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The following is an excerpt from a 10-K SEC Filing, filed by SILICON IMAGE INC on 3/1/2007.
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SILICON IMAGE INC - 10-K - 20070301 - BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities 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 Annual Report on Form 10-K entitled “Factors Affecting Future Results,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Annual Report on Form 10-K are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will”, “can”, “should”, “could”, “estimate”, based on”, “intended”, “would”, “projected”, “forecasted” and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any updates or revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-K with the Securities and Exchange Commission (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 us in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.
 
PART I
 
Item 1.    Business
 
Our vision is to promote the use of digital content everywhere. We are dedicated to the promotion of technologies, standards and products that facilitate the movement of digital content between and among digital devices across the consumer electronics, PC and storage markets.
 
Our mission is to be the leader in the design, development and implementation of Semiconductors for the secure storage, distribution and presentation of high-definition content in the home and mobile environments.
 
We place an emphasis on understanding and having strategic relationships within the eco-system of companies that provide the content and products that drive digital content creation and consumption. To that end, we have developed strategic relationships with Hollywood studios such as Universal, Warner Brothers, Disney and Fox and major consumer electronics companies such as Sony, Hitachi, Toshiba, Matsushita, Phillips and Thomson. Through these relationships we have formed a strong understanding of the requirements for storing, distributing and viewing high quality digital video and audio in the home and mobile environments, especially in the area of High Definition (HD) content. We have also developed a substantial intellectual property base for building the standards and products necessary to promote opportunities for our products.
 
Through the creation and development of the High Definition Multimedia Interface or HDMI tm standard along with Sony, Hitachi, Toshiba, Matsushita, Phillip and Thomson we helped drive a worldwide standard for digital connectivity that has resulted in an installed base of over 85 million devices by the end of 2006, according to market-research firm In-Stat. In-Stat projects that over 325 million devices will ship in 2010 and this means that the installed base for HDMI devices will reach almost 1 billion units by 2010.
 
Finally, we believe a world of digital devices requires a robust testing regimen to ensure rock-solid plug and play interoperability. Today we operate several HDMI Authorized testing centers around the world that do this vital testing. However, we saw a need to develop a much more comprehensive test suite in 2005 and launched a new licensing entity called Simplay Labs, LLC (Simplay).
 
Simplay has created the Simplay HD branding program to offer the industry what we believe to be the most comprehensive method for ensuring product interoperability. It also provides consumers with a way of identifying products that have had rigorous testing and are “best in class” tested for broad plug and play trouble free usage.
 
Note- Silicon Image and Simplay HD are trademarks, registered trademarks or service marks of Silicon Image, Inc. in the United States and other countries. HDMI tm and High-Definition Multimedia Interface are trademarks or registered trademarks of HDMI Licensing, LLC in the United States and other countries, and are used under license


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from HDMI Licensing, LLC. All other trademarks and registered trademarks are the property of their respective owners.
 
Standards Innovation
 
The rate of innovation within the HDMI standard has been rapid, with 6 revisions of the standard over the last 4 years. These releases have brought greater benefits to the consumer in terms of digital video and audio quality and increased functionality. Silicon Image believes that it can obtain a competitive advantage due to its founding member status and its drive for introducing new innovations in quality and connectivity that get incorporated into the standard.
 
New Initiatives
 
At the beginning of 2007 Silicon Image completed two important transactions. These transactions enhance our ability to offer higher levels of integration and greater price/performance value to our customers.
 
In February 2007, we entered into an intellectual property (“IP”) license from Sunplus Technology Co. The IP licensed to us in this transaction represents approximately 60 blocks of market-tested IP in the area of DTV and DVD system on chip (SOC) implementations. These IP blocks represent fundamental building blocks in the DTV market that are expected to advance our connectivity solutions for the home and mobile environment as well as allow us to offer greater value to our customers. We anticipate that our first generation of products based on this IP will start shipping in the second half of 2007 and will include new integrated front-end TV input processors and fully-integrated system-on-a-chip (SoC) DTV products that we believe will advance a new architecture for premium HD content access throughout the home and mobile environment.
 
The other transaction, our acquisition of sci-worx GmbH, was completed in January 2007 and provided a combination of additional IP, especially in the areas of multi-format decoders and a highly skilled labor pool of engineers who will increase our capacity to absorb the Sunplus IP and put it to use in new more integrated products over the next several years.
 
These acquisitions were important steps in our efforts to support the growth we have seen over the last several years. They allow us to complement our digital connectivity innovations with more value as we integrate many of the processing blocks required by our customers.
 
Future Technology Directions
 
Our view of tomorrow includes the consumer’s ability to purchase digital content from any source (cable, satellite, terrestrial broadcast or the internet) and the ability to securely store it, move it and display it on any device they own. This will require the advancement of home connectivity in the area of protocols and content protection. These two areas represent key core competencies in Silicon Image. We believe we now have the IP, talent and vision to implement compelling products, technologies and standards that will address our vision of digital content everywhere.
 
Business Development Background
 
We have been at the forefront of the development and promotion of several industry-standard, high-speed, digital, secure interfaces, including the Digital Visual Interface specification (DVI), HDMI and the Serial Advanced Technology Attachment specification (SATA).
 
DVI, a video-only standard pioneered by Silicon Image and designed for PC applications, enables PCs to send video data between a computer and a digital display. By defining a robust, high-speed serial communication link between host systems and displays, DVI enables sharper, crystal-clear images and lower cost designs. Accommodating bandwidth in excess of 165 MHz, DVI provides UXGA support with a single-link interface. In many applications DVI is being replaced by the more feature-rich HDMI.
 
HDMI is a high-bandwidth, all-digital, interconnect technology used in both CE and PC applications to provide high quality uncompressed video and audio. Based on IP developed by Silicon Image and other HDMI


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Founders (Sony, Matsushita Electric Industrial Co. (MEI or Panasonic), Philips, Thomson, Hitachi and Toshiba), HDMI was first introduced in 2002, and has emerged as the de facto connectivity standard for high definition CE devices. Our Transition Minimized Differential Signaling (TMDS ® ) technology that served as the basis for DVI also serves as the basis for HDMI. TMDS enables large amounts of data to be transmitted reliably over a twisted-pair cable. Fully backward-compatible with products incorporating DVI, HDMI offers additional consumer enhancements such as automatic format adjustment to match content to its preferred viewing format and the ability to build in intelligence, so one remote click can configure an entire HDMI-enabled system.
 
Our HDMI interconnect technology is used in many high-definition products, including both source and receiver devices. Source devices include DVD players, high definition (HD) and Blu-ray DVD recorders, audio/video (A/V) receivers, set-top boxes (STBs), game consoles, digital cameras and high definition camcorders, and receiver devices include digital TVs.
 
According to the market research firm In-Stat, an estimated over 63 million HDMI-enabled devices were shipped worldwide in 2006, including nearly 61 million CE devices. In-Stat projects that approximately 130 million devices, including approximately 115 million CE devices, will be shipped worldwide in 2007.
 
