with a competitive advantage in the marketplace. Our inability to continue to innovate and to develop and market new products could negatively affect our business and results of operations.

The development of new semiconductor products is highly complex. On several occasions in the past, we have experienced delays, some of which exceeded one year, in the development and introduction of our new semiconductor products. As our products integrate new, more advanced functions and transition to smaller geometries, they become more complex and increasingly difficult to design, manufacture and debug.

Our ability to successfully develop and introduce new products also depends on a number of factors, including, but not limited to:

·	our ability to accurately predict market trends and requirements, the establishment and adoption of new standards in the market and the evolution of existing standards, including enhancements or modifications to existing standards such as HDMI, MHL and WirelessHD;
·	our ability to identify customer and consumer market 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;

·	our ability to develop advanced technologies and capabilities and new products that satisfy customer and consumer market requirements;
·	how quickly our competitors and customers integrate the innovation and functionality of our new products into their semiconductor products, putting pressure on us to continue to develop and introduce innovative products with new features and functionality;

·	our ability to complete and introduce new product designs on a timely basis; while accurately anticipating the market windows for our products and bringing them to market within the required time frames;
·	our ability to manage product life cycles;

·	our ability to transition our product designs to leading-edge foundry processes in response to market demands, while achieving and maintaining of high manufacturing yields and low testing costs;
·	the consumer electronics market’s acceptance of our new technologies, architectures and products; and

·	consumers’ shifting preferences for how they purchase and consume HD content, which may not be met by our products.

Accomplishing what we need to do to be successful is extremely challenging, time-consuming, and expensive; and there is no assurance that we will succeed. We may experience product development delays from unanticipated engineering complexities, changing market or competitive product requirements or specifications, difficulties in overcoming resource constraints, the inability to license third-party technology or other factors. Also our competitors and customers may integrate the innovation and functionality of our products into their own products, thereby reducing demand for our products. If we are not able to develop and introduce new and innovative 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. And, even if we are successful in our product development efforts, it is possible that we may experience delays in generating revenue from our new products or that we may never generate revenue from these products.

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In addition, we must work with semiconductor foundries and potential customers to complete new product development and to validate manufacturing methods and processes to support volume production and potential re-work. These steps may involve unanticipated difficulties, which could delay product introductions and reduce market acceptance of our products. These difficulties and the increasing complexity of our products may further result in the introduction of products that contain defects or that do not perform as expected, which would harm our relationships with customers and market acceptance of our new products. There can be no assurance that we will be able to achieve design wins for our 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 of companies and intangible assets in the past and expect to continue to make such acquisitions in the future as we look to develop and bring to market new and innovative semiconductor and products and technologies on a timely basis. Acquisitions of companies or intangible assets involve numerous risks and uncertainties.

Our growth depends on the growth of the markets we serve and our ability to enhance our existing products and technologies and to introduce new products and technologies for those markets on a timely basis. The acquisition of companies or intangible assets is a strategy we have and will continue to use to develop new technologies and products and enter new markets. Acquisitions involve numerous risks, including, but not limited to, the following:

suitable acquisition opportunities may not be available, or if available, may not be available in the time frame necessary for us to take advantage of market opportunities or may not be available at a price that we can afford;

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

the disruption to our ongoing business of the acquisition process itself and subsequent integration;

the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies;

our inability to commercialize acquired technologies;

the need to take impairment charges or write-downs with respect to acquired assets and technologies; and

the risk that the future business potential as projected is not realized and as a result, we may be required to take a charge to earnings that would impact our profitability.

We cannot assure you 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. Our failure to manage growth effectively and to successfully integrate acquisitions made by us could materially harm our business and operating results.

In January 2007, we completed the acquisition of sci-worx, now Silicon Image, GmbH. In 2009, because of our decision to focus on discrete semiconductor products and related intellectual property, we decided to restructure our research and development operations resulting in the closure of our two sites in Germany. We acquired Anchor Bay Technologies in February 2011 and SiBEAM, Inc. in May 2011. Due to the risks associated with integrating the operations and employees of these two acquisitions and with our ability to develop and commercialize the technologies acquired, we may not realize the expected benefits from these strategic transactions. The success of the acquisitions depends, in part, on our ability to realize the anticipated benefits and cost savings (if any) from combining the businesses of the acquired companies and our business, which may take longer to realize than expected.

We have made and continue to make strategic investments in and enter into strategic partnerships with third parties. The anticipated benefits of these investments and partnerships may never materialize.

