##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 20-F



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(Mark One)

| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

OR



| ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Date of event requiring this shell company report:

Commission file number: 333-130116



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Pixelplus Co., Ltd.

(Exact name of Registrant as specified in its charter)



---

Not
applicable

(Translation of Registrants name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

6th Floor, Gyeonggi R&DB Center

906-5 Iui-dong, Yeongtong-gu, Suwon-si

Gyeonggi-do 443-766, Korea

(Address of principal executive offices)



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Securities registered or to be registered pursuant to Section 12(b) of the Act:



|                                                                                                                                                 |  |                                          
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------
|Title of each class                                                                                                                              |  | Name of each exchange on which registered
|American Depositary shares, as evidenced by American depositary receipts, each representing one-half of a common share, par value W500 per
share |  | The Nasdaq Global Market                 

Securities registered or to be registered pursuant to Section 12(g) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|[None]              |  | [None]                                   

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
[None]



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Indicate the number of
outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.

6,425,072 common shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ̈Yes    x  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. ̈Yes    x  No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One).



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer  x

Indicate by check mark which financial statement item the registrant has elected to
follow. ̈Item 17    x  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act) ̈Yes    x  No

[APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS]

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court. ̈Yes    x  No



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##### Table of Contents

Introduction

In this annual report, references to Korea are to the Republic of Korea; references to Government are to the government of Korea; references to China or the PRC are to
the Peoples Republic of China; references to Taiwan are to Taiwan, Republic of China; references to U.S. or the United States are to the United States of America; references to Pixelplus,
we, us, our or our company are to Pixelplus Co., Ltd. and its subsidiaries; references to Korean Won, Won or W are to the currency of Korea;
references to NT$ are to the currency of Taiwan; and references to U.S. dollars, US$ or $ are to the currency of the United States.

This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2004, 2005 and 2006, and as
of December 31, 2005 and 2006. References to 2004, 2005, and 2006 are, where appropriate, references to the years ended or ending December 31, 2004, 2005 and 2006, respectively.

Forward-looking statements

This
annual report contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as anticipate, believe,
continue, could, estimate, expect, forecast, intend, may, plan, potential, predict, project, should, or
will, or the negative of such terms or other comparable terminology. These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industrys actual results, levels of activity,
performance or achievements to be materially different from any future result, level of activity, performance or achievement expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among other
things, those listed under Risk factors as well as those included elsewhere in this annual report.

These forward-looking
statements include, but are not limited to, statements relating to:



| |  |  | our anticipated capital expenditures and our ability to fund such expenditures;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our expectations about growth in demand for our products;
| | - |  | ---------------------------------------------------------



| |  |  | the timing of our anticipated new product releases;
| | - |  | ---------------------------------------------------



| |  |  | our ability to enter new markets and expand our product offerings into new applications;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our ability to maintain technological leadership and adjust to technological changes;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to address material weaknesses in our internal control over financial reporting; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the outcome of patent infringement and shareholder class action litigation.
| | - |  | ---------------------------------------------------------------------------

We undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions the forward-looking events discussed in this annual report might not occur and our actual results could differ materially from those anticipated in these forward-looking statements.