The market acceptance and adoption of HDMI has been a significant factor in our growth over the last several years, driving both our product and licensing revenues. As of December 31, 2006, more than 500 companies had licensed HDMI from HDMI Licensing, LLC, our wholly-owned subsidiary and the agent responsible for the licensing of HDMI. HDMI has the support of major Hollywood studios as part of their ongoing efforts in the areas of digital rights management and content protection, since HDMI offers significant advantages over analog A/V interfaces, including the ability to transmit uncompressed, high-definition digital video and multi-channel digital audio over a single cable.
 
HDMI Licensing, LLC issued its fifth HDMI version (HDMI 1.3) in June 2006 and its sixth version (HDMI 1.3a) in November 2006. We introduced the industry’s first HDMI 1.3 products around the same time, providing a time-to-market advantage to our customers. By the end of December 31, 2006, a number of top-tier CE manufacturers had announced products using our HDMI products, led by Sony (Playstation3) and Samsung Electronics (BD-P1200 Blu-ray Disc player and its new plasma, liquid crystal display (LCD) and Digital Light Processing (DLP) High Definition Televisions (HDTVs)).
 
We shipped the first HDMI-compliant silicon to the market, and we remain a market leader for HDMI functionality, with more than 97 million units shipped to date. We recently expanded our HDMI product line with the introduction of the industry’s first HDMI 1.3-compliant discrete receiver and transmitter discrete chips, a new switch product family and a new family of integrated input processors designed to help manufacturers offer cutting-edge HDMI 1.3 functionality. We expect to begin sampling an integrated SoC supporting HDMI 1.3 during 2007.
 
A key element of our growth in CE product sales during the past several years has been our ability to work closely with top-tier CE original equipment manufacturers (OEMs) in developing new capabilities and features to incorporate into the HDMI standard. We also work closely with our customers to develop a broad line of products to meet their various needs for particular market segments (e.g., semiconductors with advanced features for high-end products, and lower-priced semiconductor solutions for mid-range, mass- market products). Our leadership in the HDMI marketplace has been based on our ability to introduce first-to-market semiconductor solutions. As we did with each prior version of HDMI, we introduced the industry’s first HDMI 1.3 products, providing a time-to-market advantage to our customers.
 
For CE manufacturers, HDMI is a lower-cost, standardized means of interconnecting their devices, which enables these manufacturers to build feature-rich products that deliver a true home theatre entertainment experience. For consumers, HDMI provides a simpler way to connect and use devices which provide the higher-quality entertainment experience available with digital content.
 
For PC and monitor manufacturers, HDMI enables PCs to connect to digital TVs and monitors DTVs with HD quality video signals. More than 50 HDMI PC products were available at the end of 2006 or expected to come to market in early 2007, including HDMI products available from major original equipment manufacturers (OEMs) for desktop media-center PCs and notebook PCs, as well as add-in graphics cards, motherboards and LCD monitors.


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The introduction of Microsoft’s new operating system in January 2007, Vista, with its digital content rights management requirements, has generated increased interest in HDMI connectivity by PC manufacturers.
 
In the storage market, we have assumed a leadership role in SATA. SATA, based on serial signaling technology, is a computer bus technology for connecting hard disk drives and other devices that is faster than traditional Parallel Advance Technology Attachment specification (PATA) or USB connectors. SATA is replacing parallel PATA in desktop storage and making inroads in the enterprise arena due to its improved price/performance ratio. The market for external SATA (eSATA) has grown significantly since mid-2005. eSATA connectors enable faster transmission of data than traditional PATA or USB connectors. We are a leading supplier of discrete SATA solutions for motherboard and add-in-card manufacturers.
 
With the advent of MP3 players and other similar devices, consumers are downloading and storing an increasing array of digital content, including video, photos, and music, which we believe is creating a growing awareness and need for low-cost, simple, secure and reliable CE storage. In late 2006, we introduced our second generation SteelVine tm storage processor to address this anticipated market demand. Our storage processor solutions are fully SATA-compliant and offer SoC implementations that include a high-speed switch, a custom-designed dual-instruction RISC (reduced instruction set computing) microprocessor, firmware, SATA interface, as well as advanced features and capabilities such as 3 Giga bits per second (Gb/s) support Native Command Queuing, hot plug, port multiplier capability and ATAPI support.
 
Simplay Labs, LLC (Simplay) (formerly named PanelLink Cinema, LLC), a wholly-owned subsidiary of Silicon Image, is a leading provider of testing services for the high-definition CE industry. Simplay markets and sells its services to CE manufacturers through direct sales and a variety of industry events that focus on the HD marketplace. In 2006, we introduced the Simplay HD tm Testing Program to address the issue of compliance to industry standards and interoperability across multiple devices, an issue of growing importance to retailers and consumers. The Simplay HD Testing Program is open to all manufacturers of consumer electronics devices implementing HDMI and High-bandwidth Digital Content Protections (HDCP), including HDTVs, STBs, DVD players, A/V receivers and cables. More than 125 products had been Simplay HD-verified, conferring upon those products a higher level of consumer trust that the products are HDMI compliant and fully interoperable with other HDMI-compliant products.
 
Simplay operates testing centers in China, North America and, beginning in January 2007, Europe. These centers provide manufacturers with advanced compatibility testing facilities to ensure they are delivering industry-compatible high-definition products to consumers. We believe that Simplay has further enhanced our reputation for quality, reliable products and leadership in the HDMI market.
 
Markets and Customers
 
We focus our sales and marketing efforts on achieving design wins with leading OEMs of CE, PC and storage products. In many cases, OEMs outsource the manufacturing of their products to third-party, contract manufacturers. In these cases, once our product is designed into an OEM’s product, we typically work with the OEM’s contract manufacturer to facilitate the design for production. After the design is complete, we sell our products to these third-party, contract manufacturers either directly or indirectly through distributors.
 
Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. Our top five customers, including distributors, generated 57%, 54%, and 47%, of our revenue in 2006, 2005 and 2004, respectively. The increase in 2006 from 2005 and in 2005 from 2004 can be attributed to the increased level of purchasing activities with these distributors. 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 functions. Our revenue generated through distributors, was 50%, 52% and 45% of our total revenue in 2006, 2005 and 2004, respectively. Microtek Corporation, a distributor, comprised 16%, 11%, and 12% of our revenue in 2006, 2005 and 2004, respectively. Innotech Corporation, a distributor, comprised 16%, 9%, and 5% of our revenue in 2006, 2005 and 2004, respectively. World Peace Industrial, a distributor, comprised 12%, 17% and 15% of our revenue in 2006, 2005 and 2004, respectively. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases, we would expect a decrease in the percentage of our revenue generated through distributors. A substantial portion of our


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business is conducted outside the United States; therefore, we are subject to foreign business, political and economic risks. Nearly all of our products are manufactured in Asia, and for the years ended December 31, 2006, 2005, and 2004, approximately 79%, 74%, and 72%, of our revenue, respectively, was generated from customers and distributors located outside the United States, primarily in Asia. Please refer to the risk factor section for a discussion about the risks associated with the sell-through arrangement with our distributors.
 