We have made and continue to make strategic investments in and enter into strategic partnerships with third parties with the goal of acquiring or gaining access to new and innovative semiconductor products and technologies on a timely basis. Negotiating and performing under these arrangements involves significant time and expense, and we cannot assure you that the anticipated benefits of these arrangements will ever materialize or that the products or technologies involved will ever be commercialized or that, as a result, we will not have write down a portion or all of our investment.

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For example, in 2011, we converted $8.5 million of secured promissory notes from a third-party company into advances for intellectual properties. In the fourth quarter of 2011 and again subsequent to our year ended December 31, 2011, we assessed our advances for intellectual properties for impairment. We concluded that the intangible assets related to these advances were fully impaired as of December 31, 2011, and have written them off. This conclusion was based on our determination that certain of the technologies was no longer aligned with our product roadmap due to a change in strategic focus and therefore, would not be used. The remaining technologies were impaired due to an adverse change in the extent and manner in which the technology was expected to be utilized by a strategic customer, as well as the competitive environment in which the technology was intended for use. In connection with this assessment, we recognized an impairment charge of $8.5 million in our 2011 consolidated statement of operations.

In February 2007, we entered into a licensing agreement with Sunplus Technology Co., Ltd. (Sunplus), which granted us the rights to use and further develop advanced IP technology. Previously, we believed that the IP licensed under this agreement enhanced our ability to develop DTV technology and other related consumer product offerings. Based on our product strategy as of October 2009, we realized the IP obtained through the Sunplus agreement did not align with our product roadmap and during October 2009, we decided to write off our investment in Sunplus IP of $28.3 million. This decision was prompted by a change in our product strategy due to market place and related competitive dynamics.

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

Our annual and quarterly operating results are highly dependent upon and may fluctuate based on how well we manage our business, including without limitation:

·	our ability to manage product introductions and transitions, develop necessary sales and marketing channels and manage our entry into new market segments;
·	our ability to manage sales into multiple markets such as mobile, CE and PC, which may involve additional research and development, marketing or other costs and expenses;

·	our ability to enter into licensing transactions when expected and make timely deliverables and milestones on which recognition of revenue often depends;
·	our ability to develop customer solutions that adhere to industry standards in a timely and cost-effective manner;

·	our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;
·	our ability to manage joint ventures and projects, design services and our supply chain partners;

·	our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;
·	our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;

·	the success of the distribution and partner channels through which we choose to sell our products and our ability to manage expenses and inventory levels; and
·	our ability to successfully maintain certain structural and various compliance activities in support of our global structure which is designed to result in certain operational benefits as well as an overall lower tax rate and which, if not maintained, may result in us losing these operational and tax benefits; and

Our failure to effectively manage our business, could adversely affect our results of operations.

Our annual and quarterly operating results may fluctuate significantly and are difficult to predict, particularly given adverse domestic and global economic conditions.

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

·	the growth, evolution and rate of adoption of industry standards in our key markets, including mobile, CE and PCs;

our licensing revenue is heavily dependent on a few key licensing transactions being completed in 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 we depend on a few licensees in any period for substantial portions of our anticipated licensing revenue and profits;

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

·	the impact on our operating results of the results of the royalty compliance audits which we regularly perform;

competitive pressures, such as the ability of our competitors to offer or introduce products that are more cost-effective or that offer greater functionality than our products, including through the integration into their products of innovation or 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 and gross margins of our products, which are influenced by competition and technological advancements, among other factors;

·	government regulations impacting the industry standards in our key markets or our products;

·	the availability or continued viability of other semiconductors or key components required for a customer solution where we supply one or more of the necessary components;

·	the cost to manufacture our products, including the cost of gold, and prices charged by the third parties who manufacture, assemble and test our products; and

·	fluctuations in market demand, one-time sales opportunities and sales goals, which sometimes result in heightened sales efforts during a given period that may adversely affect our sales in future periods.

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

Our business has been and may continue to be significantly impacted by the deterioration in worldwide economic conditions and uncertainty in the outlook for the global economy makes it more likely that our actual results will differ materially from expectations.

Global credit and financial markets have experienced disruptions, and may continue to experience disruptions in the future, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The continued or further tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. The volatility in the credit markets has severely diminished liquidity and capital availability. Our mobile and CE product revenue, which comprised approximately 70.5% and 66.2% of total revenue for the three months ended March 31, 2012 and 2011, respectively, is dependent on continued demand for consumer electronics, including but not limited to, DTVs, STBs, AV receivers, tablets, digital still cameras, and smartphones. Demand for consumer electronics is a function of the health of the economies in the United States, Japan and around the world. As a result of the recent global recession experienced by the U.S. and other economies around the world, as well as the European sovereign debt crisis, the overall demand for consumer electronics has been and may continue to be adversely affected. As a result, the demand for our mobile, CE and PC products and our operating results have been and may continue to be adversely affected as well. We cannot predict the timing, strength or duration of any economic disruption or subsequent economic recovery, worldwide, in the United States, in our industry, or in the consumer electronics market. These and other economic factors have had and may continue to have a material adverse effect on demand for our mobile, CE and PC products and on our financial condition and operating results.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. Recent adverse events in the global economy and in the credit markets could negatively impact our return on investment for these debt securities and thereby reduce the amount of cash and cash equivalents and investments on our balance sheet.