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##### Table of Contents

TABLE OF CONTENTS



|                                                                                      |  |     
|------------------------------------------------------------------------------------- |  | ----
|                                                                                      |  | Page
|Item 1. Identity of Directors, Senior Management and Advisors                         |  | 1   
|Item 2. Offer Statistics and Expected Timetable                                       |  | 1   
|Item 3. Key Information                                                               |  | 1   
|Item 4. Information on the Company                                                    |  | 11  
|Item 4A. Unresolved Staff Comments                                                    |  | 23  
|Item 5. Operating and Financial Review and Prospects                                  |  | 23  
|Item 6. Directors, Senior Management and Employees                                    |  | 41  
|Item 7. Major Shareholders and Related Party Transactions                             |  | 50  
|Item 8. Financial Information                                                         |  | 51  
|Item 9. The Offer and Listing                                                         |  | 54  
|Item 10. Additional Information                                                       |  | 55  
|Item 11. Quantitative and Qualitative Disclosures About Market Risk                   |  | 70  
|Item 12. Description of Securities Other than Equity Securities                       |  | 70  
|Part II                                                                               |  | 71  
|Item 13. Defaults, Dividend Arrearages and Delinquencies                              |  | 71  
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 71  
|Item 15. Controls and Procedures                                                      |  | 71  
|Item 16A. Audit Committee Financial Expert                                            |  | 73  
|Item 16B. Code of Ethics                                                              |  | 73  
|Item 16C. Principal Accountant Fees and Services                                      |  | 73  
|Item 16D. Exemptions from the Listing Standards for Audit Committee                   |  | 74  
|Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers      |  | 74  
|Part III                                                                              |  | 75  
|Item 17. Financial Statements                                                         |  | 75  
|Item 18. Financial Statements.                                                        |  | 75  
|Item 19. Exhibits.                                                                    |  | 75  
|Signatures                                                                            |  | 77  



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##### Table of Contents

PART I

Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data.

The following table shows selected consolidated financial information and other data for our business. You should read the following information in
conjunction with Item 5 of this annual report, Operating and Financial Review and Prospects. The financial information as of and for each of the five years ended December 31, 2006 are derived from our consolidated financial
statements, which have been audited by our independent auditors, Ernst & Young Han Young for the year ended December 31, 2006 and Samil PricewaterhouseCoopers for the years ended December 31, 2005, 2004, 2003 and 2002. The audited
consolidated financial statements for the years ended December 31, 2006, 2005 and 2004 are included elsewhere in this annual report. The audit report of Ernst & Young Han Young for the year ended December 31, 2006 contains an
explanatory paragraph relating to our ability to continue as a going concern as described in more detail in note 2 to such consolidated financial statements.

These audited consolidated financial statements and the related notes thereto have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The information set
forth below is not necessarily indicative of the results of future operations.