Products
 
We market products to the CE, PC/display and storage markets. To ensure that rich digital content is available across devices, consumer electronics, PC and storage devices must be architected for content compatibility and interoperability. Our industry and the markets we serve are characterized by rapid technological advancement and we constantly strive for innovation in our product offerings. We introduce products to address markets or applications that we have not previously addressed, and to replace our existing products with products that are based on more advanced technology that incorporates new or enhanced features.
 
Consumer Electronics
 
Our CE semiconductor products are used in a growing number of devices, including DTVs, DVD players, STBs, A/V receivers, game consoles, camcorders and digital still cameras. Our engineering resources are working on developing further enhancements to HDMI to better support mobile devices, such as cameras, phones, and personal media players. We are actively developing advanced, integrated DTV-processor SoCs, which we expect to sample in 2007. Our engineering resources are also focused on broadening HDMI from a point-to-point device connectivity standard to include networking functionality throughout the home.
 
Silicon Image’s HDMI products are branded under the VastLane TM product family and have been selected by many of the world’s leading CE companies.
 
VastLane HDMI Transmitters.   Our VastLane HDMI transmitter products reside in personal computers and consumer electronics products, such as DVD players, DVD recorders, game consoles, STBs, digital camcorders, A/V receivers, and digital video recorders (DVRs). VastLane HDMI transmitters convert digital video and audio into a multi-gigabit per second (Gbps) encrypted serialized stream and transmit the secure content to an HDMI receiver that is built into televisions and A/V receivers.
 
VastLane HDMI Receivers.   Our VastLane HDMI receiver products reside in display systems, such as HDTVs, plasma TVs, LCD TVs, rear-projection TVs, front projectors, PC monitors as well as A/V receivers. VastLane HDMI receivers convert an incoming encrypted serialized stream to digital video and audio, which is then processed by a television or PC monitor for display.


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Some of our products targeting the CE market are listed below:
 
                             
        HDMI
    Maximum
  Maximum
  Maximum
   
Product
 
Type
 
Ports
   
Resolution
 
Color Depth
 
Bandwidth
 
Target Applications
 
SiI9011
  VastLane HDMI Receiver     1     1080p   24 bits/pixel   5 Gbps   LCD TVs, plasma TVs, projection TVs
SiI9023
  VastLane HDMI Receiver     2     1080p   24 bits/pixel   5 Gbps   LCD TVs, plasma TVs, projection TVs
SiI9133
  VastLane HDMI Receiver     2     1080p   36 bits/pixel   6.75 Gbps   DVD players, STB’s
SiI9993
  VastLane HDMI Receiver     1     720p/1080i   24 bits/pixel   2.58 Gbps   LCD TVs, plasma TVs, projection TVs
SiI9030
  VastLane HDMI Transmitter     1     1080p   24 bits/pixel   5 Gbps   DVD players/recorders, STBs
SiI9132
  VastLane HDMI Transmitter     1     1080p   36 bits/pixel   6.75 Gbps   game consoles
SiI9134
  VastLane HDMI Transmitter     1     1080p   36 bits/pixel   6.75 Gbps   DVD players/recorders, STBs
 
PCs and Displays
 
Pioneered by Silicon Image and introduced by the Digital Display Working Group (DDWG), DVI is the predominate digital standard for connecting PCs to digital displays. DVI defines a robust, high-speed serial communication link between host systems and displays — enabling sharper, crystal-clear images and lower-cost designs. Accommodating bandwidth in excess of 165 MHz, DVI provides UXGA support with a single-link interface.
 
Silicon Image continues to be a leader in the DVI market, having shipped over 84 million components to date. Our DVI products are marketed under our VastLane product family. Market researcher In-Stat estimated that 92 million DVI-enabled PC devices were shipped by industry participants in 2006. Although DVI is being replaced by the more feature-rich HDMI in many applications, In-Stat projects that approximately 92 million DVI-enabled PC devices will ship in 2007.
 
During the past year, we have seen a rapid penetration of HDMI into the PC market with more than 50 HDMI PC products currently, or expected be, available by early 2007 including, nearly two dozen desktop and notebook PCs, families of HDMI PC monitors from major manufacturers, and a broad range of motherboards and graphics cards with HDMI outputs. The introduction of Microsoft’s new Vista operating system in January 2007 is accelerating the adoption of HDMI in the consumer PC market. Vista contains rich multimedia functions and the ability to access and play-back premium high-definition content from a variety of sources including Advanced Television Systems Committee (ATSC) tuners, digital cable tuners, HD-DVD, and Blu-ray Discs.
 
By the end of 2006, In-Stat estimated that there were approximately 50 million digital TVs that potentially could be connected to PCs with HDMI outputs. In-Stat projects that this number will grow to approximately 105 million digital TVs with HDMI inputs by the end of the 2007, allowing PC users to play games, watch high-definition DVDs and view photos on their monitors or large screen TVs. Because HDMI is backwards compatible with the DVI standard, HDMI-enabled PCs can also connect directly to the enormous installed base of PC monitors with DVI inputs, which In-Stat estimates at approximately 106 million shipped to date since 2002. In addition, major producers of PC monitors are starting to introduce low-cost HDMI monitors to respond to the recent surge of PCs with HDMI outputs.


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Silicon Image offers a broad line of receivers and transmitters for the PC marketplace, including the following:
 
             
Product
 
Type
 
Target Applications
 
Other Features
 
SiI164
  VastLane DVI Transmitter   Desktop PCs (motherboards, add-in boards) Notebook PCs   • I 2 C interface
• 3.3V or 1.0-1.8V interface
• De-skewing option
SiI1162
  VastLane DVI Transmitter   PC motherboards, graphic boards, notebook PCs   • I2C interface • 3.0-3.6V or 1.0-1.9V interface • De-skewing option • BIOS and driver compatible with SiI 164
SiI1169
  VastLane DVI Receiver   LCD monitors, video and multimedia projectors, plasma displays   • 3.3V interface
• HDCP
• Dual-link sync
• 12C interface
• Programmable Equalization for long cable support
• Pin compatible with SiI161B, SiI1161, SiI169 and SiI163B
SiI1362
  VastLane DVI Transmitter   Desktop PC motherboards and add-inboards, notebook PCs   VGA-UXGA Transmitter, 48 Pin
SiI1362A
  VastLane DVI Transmitter   PC motherboards, notebook PCs   • I2C interface • Supports Intel SDVO technology • Cable distance support greater than 10 meters
SiI1390/2
  VastLane DVI Transmitter   Notebook and Desktop PCs (motherboards, add-in boards)   • SDVO interface• HDMI 1.2 output• HDCP
SiI1930/2
  VastLane DVI Transmitter   Notebook and Desktop PCs (motherboards, add-in boards)   • TMDS interface • HDMI 1.2 output • HDCP
 
Storage
 
In the storage market, we have assumed a leadership role in SATA, a standard that is replacing PATA in desktop storage and making inroads in the enterprise arena due to its improved price/performance ratio. Silicon Image remains focused on continuing to introduce higher levels of SATA integration, driving higher SATA performance and functionality, and delivering a family of SATA SoC solutions and systems for the consumer electronics environment.
 