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

Our business strategy includes licensing our IP to companies for incorporating into their respective technologies that address markets in which we do not directly participate or compete and we license into markets where we do participate and to compete. There can be no assurance that these customers will continue to be interested in licensing our technology on commercially favorable terms or at all. There also can be no assurance that our licensing customers 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 or will maintain the confidentiality of our proprietary information. Our IP licensing agreements are complex and depend upon many factors including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these require significant judgments. Our licensing revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our expectations. Because of its high margin, the licensing revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. Also, generating revenue from IP licenses is a lengthy and complex process that may last beyond the period in which our efforts begin and, once an agreement is in place, the timing of revenue recognition may be dependent on the 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. The accounting rules governing the recognition of revenue from IP licensing transactions are increasingly complex and subject to interpretation. Due to the foregoing, the amount of license revenue recognized in any period may differ significantly from our expectations.

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

The markets in which we operate are intensely competitive and characterized by rapid technological change, evolving standards, short product life cycles and declining selling prices. We expect competition to increase, as industry standards become widely adopted, new industry standards are introduced, competitors reduce prices and offer products with greater levels of integration, and new competitors enter the markets we serve.

Our products face competition from companies selling similar discrete products and from companies selling products such as chipsets and system-on-a-chip (SoC) solutions with integrated functionality. Our competitors include semiconductor companies that focus on the mobile, CE and PC markets, as well as major diversified semiconductor companies and we expect that new competitors will enter our markets.

Some of our current or potential customers, including our own licensees, have their own internal semiconductor capabilities or other semiconductor suppliers or relationships, and may also develop solutions integrating the innovations, features and functionality of our products for use in their own products rather than purchasing products from us. Some of our competitors have already established supplier or joint development relationships with some of our current or potential customers and may be able to leverage these relationships to discourage these customers from purchasing products from us or to persuade them to replace our products with theirs. Many of our competitors have longer operating histories, greater presence in key markets, better name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do and therefore may be able to adapt more quickly to new or emerging technologies and customer requirements, or to devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, NXP, Broadcom, Intel, MediaTek, Mstar and Texas Instruments and CE manufacturers, such as Panasonic, Sony, Samsung and Toshiba, may compete against us in the future. Mergers and acquisitions are very common in our industry and some of our competitors could merge, which may enhance their market presence. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has resulted in and is likely to continue to result in price reductions and loss of market share in certain markets. We cannot assure you that we can compete successfully against current or potential competitors, or that competition will not reduce our revenue and gross margins.

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

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

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We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries. This requires us to change the manufacturing processes for our products and to redesign some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. Currently most of our products are manufactured in 180 nanometer and 130 nanometer, geometry processes. We are now designing new products in 65 nanometer process technology and planning for the transition to smaller process geometries. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, resulting in reduced manufacturing yields, delays in product deliveries and increased expenses. The transition to 65 nanometer geometry process technology has and will continue to result in significantly higher mask and prototyping costs, as well as additional expenditures for engineering design tools and related computer hardware. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes.

We are dependent on our relationship with our foundry to transition to smaller geometry processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition in a timely manner, or at all, or that we will be able to maintain our existing foundry relationships or develop new ones. If any of our foundry subcontractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations.

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

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

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

Our customers will usually test and evaluate our products prior to deciding to design our product into their own products. Our customers generally need from three to over six months to test, evaluate and adopt our product and then an additional three months to over nine months to begin volume production of products incorporating our products. This lengthy sales cycle may cause us to experience significant delays from the time we incur operating expenses and make investments in inventory until the time that we generate revenue from our products. It is possible that we may never generate any revenue from products after incurring significant expenditures. Even if we achieve a design win with a customer, we cannot assure you that the customer will ultimately market and sell its products or that our customer’s efforts will be successful. The length of our sales cycle increases the risk that a customer will decide to cancel or change its product plans, which would cause us to lose sales that we had anticipated. In addition, anticipated sales could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products. Further, the combination of our lengthy sales cycles coupled with worldwide economic conditions could have a compounding negative impact on the results of our operations.

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

Our customers may not purchase anticipated levels of products, which can result in excess inventories.