|                                                                                                                 |  |                                                                                   |        |   |           |   |        |           |  |   |           |   |  |           |        |   |             |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | ------ | - | --------- | - | ------ | --------- |  | - | --------- | - |  | --------- | ------ | - | ----------- | - | ------- | - |  | - | ------- | -
|                                                                                                                 |  | For the Years Ended December 31,                                                  |       
|                                                                                                                 |  | 2002                                                                              |        |   | 2003      |   |        | 2004      |  |   | 2005      |   |  | 2006      |        |   | 2006        |  
|                                                                                                                 |  | (audited)                                                                         |        |   | (audited) |   |        | (audited) |  |   | (audited) |   |  | (audited) |        |   | (unaudited) |  
|                                                                                                                 |  | (in millions of Korean Won and thousands of US$, except share and per share data) |       
|Statement of Operations Data:                                                                                    |  |                                                                                   |        |   |           |   |        |           |  |   |           |   |  |           |        |   |             |   |         |   |  |   |         |  
|Revenues                                                                                                         |  |                                                                                   | 73     |   |           |   | 17,806 |           |  |   | 35,796    |   |  |           | 41,584 |   |             |   | 31,996  |   |  |   | 34,404  |  
|Cost of revenues                                                                                                 |  |                                                                                   | 296    |   |           |   | 14,562 |           |  |   | 32,288    |   |  |           | 31,217 |   |             |   | 31,208  |   |  |   | 33,557  |  
|Gross profit (loss)                                                                                              |  |                                                                                   | (223   | ) |           |   | 3,244  |           |  |   | 3,508     |   |  |           | 10,367 |   |             |   | 788     |   |  |   | 847     |  
|Operating expenses:                                                                                              |  |                                                                                   |        |   |           |   |        |           |  |   |           |   |  |           |        |   |             |   |         |   |  |   |         |  
|Selling, general and administrative                                                                              |  |                                                                                   | 310    |   |           |   | 1,136  |           |  |   | 3,966     |   |  |           | 6,407  |   |             |   | 12,220  |   |  |   | 13,139  |  
|Research and development                                                                                         |  |                                                                                   | 666    |   |           |   | 1,335  |           |  |   | 3,211     |   |  |           | 3,503  |   |             |   | 5,834   |   |  |   | 6,273   |  
|Total operating expenses                                                                                         |  |                                                                                   | 976    |   |           |   | 2,471  |           |  |   | 7,177     |   |  |           | 9,910  |   |             |   | 18,504  |   |  |   | 19,412  |  
|Income (loss) from operations                                                                                    |  |                                                                                   | (1,199 | ) |           |   | 773    |           |  |   | (3,669    | ) |  |           | 457    |   |             |   | (17,266 | ) |  |   | (18,565 | )
|Other income (expense)                                                                                           |  |                                                                                   | (72    | ) |           |   | 137    |           |  |   | 110       |   |  |           | (315   | ) |             |   | (1,058  | ) |  |   | (1,137  | )
|Income (loss) before income tax, gain (loss) from equity method investments, dilution gain and minority interest |  |                                                                                   | (1,271 | ) |           |   | 910    |           |  |   | (3,559    | ) |  |           | 142    |   |             |   | (18,324 | ) |  |   | (19,702 | )
|Income tax expenses                                                                                              |  |                                                                                   |       |   |           |   | 106    |           |  |   | 234       |   |  |           |       |   |             |   |        |   |  |   |        |  
|Gain (loss) from equity method investments, net                                                                  |  |                                                                                   |       |   |           |   |       |           |  |   | (272      | ) |  |           | 85     |   |             |   | 5       |   |  |   | 6       |  
|Dilution gain from equity method investments and consolidated subsidiary                                         |  |                                                                                   |       |   |           |   |       |           |  |   |          |   |  |           | 411    |   |             |   |        |   |  |   |        |  
|Minority Interest                                                                                                |  |                                                                                   |       |   |           |   |       |           |  |   |          |   |  |           | 341    |   |             |   | 818     |   |  |   | 879     |  
|Net income (loss) before cumulative effect of change in accounting principle                                     |  |                                                                                   | (1,271 | ) |           |   | 804    |           |  |   | (4,065    | ) |  |           | 979    |   |             |   | (17,501 | ) |  |   | (18,817 | )
|Cumulative effect of change in accounting principle                                                              |  |                                                                                   |       |   |           |   |       |           |  |   |          |   |  |           |       |   |             |   | 132     |   |  |   | 141     |  
|Net income (loss)                                                                                                |  | W                                                                                 | (1,271 | ) |           | W | 804    |           |  | W | (4,065    | ) |  | W         | 979    |   |             | W | (17,369 | ) |  | $ | (18,676 | )
|Accretion of preferred shares                                                                                    |  |                                                                                   |       |   |           |   | (1,149 | )         |  |   | (1,569    | ) |  |           | (1,927 | ) |             |   |        |   |  |   |        |  