SATA offers a number of benefits over PATA interfaces, including higher bandwidth, scalability, lower voltage and narrower cabling. As a result, SATA is expected to become the standard drive interface for desktop and notebook PCs and is expected to establish a significant presence in both enterprise storage and CE applications through external SATA (e-SATA) connections.
 
External SATA (eSATA) extends the SATA connection outside the device enclosure providing a storage interface that is six times faster than Universal Serial Bus (USB) 2.0 and three times faster than IEEE 1394. The latest generation of digital video recorders (DVRs) from Scientific Atlanta, Motorola and TiVo, as well as PC motherboards from ASUS, MSI, ECS, Foxconn, ASRock and iWill are equipped with eSATA ports.
 
We introduced our SteelVine architecture in 2004. SteelVine integrates the capabilities of a complex redundant array of independent disks (RAID) controller into a single-chip architecture.
 
Our storage products fall into three categories: controllers, bridges and storage processors, each of which is branded under the SteelVine tm product family.


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SteelVine Storage Controllers  — We provide a full line of SATA controllers used in PC, DVR, and NAS (network attached storage) applications. The current generation of SteelVine controllers provides the latest SATA Gen II features including eSATA signal levels, 3.0 Gb/s, NCQ, hot-plug, and port multiplier support.
 
SteelVine Bridges  — Our bridge products such as the SiI3811 provide PC OEMs with a solution that connects legacy PATA optical drives to the current generation of motherboard chip sets, and are used primarily in desktop and laptop PC applications.
 
SteelVine Storage Processors  — Our SteelVine storage processors represent a completely new product category that enables a new class of storage solutions for the PC, CE and external storage markets. SteelVine storage processors deliver enterprise-class features such as virtualization, RAID, hot-plug and hot spare, in a single very low cost SoC. These unique SoCs allow system builders to produce appliance-like solutions that are simple, reliable, affordable and scalable without the need for host software. Storage processors are currently shipping in PC motherboard as well as external storage solutions.
 
We believe that Silicon Image’s multi-layer approach to providing robust, cost-effective, multi-gigabit semiconductor solutions on a single chip for high-bandwidth applications, lends itself well to SATA storage market applications. We intend to continue to introduce higher levels of SATA integration, driving higher SATA performance and functionality, and delivering a family of SATA SoC solutions for the PC and consumer electronics environment.
 
Our storage products include the following:
 
             
Product
  Categories   Key Features   Target Applications
 
SiI5723, 5733,
5743, 5744, 3726
4723, 4726
  eSATA Storage Processors.   2-drive SteelVine IC with 3Gb/s Serial ATA and USB 2.0 host link and support for up to 2 SATA devices. Also supports drive cascading, RAID 0, 1 and drive spanning.   Consumer storage applications for PC and CE markets.
             
SiI3124A   SATA Controllers   Single chip, quad-channel, PCI/PCI-X-to-3Gb/s SATA- Gen II host controller, SATARAID tm software, 1st Party DMA, hot plug, ATAPI support, port multiplier support with FIS-based switching, variable output strengths for backplane support, Supports up to 3Gb/s per channel.   Server motherboards, server add-in-cards, host bus adapters, RAID subsystems, embedded applications
             
SiI3112,
3512, 3114
  SATA Controllers   Single-chip, PCI-to-1.5Gb/s SATA-Gen I host controller, SATARAID tm software, hot plug, ATAPI support, variable output strengths for backplane support   PC motherboards, PC add-in-cards, server motherboards, host bus adapters, RAID subsystems, embedded applications


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Product
  Categories   Key Features   Target Applications
 
             
SiI3132,
3531
  SATA Controllers   Single-chip, PCI Express-to-3.0Gb/s SATA Gen-II host controller, SATARAID tm software, hot plug, ATAPI support, port multiplier with FIS based switching, variable output strengths for backplane support   PC motherboards, PC add-in-cards, server motherboards, host bus adapters, RAID subsystems, embedded applications
             
SiI3811   SATA Device Bridge   1.5Gb/s SATA-to-PATA device bridge, ATAPI support   Notebook and PC motherboards, ATAPI devices
             
SiI0680   PATA Controller   Ultra ATA/133 PCI-to-ATA host Controller   PC Motherboards, PC add-in-cards, server motherboards, host bus adapters, embedded applications
 
Promotion of Industry Standards
 
A key element of our business strategy is to grow the available market for our products and technologies through the development and promotion of industry standards. In some cases, this involves participation in existing industry standards bodies such as the Consumer Electronics Association. In other cases, this involves forming new industry organizations to create, promote and manage new industry specifications, such as HDMI. Though we are active in existing industry standards bodies, it is our formation of, and participation in new industry organizations that have had the greatest impact on our business. We are currently directly involved in the following standards efforts:
 
High-Definition Multimedia Interface (HDMI)
 
Silicon Image, together with Sony, Matsushita Electric Industrial Co. (Panasonic), Philips, Thomson, Hitachi and Toshiba, entered into a Founder’s Agreement under which we formed a working group to develop a specification for a next-generation, uncompressed, digital interface for consumer electronics. In December 2002, the specification for HDMI 1.0 was released. The HDMI specification revision history to date is as follows:
 
         
Revision
 
Date Issued
 
Key Features
 
HDMI 1.0
  December 2002   Uncompressed digital audio/video interface
HDMI 1.1
  May 2004   DVD-Audio support
HDMI 1.2
  August 2005   Super Audio CD support removed restrictions on use of PC video format timings
HDMI 1.2a
  December 2005   Full definition of CEC functionality and compliance test. Additional cable and connector testing requirements.
HDMI 1.3
  June 2006   Single link bandwidth doubled to 10.2 Gb/s (340 MHz)
Deep Color
xvYCC color gamut
Lossless High Bit Rate audio support Mini connector
Lip Sync correction
HDMI 1.3a
  November 2006   Compliance Testing requirements for HDMI 1.3 features, required testing
 
The HDMI specification is based on our proven TMDS technology, the same technology underlying HDMI’s predecessor, DVI. Because of the dynamic nature of the CE market and the number of CE devices, we anticipate that the HDMI standard will continue to evolve over time. As an HDMI Founder, we have actively participated in the evolution of the HDMI specification, and we expect our involvement to continue.

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In 2002, Silicon Image established a wholly-owned subsidiary, HDMI Licensing, LLC, to perform the duties of licensing agent for the HDMI specification, a role previously performed by Silicon Image under the terms of the Founders’ Agreement. As of December 31, 2006, there were more than 500 HDMI Adopters (not including the 7 founding members) that have been licensed to implement the HDMI specification in their products.
 