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

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We depend on a few key customers and the loss of any of them could significantly reduce our revenue and gross margins and adversely affect our results of operations.

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For the three months ended March 31, 2012, revenue from Samsung Electronics and our distributors Edom Technology and Weikeng accounted for 34.3%, 8.9% and 7.3% of our total revenue, respectively. For the three months ended March 31, 2011, revenue from Innotech Corporation, Samsung Electronics, Weikeng Industrial, Edom Technologies, Inc. and Microtek, Inc. accounted for 13.4%, 13.1%, 10.8%, 10.5% and 10.0% of our total revenue, respectively. In addition, an OEM customer of ours may buy our products through multiple distributors, contract manufacturers and /or directly from us, which could mean an even greater concentration of revenue in such a customer. 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 or products incorporating our products and generate revenue for us. As a result of this concentration of revenue in few customers, our results of operations could be adversely affected if any of the following occurs:

·	one or more of our customers or distributors becomes insolvent or goes out of business;
·	one or more of our key customers or distributors significantly reduces, delays or cancels orders; and/or

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

While our participation in multiple markets has broadened our customer base, we remain dependent on a small number of customers or, in some cases, a single customer for a significant portion of our revenue in any given quarter, the loss of which could adversely affect our operating results.

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

Many OEMs rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors generated 36.2% and 58.5% of our total revenue for the three months ended March 31, 2012 and 2011, respectively. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring us to:

·	manage a more complex supply chain;
·	monitor 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 not publicly traded.

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

We are dependent upon suppliers for a portion of raw materials used in the manufacturing of our products and new regulations related to conflict free minerals could require us to incur additional expenses in connection with procuring these raw materials.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Securities and Exchange Commission to adopt additional disclosure requirements related to certain minerals, so called "conflict minerals", sourced from the Democratic Republic of Congo and adjoining countries for which such conflict minerals are necessary to the functionality of a product manufactured, or contracted to be manufactured. These regulations also require a reporting company to disclose efforts to prevent the use of such minerals.

In our industry, such conflict minerals are most commonly found in metals. Some of our products use certain metals, such as gold, as part of the manufacturing process. Although we have not yet determined whether the gold used in the manufacture of our products would be considered conflict minerals, if such a determination is made, we may not be able to obtain alternative supplies for such metals due to the limited number of sources of non-conflict metals. If we are required to use alternative supplies, the price we pay for such metals may increase.

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Governmental action against companies located in offshore jurisdictions may lead to a reduction in the demand for our common shares.

Federal and state legislation has been proposed in the past, and similar legislation may be proposed in the future which, if enacted, could have an adverse tax impact on both us and our stockholders. For example, the ability to defer taxes as a result of permanent investments offshore could be limited, thus raising our effective tax rate.

The cyclical nature of the semiconductor industry may create constraints in our foundry, test and assembly capacities and strain our management and resources.

The semiconductor industry is characterized by significant downturns and wide fluctuations in supply and demand. This cyclicality has led to significant fluctuations in product demand and in the foundry, test and assembly capacity of third-party suppliers. During periods of increased demand and constraints in manufacturing capacity, production capacity for our semiconductors may be subject to allocation, in which case not all of our production requirements may be met. This may impact our ability to meet demand and could also increase our production costs and inventory levels. Cyclicality has also accelerated decreases in average selling prices per unit. We may experience fluctuations in our future financial results because of changes in industry-wide conditions. Our financial performance has been and may in the future be, negatively impacted by downturns in the semiconductor industry. In a downturn situation, we may incur substantial losses if there is excess production capacity or excess inventory levels in the distribution channel.

The cyclicality of the semiconductor industry may also strain our management and resources. To manage these industry cycles effectively, we must:

·	improve operational and financial systems;
·	train and manage our employee base;

·	successfully integrate operations and employees of businesses we acquire or have acquired;
·	attract, develop, motivate and retain qualified personnel with relevant experience; and

·	adjust spending levels according to prevailing market conditions.

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

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 one third party semiconductor foundry overseas to produce substantially all of our semiconductor products. We also rely on outside assembly and test services to test all of our semiconductor products. Our reliance on independent foundries and assembly and test facilities involves a number of significant risks, including, but not limited to:

·	reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
·	lack of guaranteed production capacity or product supply, potentially resulting in higher inventory levels; and

·	lack of availability of, or delayed access to, next-generation or key process technologies.

