This report contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-Q entitled "Factors Affecting Future Results," that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Form 10-Q are identified by words such as "believes," "anticipates," "expects," "intends," "estimates," "may," "will" and variations of such words and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image, Inc. in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

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

Overview

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

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

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

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

Historically, we have grown our business by introducing and promoting the adoption of new standards and entering new markets. We collaborated with several companies and jointly developed the DVI and HDMI standards. Our first products addressed the PC market. Subsequently, we introduced products for a variety of CE market segments, including DVD, STB, game console and digital television (DTV) markets. More recently, we have expanded our research and development activities and are developing products based on our innovative digital interconnect core technology for the mobile device market, including digital still cameras, HD camcorders, portable media players and smart phones. We are also developing a personal networking technology solution that will enable a consumer to access and display digital content from and to the various devices in the consumer's personal domain.

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

Concentrations

Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our top five customers, including distributors, generated 52.0% of our revenue for the three months ended March 31, 2009 and 53.9% of our revenue for the three months ended March 31, 2008. 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, 2009 and 2008, 51.8% of our revenue 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.

A significant portion of our revenue is generated from products sold overseas. Sales to customers in Asia, including distributors, represented 68.4% of our revenue for the three months ended March 31, 2009, and 67.9% for the three months ended March 31, 2008. The reason for the geographical concentration in Asia is that most of our products are components of consumer electronics, computer and storage products, the majority of which are manufactured in Asia. The percentage of our revenue derived from any country is dependent upon where our end customers choose to manufacture their products. Accordingly, variability in our geographic revenue is not necessarily indicative of any geographic trends, but rather is the combined effect of new design wins and changes in customer manufacturing locations. All revenue to date has been denominated in U.S. dollars except for a relatively insignificant portion generated in Euros through our subsidiary in Germany.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and all known facts and circumstances that we believe are relevant. Actual results may differ materially from our estimates. We believe the following accounting policies to be most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition, (2) allowance for doubtful accounts receivable, (3) inventories,
(4) goodwill and intangible assets, (5) income taxes, (6) accrued liabilities,
(7) stock-based compensation expense, and (8) legal matters. For a discussion of the critical accounting estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

REVENUE

                       Three months ended March 31,
                      2009             2008       Change
                    (dollars in thousands)
Product revenue   $     34,595       $ 57,187       -39.5 %
Licensing                5,917          9,926       -40.4 %
Total revenue     $     40,512       $ 67,113       -39.6 %




                                Three months ended March 31,
                               2009             2008       Change
                             (dollars in thousands)
Consumer Electronics (1)   $     33,476       $ 49,535       -32.4 %
Personal Computers (1)            3,207         11,169       -71.3 %
Storage (1)                       3,829          6,409       -40.3 %
Total revenue              $     40,512       $ 67,113       -39.6 %


___________
(1) Includes development, licensing and royalty revenue

                            Three months ended March 31,
                           2009             2008       Change
                         (dollars in thousands)
Consumer Electronics   $     27,576       $ 42,452       -35.0 %
Personal Computers            3,468         10,007       -65.3 %
Storage                       3,551          4,728       -24.9 %
Licensing                     5,917          9,926       -40.4 %
Total revenue          $     40,512       $ 67,113       -39.6 %

Total revenue for the three months ended March 31, 2009 was $40.5 million and represented a decline of 39.6% or $26.6 million from the same period last year. The decrease in product revenue during the first quarter of 2009 as compared to the same period last year was primarily due to declines in sales across our product lines, especially for our Consumer Electronics ("CE") and Personal Computers ("PC") products where we experienced decline in sales of $14.9 million or 35.0%, and $6.5 million or 65.3%, respectively.

Revenues from products sold into the CE market in the current quarter decreased by 35.0% compared to the same period last year primarily due to lower revenues resulting from our previously announced product transition, and increased competition and recent integration for discrete and integrated solutions from other companies. Weak consumer demand due to concerns about the economy has continued to have a negative impact on our revenue.

The down turn in PC revenue was a result of continuing economic recession and lower shipments of HDMI transmitters into traditional PC platforms due to Intel's integrated HDMI offering. We expect several Mobile Internet Device (MID) HDMI design wins in 2009, however these wins will represent a smaller market than the traditional PC market.

The transition period to newer products, coupled with the ongoing global recession resulted in significantly lower revenue during the first quarter of 2009 compared to the same quarter of the previous year. Shipments decreased by 18.0% and average selling price was down 26.0% during the first quarter 2009 when compared to the shipments and selling prices in the same period last year primarily due to product mix as customers transition from HDMI receivers to more cost effective Port Processors. We expect continued strong demand for Port Processors and our proprietary InstaPort™ technology through the 2009/2010 design cycle.