Under the HDMI Adopter Agreement, a manufacturer implementing HDMI in its products is required to test its first product in each of four categories at an independent HDMI Authorized Testing Center (ATC). The four categories are sinks (display devices), sources, repeaters and cables. Our wholly-owned subsidiary, Simplay, operates HDMI ATCs that test manufacturer products for conformance to the HDMI specification. Two other HDMI Founders (Panasonic and Philips) also operate ATCs.
 
The adoption of and demand for products incorporating HDMI has been driven, in part, by the actions of other standards setting bodies and, in some cases, government regulation requiring or authorizing the use of HDMI technology.
 
DVD Copy Control Association.   The DVD Copy Control Association, responsible for licensing CSS (Content Scramble System) to manufacturers of DVD hardware, media and related products, has approved HDMI with HDCP as an authorized digital output of DVD players for CSS protected content.
 
Federal Communications Commission.   The FCC issued its Plug and Play order in October 2003. In November 2003 and March 2004, these rules, known as the Plug & Play Final Rules (Plug & Play Rules), became effective. According to the Plug & Play Rules, as of July 1, 2005, all high definition set-top boxes acquired by cable operators for distribution to subscribers would need to include either a DVI or HDMI output with HDCP.
 
Moreover, under the Plug & Play Rules, a unidirectional digital cable television may not be labeled or marketed as digital cable ready unless it includes the following interfaces according to the following schedule:
 
(i) For 480p grade unidirectional digital cable televisions, either a DVI/HDCP, HDMI/HDCP, or 480p Y, Pb, Pr (analog) interface:
 
100% of models manufactured or imported in the U.S. with screen sizes 36 inches and above after July 1, 2005; 100% of models manufactured or imported in the U.S. with screen sizes 32 to 35 inches after July 1, 2006.
 
(ii) For 720p/1080i grade unidirectional digital cable televisions, either a DVI/HDCP or HDMI/HDCP interface:
 
100% of models manufactured or imported in the U.S. with screen sizes 36 inches and above as of July 1, 2005; 100% of models manufactured or imported in the U.S. with screen sizes 32 to 35 inches as of July 1, 2006; 100% of models manufactured or imported in the U.S. with screen sizes larger than 13 inches after July 1, 2007.
 
In the past, the FCC has made modifications to its rules and timetable for the DTV transition and it may do so in the future.
 
EICTA In January 2005, the European Industry Association for Information Systems, Communication Technologies and Consumer Electronics (EICTA) issued its “Conditions for High Definition Labeling of Display Devices”, which requires all HDTVs using the “HD Ready” logo to have either an HDMI or DVI input with HDCP. In August 2005, EICTA issued its “Minimum Requirements for HD Television Receivers”, which requires HD Receivers without an integrated display (e.g. HD STBs) utilizing the “HDTV” logo and intended for use with HD sources (e.g. television broadcasts), some of which require content protection in order to permit HD quality output, to have either a DVI or HDMI output with HDCP.
 
CASBAA In August 2005, the Cable and Satellite Broadcasting Association of Asia (CASBAA) issued a series of recommendations in its “CASBAA Principles for Content Protection in the Asia-Pacific Pay-TV Industry” for handling digital output from future generations of set-top boxes for video on demand (VOD), Pay-per-view (PPV), Pay-TV and other encrypted digital programming applications. These recommendations include the use of one or more of HDMI with HDCP or DVI with HDCP digital outputs for set-top boxes capable of outputting uncompressed high-definition content.


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CVIA — In July 2006, Silicon Image and China Video Industry Association (CVIA) signed an agreement and agreed to work together to promote HDMI adoption among domestic Chinese electronics manufacturers, co-develop new technology applicable to HDMI, and collaborate on establishing testing and interoperability certification labs that complement the capabilities of the HDMI Authorized Testing Centers established by Silicon Image. In addition, Silicon Image agreed to support the China Digital Interface Industry Alliance (CDIA), an industry alliance consisting of major Chinese electronics manufacturers that CVIA established. CDIA would work to promote the use of HDMI in consumer electronic products, promote communications among manufacturers in China and abroad, and strengthen coordination between hardware manufacturers and content providers.
 
Digital Visual Interface (DVI)
 
In 1998, Silicon Image, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu, announced the formation of the Digital Display Working Group (DDWG). Subsequently, members of the DDWG entered into a Promoter’s Agreement in which they agreed to:
 
  •  define, establish and support the DVI specification, an industry specification for sending video data between a computer and a digital display;
 
  •  encourage broad industry adoption of the DVI specification, in part by creating an implementer’s forum that others may join in order to receive information and by providing support for the DVI specification;
 
  •  invite third parties to enter into a Participant’s Agreement in order to consult on the content, feasibility and other aspects of the DVI specification.
 
In 1999, the DDWG published the DVI 1.0 specification, which defines a high-speed serial data communication link between computers and digital displays. The DVI 1.0 standard remains in effect, and has not changed from its release in 1999. Over 100 companies, including systems manufacturers, graphics semiconductor companies and monitor manufacturers have participated in DDWG activities, and many are developing hardware and software products designed to be compliant with the DVI specification. Market researcher In-Stat estimated that 92 million DVI-enabled PC devices were shipped by industry participants in 2006.
 
High-bandwidth Digital Content Protection (HDCP)
 
In 2000, the HDCP specification HDCP 1.0 was published by Intel, with contributions from Silicon Image acknowledged in the specification. The specification was developed to add content protection to DVI in order to prevent unauthorized copying of content when transmitted between source and display over a DVI link. In 2003, the HDCP specification was updated to revision level 1.1 and made available for use with HDMI. This technology has been widely adopted in consumer electronics products, initially in combination with DVI, and more recently and more prevalently in combination with HDMI. In 2006, the HDCP specification was again revised in version 1.2 to clarify certain technical ambiguities and consolidate errata. The HDCP Compliance Test Specification VI.1 was also released in 2006.
 
Serial ATA Working Group
 
During 2000, we acquired Zillion Technologies, a developer of high-speed transmission technology for data storage applications. Zillion contributed to the drafting of the preliminary SATA 1.0 specification, eventually published in 2001 and promoted as a successor to PATA bus technology. We were a contributor to the SATA working group, which includes Dell, Intel, Maxtor, Seagate, and Vitesse, among its promoters. In February 2002, we joined the SATA II Working Group, the successor to the SATA working group, as a contributor. The SATA II working group released “Extensions to Serial ATA 1.0 Specifications” in October 2002 and “Extensions to Serial ATA 1.0a rev. 1.1” in November of 2003, to enhance the SATA 1.0 specification for the server and network storage markets. The SATA II working group has also released specifications for SATA port multipliers and SATA port selectors.
 
In 2004, the SATA II working group released specifications to increase SATA’s speed to 3 Gb/s, as well as defining external cabling for SATA.