We do not have a long-term supply agreement with our third party semiconductor foundry or many of our other subcontractors and instead obtain these services on a purchase order basis. Our outside sub-contractors have no obligation to manufacture our products or 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 or multi month quote. Our requirements represent a small portion of the total production capacity of our outside foundry, assembly and test facilities and our sub-contractors may reallocate capacity on short notice to other customers who may be larger and better financed than we are, or who have long-term agreements with our sub-contractors, even during periods of high demand for our products. We may elect to have our suppliers move or expand production of our products to different facilities under their control, even in different locations, which may be time consuming, costly and difficult, have an adverse effect on quality, yields and costs and require us and/or our customers to re-qualify our products, which could open up design wins to competition and result in the loss of design wins. If our subcontractors are unable or unwilling to continue manufacturing, assembling or testing our products in the required volumes, at acceptable quality, yields and costs and in a timely manner, our business will be substantially harmed. In this event, we would have to identify and qualify substitute sub-contractors, which would be time-consuming, costly and difficult; and we cannot guarantee that we would be able to identify and qualify such substitute sub-contractors on a timely basis or obtain commercially reasonable terms from them. 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. 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.

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

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

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

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

We face foreign business, political and economic risks because a majority of our products and our customers’ products are manufactured and sold outside of the United States and because we have employees in research and development centers and sales offices throughout the world.

A substantial portion of our business is conducted outside of the United States and we have a significant portion of our workforce in research and development centers and sales offices throughout the world. As a result, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Taiwan or elsewhere in Asia. For the three months ended March 31, 2012 and 2011, approximately 61.2% and 77.2% of our total revenue respectively, was generated from customers and distributors located outside of North America, primarily in Asia. We anticipate that sales outside of the United States will continue to account for a substantial portion of our revenue in future periods.

In addition to our headquarters in Sunnyvale, California, we maintain research and development centers in Shanghai, China, and Hyderabad, India, and undertake sales and marketing activities through regional offices in several other countries. As we grow, we intend to continue to expand our international business activities.

Accordingly, we are subject to a variety of risks associated with the conduct of business outside the United States. These risks include, but are not limited to:

political, social and economic instability;

the operational challenges of conducting our business in several geographic regions around the world, especially in the face of different business practices, social norms and legal standards that differ those to which we are accustomed and held to as a publicly traded company in the United States, particularly with respect to the protection and enforcement of intellectual property rights and the conduct of business generally;

·	natural disasters and public health emergencies;
·	nationalization of business and blocking of cash flows;

·	trade and travel restrictions;
·	the imposition of governmental controls and restrictions;

·	burdens of complying with a variety of foreign laws;
·	import and export license requirements and restrictions of the United States and each other country in which we operate;

·	unexpected changes in regulatory requirements;
·	foreign technical standards;

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·	changes in taxation and tariffs;
·	difficulties in staffing and managing international operations;

·	fluctuations in currency exchange rates;
·	difficulties in collecting receivables from foreign entities or delayed revenue recognition;

·	expense and difficulties in protecting our intellectual property in foreign jurisdictions;
·	exposure to possible litigation or claims in foreign jurisdictions; and,

·	potentially adverse tax consequences.

Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales or conduct our business generally.

Also OEMs 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 their competitiveness in the marketplace. This in turn could lead to a reduction in our sales and profits.

Our success depends on our investment of significant amount of resources in research and development. We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.

Our success depends on us investing significant amounts of resources into research and development. Our research and development expenses as a percent of our total revenue were 39.5% and 31.1% for the three months ended March 31, 2012 and 2011, respectively. We expect to have to continue to invest heavily in research and development in the future in order to continue to innovate and come to market with new products in a timely manner and increase our revenue and profitability. If we have to invest more resources in research and development than we anticipate, we could see an increase in our operating expenses which may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and development resources, we could see adverse effects on our business, financial condition and operating results.

In addition, if new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.

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 confidential and proprietary technologies and information. Our success depends on our ability to adequately protect such intellectual property. With respect to our patents, we have been issued patents and have a number of pending patent applications. However, we cannot assume that any pending patents applications will be issued 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. Additionally, it is possible that existing or future patents may be challenged, invalidated or circumvented. With respect to our copyright and trademark intellectual property, it may be possible for a third-party, including our licensees, to misappropriate such proprietary technology. It is possible that copyright, trademark and trade secret protection effective in the US may be unavailable or limited in foreign countries. Additionally, with respect to all of our intellectual property, 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.

Despite our efforts and expenses, for the foregoing reasons and others, 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. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.

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We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. Also, current or former employees may seek employment with our business partners, customers or competitors, and we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, current, departing or former employees or third parties could attempt to penetrate our computer systems and networks to misappropriate our proprietary information and technology or interrupt our business. Because the techniques used by computer hackers and others to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate, counter or ameliorate these techniques. As a result, our technologies and processes may be misappropriated, particularly in countries where laws may not protect our proprietary rights as fully as in the United States.