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|                                                    |  |                                                                                   |           |   |           |           |   |           |           |   |           |           |   |           |           |   |             |   |           |  
|--------------------------------------------------- |  | --------------------------------------------------------------------------------- | --------- | - | --------- | --------- | - | --------- | --------- | - | --------- | --------- | - | --------- | --------- | - | ----------- | - | --------- | -
|                                                    |  | For the Years Ended December 31,                                                  |          
|                                                    |  | 2002                                                                              |           |   | 2003      |           |   | 2004      |           |   | 2005      |           |   | 2006      |           |   | 2006        |  
|                                                    |  | (audited)                                                                         |           |   | (audited) |           |   | (audited) |           |   | (audited) |           |   | (audited) |           |   | (unaudited) |  
|                                                    |  | (in millions of Korean Won and thousands of US$, except share and per share data) |          
|Net loss attributable to common shareholders        |  |                                                                                   | (1,271    | ) |           | (345      | ) |           | (5,634    | ) |           | (948      | ) |           | (17,369   | ) |             |   | (18,676   | )
|Loss per sharebasic and diluted                    |  |                                                                                   | (488      | ) |           | (283      | ) |           | (2,353    | ) |           | (356      | ) |           | (2,777    | ) |             |   | (2.99     | )
|Weighted average number of sharesbasic and diluted |  |                                                                                   | 2,604,000 |   |           | 2,604,000 |   |           | 2,604,000 |   |           | 2,664,862 |   |           | 6,254,054 |   |             |   | 6,254,054 |  
|Cash Flow Data:                                     |  |                                                                                   |           |   |           |           |   |           |           |   |           |           |   |           |           |   |             |   |           |  
|Net cash provided by (used in) operating activities |  |                                                                                   | W(766     | ) |           | W(4,568   | ) |           | W(5,364   | ) |           | W(2,550   | ) |           | W(12,290  | ) |             | $ | (13,216   | )
|Net cash provided by (used in) investing activities |  |                                                                                   | 100       |   |           | (858      | ) |           | (1,499    | ) |           | (1,264    | ) |           | (3,606    | ) |             |   | (3,877    | )
|Net cash provided by (used in) financing activities |  |                                                                                   | 114       |   |           | 5,649     |   |           | 7,718     |   |           | 33,615    |   |           | (2,918    | ) |             |   | (3,138    | )
|                                                    | 
|                                                    |  | As of December 31,                                                                |          
|                                                    |  | 2002                                                                              |           |   | 2003      |           |   | 2004      |           |   | 2005      |           |   | 2006      |           |   | 2006        |  
|                                                    |  | (audited)                                                                         |           |   | (audited) |           |   | (audited) |           |   | (audited) |           |   | (audited) |           |   | (unaudited) |  
|                                                    |  | (in millions of Korean Won and thousands of US$)                                  |          
|Balance Sheet Data:                                 |  |                                                                                   |           |   |           |           |   |           |           |   |           |           |   |           |           |   |             |   |           |  
|Cash and cash equivalents                           |  |                                                                                   | W 81      |   |           | W 286     |   |           | W 1,194   |   |           | W31,040   |   |           | W 12,224  |   |             | $ | 13,144    |  
|Accounts receivable, net                            |  |                                                                                   | 37        |   |           | 5,695     |   |           | 5,446     |   |           | 11,695    |   |           | 4,989     |   |             |   | 5,365     |  
|Inventories, net                                    |  |                                                                                   | 1         |   |           | 6,374     |   |           | 6,818     |   |           | 8,708     |   |           | 4,986     |   |             |   | 5,361     |  
|Total assets                                        |  |                                                                                   | 659       |   |           | 15,299    |   |           | 17,666    |   |           | 58,119    |   |           | 31,588    |   |             |   | 33,966    |  
|Long-term borrowings                                |  |                                                                                   | 425       |   |           | 1,217     |   |           | 1,259     |   |           | 646       |   |           | 167       |   |             |   | 179       |  
|Total liabilities                                   |  |                                                                                   | 1,757     |   |           | 10,410    |   |           | 17,156    |   |           | 24,350    |   |           | 13,852    |   |             |   | 14,894    |  
|Series A convertible redeemable preferred shares    |  |                                                                                   |          |   |           | 5,975     |   |           | 6,776     |   |           |          |   |           |          |   |             |   |          |  
|Stockholders equity (deficit)                      |  |                                                                                   | (1,098    | ) |           | (1,086    | ) |           | (6,266    | ) |           | 32,950    |   |           | 17,736    |   |             |   | 19,072    |  

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|(1) | For convenience, the Korean Won amounts are expressed in U.S. dollars at the rate of W930.0 to US$1.00, the noon buying rate in effect on December 31, 2006 as
quoted by the Federal Reserve Bank of New York.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Stockholders equity (deficit) for 2003 and 2004 does not include Series A convertible redeemable preferred shares, which were issued in March 2003. These preferred shares were
converted into common shares in December 2005 in connection with our initial public offering.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange rate information

This annual report contains translations of Korean Won amounts into U.S. dollars at a specific rate solely for the convenience of the reader. The
conversion of Korean Won into U.S. dollars in this annual report is based on the noon buying rate in The City of New York for cable transfers of Korean Won as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise
noted, all translations from Korean Won to U.S. dollars and from U.S. dollars to Korean Won in this annual report were made at a rate of W930 to US$1.00, the noon buying rate in effect as of December 31, 2006. We make no
representation that any Korean Won or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Korean Won, as the case may be, at any particular rate, the rates stated below, or at all.