We expect revenues in the quarter ending June 30, 2009 to be flat to slightly higher than the revenue in the first quarter of 2009.

From time to time we enter into "direct agreements" for certain parts to certain identified end customers with our distributors who previously had the rights for price concessions and product returns. The "direct agreement" converts the previously existing distributor relationship for these parts for identified customers into a direct customer relationship whereby the distributor does not have price protection or return rights. Revenue for these types of transactions are recorded at the time of conversion of applicable products previously shipped for which revenue had not been recognized upon shipment. Thereafter, revenue for products covered under the direct agreement is recognized upon shipment.
For the three months ended March 31, 2009, we recorded $2.5 million in revenue related to the above mentioned conversion under this arrangement. We did not enter into this type of arrangement in the same period last year.

COST OF REVENUE AND GROSS PROFIT

                                                     Three months ended March 31,
                                                    2009             2008       Change
                                                  (dollars in thousands)
Cost of product revenue (1)                     $     18,219       $ 27,788       -34.4 %
Cost of licensing revenue                                196            349       -43.8 %
Total cost of revenue                           $     18,415       $ 28,137       -34.6 %
Total gross profit                              $     22,097       $ 38,976       -43.3 %
Gross profit as a percentage of total revenue           54.5 %         58.1 %


___________

Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, and costs 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. Gross margin, as a percentage of revenue was 54.5% and 58.1% for the three months ended March 31, 2009 and 2008, respectively. The decrease in gross margin was a direct result of lower revenues and the implementation of cost control measures that resulted to lower overall manufacturing costs. We expect our gross margin to be within the 54%-55% range in the second quarter of 2009.

OPERATING EXPENSES

                                    Three months ended March 31,
                                   2009             2008       Change
                                 (dollars in thousands)
Research and development (1)   $     17,734       $ 21,542       -17.7 %
Percentage of total revenue            43.8 %         32.1 %


____________

Research and Development (R&D). R&D expense consists primarily of employee compensation, including stock compensation expense, and other related costs and 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, 2009, included a stock-based compensation expense of $1.4 million as compared to $1.2 million for the same period in 2008. R&D expense decreased by 17.7% or $3.8 million im the first quarter compared to the same quarter in prior year. The decrease was mainly driven by lower compensation and bonus expenses of $2.2 million and lower project related expenses of $1.2 million. The decrease in compensation expense was a result of reduced headcount due to the restructuring activities completed in the third and fourth quarter of 2008. We expect R&D expenses to be slightly higher in the second quarter of 2009.

                                               Three months ended March 31,
                                              2009             2008       Change
                                            (dollars in thousands)
Selling, general and administrative (1)   $     13,715       $ 18,318       -25.1 %
Percentage of total revenue                       33.9 %         27.3 %


____________

Selling, General and Administrative (SG&A). SG&A expense consists primarily of compensation, including stock-based compensation, sales commissions, professional fees, and marketing and promotional expenses. SG&A expense in the first quarter of 2009 was $4.6 million or 25.1% lower than what was incurred in the same quarter of the prior year, primarily due to the decrease in legal expenses of approximately $1.6 million, decrease in compensation related expense of $0.6 million, decrease in stock-based compensation of $0.5 million and commission expenses of $0.5 million, which were generally attributed to the decrease in head count because of the reduction in force implemented in the third and fourth quarter of 2008. We expect SG&A expenses to be slightly higher in the second quarter of 2009.

                                         Three months ended March 31,
                                       2009             2008        Change
                                      (dollars in thousands)
Amortization of intangible assets   $    1,473       $    1,587        -7.2 %
Percentage of total revenue                3.6 %            2.4 %

Amortization of Intangible Assets. The decrease in the amortization of intangible assets is primarily due to the full amortization of certain intangible assets related to the sci-worx acquisition.

                                      Three months ended March 31,
                                    2009             2008        Change
                                   (dollars in thousands)
Interest income and other, net   $      939       $    1,916       -51.0 %
Percentage of total revenue             2.3 %            2.9 %

Interest Income and other, net. The net amount of interest income and other principally includes interest income. The decrease was primarily due to lower interest rates and lower average total cash balances. We expect interest income to be flat in the second quarter of 2009.