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In July 2004, a new organization, the Serial ATA International Organization, (SATA-IO), was formed as the successor to the SATA II working group. This organization provides the industry with guidance and support for implementing the SATA specification. We are a member of SATA-IO, which has a current membership of over 100 companies including its current board members, Dell, Intel, Seagate and Vitesse. Under the SATA-IO committee, a revised 2.5 specification, which integrates all previous SATA specifications into a single document, has been released. Silicon Image continues to be an active member in the SATA-IO group.
 
Incits T-13 Committee
 
In 2003, Silicon Image joined the Incits T13 technical committee (T13 Committee) as a contributor. The T13 Committee is responsible for publishing the ATA specification and is currently working to make improvements to the ATA specification, including the incorporation of advanced SATA-IO features into their next revision of the ATA specification, ATA-8. Members of the T13 Committee include Hitachi, Intel, Seagate, Phoenix Technologies, Microsoft, Fujitsu, Western Digital and nVidia among others.
 
We intend to continue to be involved and actively participate in other standard setting initiatives.
 
Silicon Image Technology
 
Multi-Layer Systems Approach to Solving High-Speed Interconnect Problems
 
We invented the technology upon which the DVI and HDMI specifications are based, and have substantial experience in the design, manufacture and deployment of semiconductor products incorporating this high-speed data communications technology. The advanced nature of our high-speed digital design allows us to integrate significant functionality with multiple high-speed communication channels using industry-standard, low-cost complementary metal oxide semiconductor (CMOS) manufacturing processes. At the core of our innovation is a multi-layered approach to providing multi-gigabit semiconductor solutions.
 
The three layers of our Multi-layer Serial Link (MSL) architecture include the physical, coding and protocol layers. Serial link technology is the basis for the physical layer, which performs electrical signaling in several data communication protocols, including DVI 1.0, HDMI 1.3 and SATA. This technology converts parallel data into a serial stream that is transmitted sequentially at a constant rate and then reconstituted into its original form. Our high-speed serial link technology includes a number of proprietary elements designed to address the significant challenge of ensuring that data sent to a display or a storage device can be accurately recovered after it has been separated and transmitted in serial streams over multiple channels. In order to enable a display or a storage device to recognize data at the proper time and rate, our digital serial link technology uses a digital phase-locked loop combined with a unique phase detecting and tracking method to monitor the timing of the data.
 
At the coding layer, we have developed substantial intellectual property in data coding technology for high-speed serial communication. Our TMDS coding technology simplifies the protocol for high-speed serial communication and allows tradeoffs to be made in physical implementation of the link, which in turn reduces the cost of bandwidth and simplifies the overall system design. In addition, we have ensured direct current, balanced transmission and the ability to use TMDS to keep electromagnetic emissions low and to enable connection to fiber optic interconnects without use of additional components.
 
VastLane HDMI
 
Our VastLane HDMI technology sends protected high-fidelity digital audio and high-definition video across the HDMI link for use in the consumer electronics market. Combining digital video and multi-channel digital audio transmissions in a single interconnect system simplifies and reduces the cost of the connection between consumer electronics devices, while maintaining high quality and content protection.
 
From our inception until 1998, our internal research and development efforts focused primarily on the development of our core VastLane (formerly called PanelLink) technology, our initial transmitter and receiver products, and our first intelligent panel controller product. The TMDS technology developed by Silicon Image became the key technology in the DVI standard completed in 1999. During 1999, we introduced the first DVI products using the VastLane architecture. Subsequent improvements to the core VastLane technology enabled


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higher display interface resolutions higher, and helped drive growth in the flat-panel display market. In 2000, we focused our internal research and development efforts on integrating our VastLane technology with additional functionality, such as digital audio and HDCP, for the consumer electronics industry. These developments led to the adoption of DVI-HDCP by major television manufacturers and created new opportunities for us in consumer electronics. We formed the HDMI Working Group with six other major consumer electronics manufacturers, and we developed key new technologies for the HDMI standard. The original VastLane technology was the basis for HDMI, and an improved VastLane architecture is the backbone of the HDMI 1.3 standard.
 
Research and Development
 
Our research and development efforts continue to focus on developing innovative technologies and standards, higher-bandwidth, lower-power links, as well as efficient algorithms, architectures, and feature-rich functions for higher-level integrated products or SoCs, for use in CE (including DTV), PC, mobile, and storage applications. By utilizing our patented technologies and optimized architectures, we believe our VastLane, and SteelVine products can scale with advances in semiconductor manufacturing process technology, simplify system design, and provide new innovative solutions for our customers.
 
We have invested, and expect that we will continue to invest, significant funds for research and development activities. Our research and development expenses were approximately $63.6 million, $44.9 million, and $61.5 million, in 2006, 2005 and 2004, respectively (including stock-based compensation expense (benefit) of $11.1 million, $(3.9) million, and $16.6 million, for 2006, 2005 and 2004, respectively).
 
We have assembled a team of engineers and technologists with extensive experience in the areas of high-speed interconnect architecture, circuit design, digital A/V processor architecture, storage architecture, logic design/verification, firmware/software, flat panel displays, digital video/audio systems, and storage systems. Our engineering team includes a group of consultants in Asia that focuses primarily on advanced technology development. As of December 31, 2006, our engineering organizations were based in the United States, China, and the U.K. In January 2007, we purchased sci-worx GmbH (sci-worx), from Infineon Technologies AG (Infineon). Sci-worx was Infineon’s wholly-owned subsidiary prior to the acquisition. We purchased all of the outstanding shares of capital stock of sci-worx and paid sci-worx’s intercompany debt to another Infineon subsidiary. The purchase price for the acquisition was $13.6 million in cash for sci-worx’ capital stock and its intercompany debt (net of its cash balances at closing). Sci-worx (now called Silicon Image Germany) is an intellectual property and design service provider specializing in multimedia, communications, and networking applications. Silicon Image Germany has approximately 172 employees. The acquisition brings Silicon Image core competencies in more than 50 IP products in the area of video/image processing, wireline communications, security and bus interfaces.
 
On February 2007, we entered into a Video Processor Design License Agreement with Sunplus. Under the terms of the license agreement, we will receive a license to use and further develop advanced video processor technology. The license agreement provides for the payment of an aggregate of $40.0 million to Sunplus by Silicon Image, $35.0 million of which is payable in consideration for the licensed technology and related deliverables and $5.0 million of which is payable in consideration for Sunplus support and maintenance obligations. We paid Sunplus $10.0 million of the consideration for the licensed technology and related deliverables in February 2007, and are required to pay the remaining $25.0 million upon delivery and completion of certain milestones. The $5.0 million to be paid for support and maintenance by Sunplus is payable over a two-year period starting upon delivery of the final Sunplus deliverables. The license agreement also provides for the grant to Sunplus of a license to certain of our intellectual property, for which Sunplus has agreed to pay us $5.0 million upon delivery and acceptance of such intellectual property. We believe that the intellectual property licensed from Sunplus, along with the engineering talent and intellectual property recently acquired in the sci-worx acquisition, will enhance and accelerate our ability to develop and offer a broader array of consumer product offerings, ranging from discrete HDMI chips to new integrated front-end DTV input processors and fully-integrated SoC DTV products.