Our products may contain technology provided to us by other parties such as contractors, suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. In addition, we may have little or no ability to correct errors in the technology provided by such contractors, suppliers and licensors, or to continue to develop new generations of such technology. Accordingly, we may be dependent on their ability and willingness to do so. In the event of a problem with such technology, or in the event that our rights to use such technology become impaired, we may be unable to ship our products containing such technology, and may be unable to replace the technology with a suitable alternative within the time frame needed by our customers.

Our participation in consortiums for the development and promotion of industry standards in our target markets, including the HDMI, MHL, SPMT and WirelessHD standards, requires us to license some of our intellectual property for free or under specified terms and conditions, which makes it easier for others to compete with us in such markets.

A key element of our business strategy includes participating in consortiums to establish industry standards in our target markets, promoting and enhancing specifications and developing and marketing products based on such specifications and future enhancements. We have and we will continue to participate in the consortiums that develop and promote the HDMI, MHL, SPMT and WirelessHD specifications. In connection with our participation in these consortiums, we make certain commitments regarding our intellectual property, in each case with the effect of making our intellectual property available to others, including our competitors, desiring to implement the specification in question. For example, as a founder of the HDMI Consortium, we must license specific elements of our intellectual property to others for use in implementing the HDMI specification, including enhancements thereof, as long as we remain part of the consortium. Also, as a promoter of the MHL specification, we must agree not to assert certain necessary patent claims against other members of the MHL Consortium, even if such members may infringed upon such claims in implementing the MHL specification. Additionally, in connection with our participation in the SPMT Consortium, we are required to license specific elements of our intellectual property on reasonable and non-discriminatory (RAND) terms to others desiring to implement the SPMT specification, including enhancements thereof so long as we continue to participate.

Accordingly, certain companies that implement these specifications in their products can use specific elements of our intellectual property to compete with us, in some cases, for free. Although in the case of the HDMI and MHL Consortiums, there are annual fees and royalties associated with the adopters’ use of the technology, there can be no assurance that our shares of such annual fees and royalties will adequately compensate us for having to license or refrain from asserting our intellectual property.

Through our wholly-owned subsidiary, HDMI Licensing, LLC, we act as agent of the HDMI specification and are responsible for promoting and administering the specification. We receive all the license fees paid by adopters of the HDMI specification to cover the costs we incur to promote and administer the HDMI specification. There can be no assurance that, going forward, we will continue to act as agent of the HDMI specification and/or receive all the license fees paid by HDMI adopters. After an initial period during which we received all of the royalties paid by HDMI adopters, in 2007, the HDMI founders reallocated the royalties to reflect each founder’s relative contribution of intellectual property to the HDMI specification, and following this reallocation, our portion of HDMI royalties was reduced to approximately 62%. In 2010, HDMI founders again reviewed the allocation of HDMI royalties and agreed on an allocation formula that reduced the portion of HDMI royalties received by us in 2011 to approximately 50%. We expect the HDMI founders to continue to review the allocation of HDMI royalties from time to time and we cannot provide any assurance regarding the portion of HDMI royalties received by us in the future.

Through our wholly-owned subsidiary, MHL, LLC, we act as agent of the MHL specification and are responsible for promoting and administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us the costs we incur to promote and administer the specification. Given the limited number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the cost we incur as agent of the specification.

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We intend to promote and continue to be involved and actively participate in other standard setting initiatives. For example, through our acquisition of SiBEAM, Inc. in May 2011, we achieved SiBEAM’s prior position as founder and chair of the WirelessHD Consortium. Accordingly, we may likely license additional elements of our intellectual property to others for use in implementing, developing, promoting or adopting standards in our target markets, in certain circumstances at little or no cost. This may make it easier for others to compete with us in such markets. In addition, even if we receive license fees and/or royalties in connection with the licensing of our intellectual property, there can be no assurance that such license fees and/or royalties will compensate us adequately.

Our business may be adversely impacted as a result of the adoption of competing standards and technologies by the broader market.

The success of our business to date has depended on our participation in standard setting organizations, such as the HDMI and MHL Consortiums, and the widespread adoption and success of those standards. From time to time, competing standards have been established which negatively impact the success of existing standards or jeopardize the creation of new standards. DisplayPort is an example of a competing standard on a different technology base which has created an alternative high definition connectivity solution in the PC space. The DisplayPort standard has been adopted by many large PC manufacturers. While currently not as widely recognized as the HDMI standard, DisplayPort does represent a viable alternative to the HDMI or MHL technologies. If DisplayPort should gain broader adoption, especially with non-PC consumer electronics, our HDMI or MHL businesses could be negatively impacted and our revenues could be reduced.