The following table sets forth information concerning exchange rates between Korean Won and U.S. dollars for the periods indicated. These rates are
provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.



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|                         |  |                          |  |         |  |            |  |           
|------------------------ |  | ------------------------ |  | ------- |  | ---------- |  | ----------
|                         |  | Noon Buying Rate        
|                         |  | Low                      |  | High    |  | Average(1) |  | Period-end
|                         |  | (Korean Won per US$1.00)
|Years Ended December 31, |  |                          |  |         |  |            |  |           
|2001                     |  | 1,234.0                  |  | 1,369.0 |  | 1,292.0    |  | 1,313.5   
|2002                     |  | 1,160.6                  |  | 1,332.0 |  | 1,250.4    |  | 1,186.3   
|2003                     |  | 1,146.0                  |  | 1,262.0 |  | 1,192.1    |  | 1,192.0   
|2004                     |  | 1,035.1                  |  | 1,195.1 |  | 1,145.2    |  | 1,035.1   
|2005                     |  | 997.0                    |  | 1,059.8 |  | 1,023.8    |  | 1,010.0   
|2006                     |  | 913.7                    |  | 1,002.9 |  | 954.3      |  | 930.0     
|2007                     |  |                          |  |         |  |            |  |           
|January                  |  | 925.4                    |  | 942.2   |  | 936.8      |  | 941.0     
|February                 |  | 932.5                    |  | 939.4   |  | 936.5      |  | 942.3     
|March                    |  | 937.2                    |  | 949.1   |  | 942.9      |  | 941.1     
|April                    |  | 926.1                    |  | 937.0   |  | 930.7      |  | 931.0     
|May                      |  | 922.3                    |  | 934.0   |  | 927.6      |  | 927.4     
|June (2)                 |  | 926.5                    |  | 932.3   |  | 928.5      |  | 927.9     

---

Source: Federal Reserve Bank of New York.

|(1) | Annual and monthly averages are calculated using the average of the daily rates during the relevant period.
|--- | -----------------------------------------------------------------------------------------------------------

|(2) | For the period to and including June 22, 2007.
|--- | ----------------------------------------------

B. Capitalization
and indebtedness.

Not applicable.

C.
Reasons for the offer and use of proceeds.

Not applicable.

D. Risk factors.

Risks Related to Our Business

We incurred significant losses in the fiscal year 2006, which is likely to continue if we are unable to increase our revenues and further reduce our
costs. If we do not generate sufficient revenue in the future to achieve or sustain profitability, we may be required to discontinue our operations or seek protection under the applicable bankruptcy statutes.

We have incurred net losses in the amount of W17,369 million (US$18.7 million) for the year ended December 31, 2006. We have
experienced losses during the first quarter of 2007 and there can be no assurance that we will achieve positive operating cash flow for any future financial periods. Our cash and cash equivalents decreased to W12,224 million as
of December 31, 2006 from W31,040 million as of December 31, 2005, as a result of such losses, along with cash amounting to W6,524 million used for investing and financing activities in 2006. Our
ability to generate future revenues will depend on securing design wins which will require continued research and development expenditures as well as sales and marketing activities. These research and development expenditures as well as other
marketing expenses could continue to exceed our revenues, thus, preventing us from achieving profitability.