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Sales and Marketing
 
We sell our products to distributors and OEMs throughout the world directly using a direct sales force with field offices located in North America, Taiwan, Europe, Japan and Korea and indirectly through a network of distributors and manufacturer’s representatives located throughout North America, Asia and Europe.
 
Our sales strategy for all products is to achieve design wins with key industry leaders in order to grow the markets in which we participate and to promote and accelerate the adoption of industry standards (such as DVI, HDMI and SATA) that we support or are developing. Our sales personnel and applications engineers provide a high-level of technical support to our customers. Our marketing efforts focus primarily on promoting adoption of the DVI, HDMI and SATA standards; participating in industry trade shows and forums; entering into branding relationships such as VastLane for DVI, HDMI and SteelVine for SATA to build awareness of our brands; and bringing new solutions to market.
 
Manufacturing
 
Wafer Fabrication
 
Our semiconductor products are fabricated using standard CMOS processes, which permit us to engage independent wafer foundries to fabricate our semiconductors. By outsourcing the manufacture of our products, we are able to avoid the high-cost of owning and operating a semiconductor wafer fabrication facility and to take advantage of these manufacturers’ high-volume economies of scale. Outsourcing our manufacturing also gives us direct and timely access to various process technologies. This allows us to focus our resources on the innovation or design and quality of our products. Our devices are currently fabricated using 0.35 micron, 0.25 micron and 0.18 micron processes. We have conducted research and development projects for our licensees, which have involved 0.13 micron and 0.90 nm designs. We continuously evaluate the benefits, primarily the improved performance, costs, and feasibility, of migrating our products to smaller geometry process technologies. We rely almost entirely on Taiwan Semiconductor Manufacturing Company (TSMC) to produce all of our CE, PC and SATA products. Because of the cyclical nature of the semiconductor industry, capacity availability can change quickly and significantly. We attempt to optimize wafer availability by continuing to use less advanced wafer geometries, such as 0.5 micron, 0.35 micron, 0.25 micron and 0.18 micron and 0.13 micron for which foundries generally have more available capacity.
 
Assembly and Test
 
After wafer fabrication, die (semiconductor devices) are assembled into packages and the finished products are tested. Our products are designed to use low-cost standard packages and to be tested with widely available semiconductor test equipment. We outsource all of our packaging and the majority of our test requirements to Amkor Technology in Korea, Advanced Semiconductor Engineering in Taiwan and Malaysia and Siliconware Product International Limited (SPIL) in Taiwan. This enables us to take advantage of these subcontractors’ high-volume economies of scale and supply flexibility, and gives us direct and timely access to advanced packaging and test technologies. We test a small portion of our products in-house.
 
The high-speed nature of our products makes it difficult to test our products in a cost-effective manner prior to assembly. Since the fabrication yields of our products have historically been high and the costs of our packaging have historically been low, we test our products after they are assembled. Our operations personnel closely review the process and control and monitor information provided to us by our foundries. To ensure quality, we have established firm guidelines for rejecting wafers that we consider unacceptable. To date, not testing our products prior to assembly has not caused us to experience unacceptable failures or yields. However, lack of testing prior to assembly could have adverse effects if there are significant problems with wafer processing. Additionally, for newer products and products for which yield rates have not stabilized, we may conduct bench testing using our personnel and equipment, which is more expensive than fully automated testing.
 
In an effort to improve control, increase operational flexibility, and lower costs, we began, in 2006, to reduce our reliance on third party turnkey suppliers, to manage the relationships with our other third party subcontractors who handle our wafer assembly and test process. In addition, during 2006, we purchased and installed several pieces


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of equipment at test houses to ensure we receive priority on such equipment and to obtain lower test prices from these test houses.
 
Quality Assurance
 
We focus on product quality through all stages of the design and manufacturing process. Our designs are subjected to in-depth circuit simulation at temperature, voltage and processing extremes before being fabricated. We pre-qualify each of our subcontractors through an audit and analysis of the subcontractor’s quality system and manufacturing capability. We also participate in quality and reliability monitoring through each stage of the production cycle by reviewing data from our wafer foundries and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yields. Our independent foundries and assembly and test subcontractors have achieved International Standards Organization (ISO) 9001 certification.
 
Intellectual Property
 
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements, licenses and methods to protect our proprietary technologies. As of December 31, 2006, we had been issued over 80 United States patents and had in excess of 70 United States patent applications pending. Our U.S. issued patents expire in 2014 or later, subject to our payment of periodic maintenance fees. We cannot assure you that any valid patent will be issued as a result of any applications; or, if issued, that any claims allowed will be sufficiently broad to protect our technology; or that any patent will be upheld in the event of a dispute. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. We also generally control access to, and distribution of, our documentation and other proprietary information. Despite our precautions, it may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization; develop similar technology independently; or design around our patents. 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, the outcome often is not predictable, and the relief available may not compensate for the harm caused.
 
Our participation as a founder of the HDMI specification requires that we grant others the right to use specific elements of our intellectual property in implementing the HDMI specification in their products in exchange for a license. This license bears an annual fee and royalties that are payable to HDMI Licensing, LLC, a wholly-owned subsidiary of ours. There can be no assurance that such license fees and royalties will adequately compensate us for having to license our intellectual property. The license, with restrictions, generally covers the patent claims necessary to implement the specification of an interface for CE devices and does not extend to the internal methods by which such performance is created. Although HDMI is an industry standard, we have developed proprietary methods of implementing the HDMI specification. The intellectual property that we have agreed to license defines the logical structure of the interface, such as the number of signal wires, the signaling types and the data encoding method for serial communication. Our implementation of this logical structure in integrated circuits remains proprietary and includes our techniques to convert data to and from a serial stream; our signal recovery algorithms; our implementation of audio and visual data processing; and our circuits to reduce electromagnetic interference (EMI). Third parties may also develop intellectual property relating to HDMI implementations that would prevent us from developing or enhancing our HDMI specification in conflict with those rights. Third parties may also develop equivalent or superior implementations of the HDMI specification, and we cannot guarantee that we will succeed in protecting our intellectual property rights in our proprietary implementation. Third parties may have infringed, or be infringing, our intellectual property rights or may do so in the future, and we may not discover that fact in a timely or cost-effective manner. Moreover, the cost of pursuing an intellectual property infringement action may be greater than any benefit we would realize. In addition, third parties may not pay the prescribed license fees and royalties, in which case we may become involved in infringement or collection actions, or we may determine that the cost of pursuing such matters may be greater than any benefit we would realize. We agreed to grant rights to the HDMI Founders and adopters of the HDMI specification in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the HDMI


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Founders and adopters of the HDMI specification from using certain specific elements of our intellectual property for certain purposes in exchange for a portion of the specified royalties.
 