Our business and future business is dependent on the continued adoption and widespread implementation of the HDMI, MHL specifications and the new implementation and adoption of the WirelessHD specifications.

Our future success is largely dependent upon the continued adoption and widespread implementation of the HDMI, MHL and WirelessHD specifications. For the three months ended March 31, 2012, more than 80% of our total revenue was derived from the sale of HDMI and MHL enabled products and the licensing of our HDMI and MHL technology. Our leadership in the market for HDMI and MHL-enabled products and intellectual property has been based on our ability to introduce first-to-market semiconductor and IP solutions to our customers and to continue to innovate within the standard. Therefore, our inability to be first to market with our HDMI and MHL-enabled products and intellectual property or to continue to drive innovation in the HDMI and MHL specifications could have an adverse impact on our business going forward.

With our acquisition of SiBEAM, Inc. in May 2011, we acquired 60 GHz wireless technology that we hope will be made widely available and adopted by the marketplace through the efforts of the WirelessHD Consortium and incorporated into certain of our future products. As was and is the case with our HDMI and MHL products and intellectual property, our success with this technology will depend on our ability to introduce first-to-market, WirelessHD-enabled semiconductor and IP solutions to our customers and to continue to innovate within the WirelessHD standard. There can be no guarantee that this wireless technology will be adopted by the marketplace and our inability to do this could have an adverse impact on our business going forward.

In addition, the establishment and adoption by the markets we sell into of a competing digital interconnect technology could have an adverse impact on our ability to sell our products and license our intellectual property and therefore our revenues and business.

As the agent for the HDMI specification, we derive revenue from the license fees paid by adopters, and as a founder we derive revenue from the royalties paid by the adopters of the HDMI technology. Any development that has the effect of lowering the number of adopters of the HDMI standard will negatively impact these license fees and royalties. The allocation of license fees and royalty revenue among the HDMI founders is reviewed and discussed by the founders from time to time. There can be no assurance that going forward we will continue to act as agent of the HDMI specification or to receive the share of HDMI license fees and royalties that we currently receive. If our share of these license fees and royalties is reduced, this decision will have a negative impact on our revenues. Refer to the previously discussed risk factor above which also discusses the sharing of HDMI royalty revenues among various founders.

We act as agent of the MHL specification and are responsible for promoting and administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us the costs we incur to promote and administer the specification. Given the limited number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the cost we incur as agent of the specification.

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Our success depends on managing our relationship with Intel.

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

·	Intel and Silicon Image have been parties to business cooperation agreements;
·	Intel and Silicon Image are parties to a patent cross-license;

·	Intel and Silicon Image worked together to develop HDCP;
·	an Intel subsidiary has the exclusive right to license HDCP, of which we are a licensee;

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

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

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

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

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

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

New Releases of Microsoft Windows® and Apple Mac OS® operating systems may render our chips inoperable.

ICs targeted to PC, laptop, or notebook designs (whether running Microsoft Windows ®, Apple Mac OS® or Linux operating systems) often require device driver software to operate. This software is difficult to produce and requires various certifications such as Microsoft’s Windows Hardware Quality Labs (WHQL) before being released. Each new revision of an operating system may require a new software driver and associated testing/certification. Failure to produce this software can have a negative impact on our relation with Microsoft and/or Apple and may damage our reputation as a quality supplier of SATA and HDMI products in the eyes of end consumers.

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

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

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Any potential intellectual property litigation against us or in which we become involved may be expensive and time-consuming and may divert our resources and the attention of our executives. It 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. Our results of operations could be adversely affected by the use of cross-license or beneficiary of a non-assertion agreement of all our patents and/or certain other intellectual property.

We indemnify certain of our customers against infringement.

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

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

Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace. The loss of one or more of these employees could harm our business. We generally do not have employment contracts with our key employees. Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our locations throughout the world. This makes it difficult to retain our key personnel and to recruit highly qualified personnel. We have experienced and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees. Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing.

The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business. In addition, regulations adopted by The NASDAQ Stock Market requiring shareholder approval for all stock option plans, as well as regulations adopted by the New York Stock Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. In addition, FASB ASC No. 718-10, Stock Compensation, requires us to record compensation expense for options granted to employees. To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.

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We have experienced transitions in our management team, our board of directors in the past and may continue to do so in the future, which could result in disruptions in our operations and require additional costs.

We have experienced a number of transitions with respect to our board of directors and executive officers in the past and we may experience additional transitions in our board of directors and management in the future. Any such future transitions could result in disruptions in our operations and require additional costs.

If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price. While we have not identified any material weaknesses in the past three years, we cannot assure you that a material weakness will not be identified in the future.