                                   Three months ended March 31,
                                  2009             2008       Change
                                (dollars in thousands)
Provision for income taxes    $      3,474       $      7       49529 %
Percentage of total revenue            8.6 %          0.0 %

Provision for Income Taxes. For the three months ended March 31, 2009, we recorded a provision for income taxes of $3.5 million. The effective tax rate for the three months ended March 31, 2009 was (11.6%) and was based on our projected taxable income for 2009, plus certain discrete items recorded during the quarter. As of March 31, 2009, we had gross tax affected unrecognized tax benefits of $18.6 million of which $3.0 million, if recognized, would affect the effective tax rate. The difference between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to various forecasted items including tax exempt income, state taxes and foreign taxes, adjusted for certain discrete items recorded during the quarter.

During the three months ended March 31, 2009, the State of California legislature enacted significant California tax law changes. As a result of the enacted legislation, we expect that in years 2011 and beyond our income subject to tax in California will be less than under prior tax law and accordingly our California deferred tax assets are less likely to be realized. We recorded a net discrete tax charge of $9.4 million related to the re-measurement of our California deferred tax assets to account for this change in tax law, as well as an increase in the valuation allowance for our California deferred tax assets that existed as of December 31, 2008. We will continue to assess our valuation allowance on our California deferred tax assets in future periods.

For the three months ended March 31, 2008, we recorded a provision for income taxes of $7,000. The effective tax rate for the three months ended March 31, 2008 was (1.3%) and was based on our projected taxable income for 2008, plus certain discrete items recorded during the quarter. The difference between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to various forecasted items including tax exempt income, state taxes and foreign taxes, adjusted for certain discrete items recorded during the quarter.

Recent Accounting Pronouncements

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

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

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

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

                                                           Three months ended March 31,
                                                         2009            2008         Change
                                                       (dollars in thousands)
Cash and cash equivalents                            $      21,009     $ 125,504         -83.3 %
 Short-term investments                                    147,908        68,910         114.6 %
Total cash, cash equivalents and
short-term investments                               $     168,917     $ 194,414         -13.1 %

Total current assets                                 $     226,634     $ 251,654          -9.9 %
Total current liabilities                                  (37,915 )     (87,798 )       -56.8 %
Working capital                                      $     264,549     $ 339,452         -22.1 %

Cash provided by (used in) operating activities      $     (15,514 )   $   7,129        -317.6 %
Cash provided by (used in) in investing activities         (59,387 )      40,534        -246.5 %
Cash provided by (used in) financing activities                786       (60,120 )      -101.3 %
Effect of exchange rate changes on cash & cash
equivalents                                                   (200 )         139        -243.9 %
Net decrease in cash and cash equivalents            $     (74,315 )   $ (12,318 )       503.3 %

Our principal source of liquidity is cash provided by operations and exercises of stock options. Cash and cash equivalents and short-term investments were $168.9 million at March 31, 2009, a decrease of $25.5 million from $194.4 million at March 31, 2008. We believe our cash and cash equivalents, short-term investments, combined with funds derived from sales of our products and licensing will be sufficient to fund operations, capital expenditures, and working capital needs through the next twelve months.

The decrease in cash and cash equivalents of $74.3 million for the three months ended March 31, 2009 was primarily due to net purchases of short-term investments of approximately $58.9 million and $15.5 million used in operations, partially offset by the cash provided by financing activities. During the first quarter of 2009, we purchased $93.4 million and sold $34.5 million of short-term investments. The $15.5 million used in operations was largely attributable to the $33.3 million net loss incurred for the three months ended March 31, 2009, $2.6 million and $1.1 million decreases in deferred revenues and accrued and other liabilities, respectively, and $11.5 million and $6.1 million increases in accounts receivable and prepaid and other assets, respectively, partially offset by the impairment of goodwill of $19.2 million, stock-based compensation of $3.6 million, depreciation and amortization of intangible assets totaling to $3.8 million, increase of $2.7 million in accounts payable and decrease in deferred income taxes of $9.0 million.

Accounts Receivable, Net. The table below summarizes our accounts receivable, net (in thousands):

                            March 31,      December 31,
                              2009             2008          Change
                              (dollars in thousands)
Accounts receivable, net   $    17,505     $       5,922       195.6 %

Net accounts receivable as of March 31, 2009 were $17.5 million, which represents 39 days of sales outstanding. This compares to 9 days of sales outstanding on December 31, 2008. Accounts receivable as of March 31, 2009 more than doubled compared to the balance as of December 31, 2008 primarily due to the linearity of shipments. Shipments during the last quarter of 2008 were front-end loaded whereas shipments in the first quarter of 2009 were back-end loaded.

. . .