Our participation in the DDWG requires that we grant others the right to use specific elements of our intellectual property in implementing the DVI specification in their products at no cost in exchange for an identical right to use specific elements of their intellectual property for this purpose. We agreed to grant rights to the DDWG members and other adopters of the DVI specification, in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the adopters of the DVI specification from using certain specific elements of our intellectual property for certain purposes for free. This reciprocal free license covers the connection between a computer and a digital display. It does not extend, however, to the internal methods by which such performance is created. Although the DVI specification is an open industry standard, we have developed proprietary methods of implementing the DVI specification. The intellectual property that we have agreed to license defines the logical structure of the interface, such as the number of signal wires, the signaling types, and the data encoding method for serial communication. Our implementation of this logical structure in integrated circuits remains proprietary, and includes our techniques to convert data to and from a serial stream, our signal recovery algorithms and our circuits to reduce EMI. Third parties may develop proprietary intellectual property relating to DVI implementations that would prevent us from developing or enhancing our DVI implementation in conflict with those rights. Third parties may also develop equivalent or superior implementations of the DVI specification, and we cannot guarantee that we will succeed in protecting our intellectual property rights in our proprietary implementation. Third parties may have infringed or be infringing our intellectual property rights or may do so in the future, and we may not discover that fact in a timely or cost-effective manner. Moreover, the cost of pursuing an intellectual property infringement action may be greater than any benefit we would realize.
 
We entered into a patent cross-license agreement with Intel, in which each of us granted the other a license to use certain of the grantor’s existing and future patents, including certain future patents, with specific exclusions related to the grantor’s current and anticipated future products and network devices. Products excluded include our digital receivers, discrete digital transmitters and discrete display controllers, and Intel’s processors, chipsets, graphics controllers and flash memory products. This cross-license does not require delivery of any masks, designs, software or any other item evidencing or embodying such patent rights, thus making “cloned” products no easier to create. The cross-license agreement expires when the last licensed patent expires, anticipated to be no earlier than 2016, subject to the right of either party to terminate the agreement earlier upon material breach by the other party, or a bankruptcy, insolvency or change of control of the other party. We have forfeited our ability to rely on intellectual property law to prevent Intel from using our patents within the scope of this license. To date, we are not aware of any use by Intel of our patent rights that negatively impacts our business.
 
Pursuant to the Unified Display Interface (UDI) Promoters Agreement, we agreed, subject to conditions stipulated in the agreement, to license certain specific elements of our TMDS and panel interface logic intellectual property to adopters of the UDI specification on a reciprocal, royalty-free basis. We agreed to grant rights to the UDI Promoters and future adopters of the UDI specification, in order to promote the adoption of our technology as an industry standard. We thereby limited our ability to rely on intellectual property law to prevent the adopters of the UDI specification from using certain specific elements of our intellectual property for certain purposes for free.
 
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which can result in significant, protracted litigation. In December 2006, we settled our longstanding litigation with Genesis Microchip, Inc. (Genesis), and in January 2007, we filed an action against Analogix Semiconductor, Inc (Analogix) alleging copyright infringement, misappropriation of trade secrets, and unlawful, unfair and fraudulent business practices. For a more detailed description of the settlement agreement with Genesis and our lawsuit against Analogix, see Part I, Item 3 — Legal Proceedings.
 
Competition
 
The markets in which we participate are intensely competitive and are characterized by rapid technological change, evolving standards, short product life cycles and decreasing prices. We believe that some of the key factors affecting competition in our markets are levels of product integration, compliance with industry standards,


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time-to-market, cost, product capabilities, system design costs, intellectual property, customer support, quality and reputation.
 
In the consumer electronics market, our digital interface products are used to connect new cable set-top boxes, satellite set-top boxes, and DVD players to DTVs. These products incorporate, HDMI with HDCP or DVI and HDCP support. Companies competing for sales of DVI-HDCP solutions include Analog Devices, Texas Instruments, Thine, Broadcom, Conexant, Mstar, and Genesis. We compete for sales of HDMI products with companies such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba. In addition, our video processor products face competition from products sold by AV Science, Broadcom, Focus Enhancements, Genesis, Mediamatics, Micronas Semiconductor, Oplus, Philips Semiconductor, Pixelworks, ATI and Trident. We also compete, in some instances, against in-house processing solutions designed by large consumer electronics OEMs.
 
In the PC market, our products face competition from a number of sources. We offer a number of HDMI and DVI solutions to the PC market and we compete against several companies such as Analog Devices, Genesis, MRT, ATI Technologies, Broadcom, Chrontel, Conexant, National Semiconductor, nVidia, Pixelworks, SIS, Smart ASIC, ST Microelectronics, Texas Instruments and Thine. DisplayPort is a new digital display interface standard being put forth by the VESA (Video Electronics Standards Association) that defines a digital audio/video interconnect, intended to be used primarily between a computer and its display monitor, or a computer and a home-theater system. Several companies have announced that they expect to introduce products based on the DisplayPort standard including AMD, Genesis, and nVidia, and these products may compete with our DVI and HDMI products.
 
Our SATA products compete with similar products from Marvell Technology, VIA Technologies, Silicon Integrated Systems, J-Micron, Atmel and Promise Technology. In addition, other companies, such as APT, Intel, LSI Logic, ServerWorks and Vitesse, have developed, or announced intentions to develop, SATA products. We also are likely to compete against Intel, nVidia, VIA Technologies, Silicon Integrated Systems, ATI Technologies, and other motherboard chip-set makers which have, or have announced intentions to integrate SATA functionality into their chipsets.
 
Many of our competitors have longer operating histories and greater presence in key markets, greater name recognition, access to larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources, than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and customer requirements, or devote greater resources to the promotion and sale of their products. In particular, well-established semiconductor companies, such as Analog Devices, Intel, National Semiconductor and Texas Instruments, and consumer electronics manufacturers, such as Hitachi, Matsushita, Philips, Sony, Thomson and Toshiba, may compete against us in the future. We cannot assure that we can compete successfully against current or potential competitors, or that competition will not seriously harm our business.
 
Employees
 
As of December 31, 2006, we had a total of 442 employees, including 65 located outside of the United States. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppages. We consider our relations with our employees to be good. In January, 2007 we purchased sci-worx GmbH from Infineon Technologies AG, and as a result of the acquisition, we added approximately 172 employees. For a more detailed discussion about the acquisition, please refer to Note 11- Subsequent Events of the notes to our Consolidated Financial Statements. We depend on the continued service of our key technical, sales and senior management personnel, and our ability to attract and retain additional qualified personnel. If we are unable to hire and retain qualified personnel, our business will be seriously harmed.
 
Available Information
 
Our Internet website address is www.siliconimage.com. We are not including the information contained on our web site as a part of, or incorporating it by reference into, the Annual Report on Form 10-K. We make available free of charge, through our Internet website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable, after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.


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To receive a free copy of this Form 10-K, please forward your written request to Silicon Image, Inc., Attn: Investor Relations, 1060 East Arques Avenue, Sunnyvale, California 94085.
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