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

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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

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

Securities class action suits and derivative suits are often brought against companies, particularly technology companies, following periods of volatility in the market price of their securities. Defending against these suits, even if meritless, can result in substantial costs to us and could divert the attention of our management.

Our operations and the operations of our significant customers, third-party wafer foundry and third-party assembly and test subcontractors are located in areas susceptible to natural disasters, the occurrence of which could adversely impact our supply of product, revenues, gross margins and results of operations.

Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes. TSMC, our outside foundry that manufactures almost all of our semiconductor products, is located in Taiwan. Siliconware Precision Industries Co. Ltd., or SPIL, Advanced Semiconductor Engineering, or ASE, and Amkor Taiwan are subcontractors located in Taiwan that assemble and test our semiconductor products.

In addition, the operations of certain of our significant customers are located in Japan and Taiwan. For the three months ended March 31, 2012 and 2011 customers and distributors located in Japan generated 17.2% and 31.7% of our total revenue, respectively, and customers and distributors located in Taiwan generated 22.1% and 25.3% of our total revenue, respectively.

Taiwan and Japan are susceptible to earthquakes, typhoons and other natural disasters.

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Our supply of product, revenues, gross margins and results of operations generally would be adversely affected if any of the following were to occur:

·	an earthquake or other disaster in the San Francisco Bay Area or the Los Angeles area were to damage our facilities or disrupt the supply of water or electricity to our headquarters;
·	an earthquake, typhoon or other natural disaster in Taiwan were to damage the facilities or equipment of TSMC, SPIL, ASE or Amkor or were to result in shortages of water, electricity or transportation, which occurrences would limit the production capacity of our outside foundry and/or the ability of our third party contractors to provide assembly and test services;

an earthquake, typhoon or other natural disaster in Taiwan or Japan were to damage the facilities or equipment of our customers or distributors or were to result in shortages of water, electricity or transportation, which occurrences would result in reduced purchases of our products, adversely affecting our revenues, gross margins and results of operations; or

an earthquake, typhoon or other disaster in Taiwan or Japan were to disrupt the operations of suppliers to our Taiwanese or Japanese customers, outside foundries or our third party contractors providing assembly and test services, which in turn disrupted the operations of these customers, foundries or third party contractors, resulting in reduced purchases of our products or shortages in our product supply.

In March 2011, Japan experienced a 9.0-magnitude earthquake which triggered extremely destructive tsunami waves. The earthquake and tsunami significantly impacted the Japanese people and the overall economy of Japan resulting to reduced consumer spending in Japan and supply chain issues, which adversely affected our revenues and results of operations in 2011.

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

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

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

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

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

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

·	authorizing the issuance of preferred stock without stockholder approval;
·	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;

·	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.

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

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

·	actual or anticipated changes in our operating results;
·	changes in expectations of our future financial performance;

·	changes in market valuations of comparable companies in our markets;
·	changes in market valuations or expectations of future financial performance of our vendors or customers;

·	changes in our key executives and technical personnel; and
·	announcements by us or our competitors of significant technical innovations, design wins, contracts, standards or acquisitions.

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

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

None

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits

(a) Exhibits

					Filing	Filed
		Form	File No.	Exhibit	Date	Herewith

10.01*	Form of Change of Control Retention Agreement.					X

31.01	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.					X

31.02	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.					X

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

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

101.INS***	XBRL Instance Document					X

101.SCH***	XBRL Taxonomy Extension Schema Document					X

101.CAL***	XBRL Taxonomy Extension Calculation Linkbase Document					X

101.LAB***	XBRL Taxonomy Extension Label Linkbase Document					X

101.PRE***	XBRL Taxonomy Extension Presentation Linkbase Document					X

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

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

*** In accordance with Rule 406T of Regulation S-T, these interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.

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SIGNATURE

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

Dated: May 2, 2012

Silicon Image, Inc.

	/s/ Noland Granberry
	Noland Granberry Chief Financial Officer (Principal Financial Officer)

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Exhibit Index

					Filing	Filed
		Form	File No.	Exhibit	Date	Herewith

10.01*	Form of Change of Control Retention Agreement.					X

31.01	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.					X

31.02	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.					X

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

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

101.INS***	XBRL Instance Document					X

101.SCH***	XBRL Taxonomy Extension Schema Document					X

101.CAL***	XBRL Taxonomy Extension Calculation Linkbase Document					X

101.LAB***	XBRL Taxonomy Extension Label Linkbase Document					X

101.PRE***	XBRL Taxonomy Extension Presentation Linkbase Document					X

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

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

Attached files

SILICON IMAGE INC Reports

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