Our ability to achieve and
sustain profitability will depend on a number of additional factors, including:



| |  |  | our ability to raise sufficient additional capital;
| | - |  | ---------------------------------------------------



| |  |  | the commercial acceptance of our products and our ability to attain expected penetration within our target markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to recruit and retain qualified personnel; and
| | - |  | ----------------------------------------------------------



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##### Table of Contents

| |  |  | our ability to establish and maintain relationships with our foundry partners.
| | - |  | ------------------------------------------------------------------------------

If we are unable to generate sufficient funds from our operations or raise additional funds, we may not be able to pay our existing debt or continue our
operations. As a result, we may be required to sell all or a portion of our assets, significantly reduce, reorganize, discontinue or shut down our operations, or seek protection under the applicable bankruptcy statutes.

We have lost many of our existing customers as we have failed to secure significant design wins based on our three transistor based image sensors
since November 2006. If our next generation CMOS products fail to satisfy the product specification requirements expected by the market, our financial conditions and results of operations will be adversely affected.

Our ability to achieve profitability depends on our ability to design and deliver cost effective camera chip solutions for our end-customers. We recently
have failed to recognize the market preference for four transistor-based CMOS image sensors and have instead focused on designing three transistor-based image sensors, which in 2006 has resulted in the loss of several significant customers, such as
Tomen Electronics Corp. and VK Corporation, which together had accounted for approximately 6.4% of our revenue in 2005. Although our next generation products are expected to meet the technological specifications that are expected by the market,
customers may still decide not to purchase our products due to concerns about our financial and technical capability to deliver sufficient number of error-free products on time, or perceived lack of reliability. Consequently, even if our CMOS image
sensor designs and end-products are comparable to those of our competitors, we may not be able to generate new design wins. If our next generation CMOS products fail to satisfy the product specification requirements expected by the market or
otherwise do not result in any significant orders, our financial conditions and results of operations will be adversely affected.

Our independent registered public accounting firm has raised questions about our ability to continue as a going concern in their report on our audited financial statements, which may have an adverse impact on our ability to raise
additional capital and on our stock price.

Our independent registered public accounting firm has included in its report on our
audited financial statements for the fiscal year ended December 31, 2006, an explanatory paragraph related to our ability to continue as a going concern. See note 2 of the accompanying financial statements to this form 20-F. The inclusion of
this explanatory paragraph in the report of our independent registered public accounting firm may have an adverse impact on our ability to raise additional capital, thereby resulting in lower prices for our ADSs than might otherwise prevail.

Additional financing will be required if we are to sustain our operations, repay all of our existing obligations or achieve our
strategic and operating objectives.

Based on our current business plans, we believe that our existing cash resources and cash from
operations will be sufficient to fund our capital expenditures, lease payments, R&D expenses and working capital requirements through the end of 2007. Unless we generate sufficient funds from operations this year, we may need to raise additional
financing, through a combination of borrowings or the sale of equity or debt securities to finance our cash requirements for the subsequent year. Such financing may be very difficult for us to obtain or may not be available at all. If we are unable
to raise additional funds or to sustain our operations in the future, substantial doubt may develop as to our ability to continue to operate our business as a going concern, with substantial adverse effects on the value of our common stock and our
ability to raise additional capital. This uncertainty may also create concerns among our current and future customers, vendors and licensees as to whether we will be able to fulfill our obligations or, in the case of customers, fulfill their future
product or service needs. As a result, our current and prospective customers, licensees and strategic partners might decide not to do business with us, or only do so on less favorable terms and conditions. If we fail to address our liquidity issues,
our ability to continue our operations may be adversely affected.

We are currently not meeting the continued listing requirements of
the Nasdaq Stock Market, which may cause our stock to be delisted and result in reduced liquidity of our stock, impact the trading price of our stock, and impair our ability to raise financing.

On May 4, 2007, our ADS prices dropped below $1.00 and has continued to trade below the $1.00 level for a consecutive 30 day period as of
June 18, 2007. As the price of our ADSs closed below $1.00 per share for 30 consecutive days, we are not in



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compliance with the Nasdaq Stock Markets requirements for continued listing. We received a letter from Nasdaq on June 19, 2007, stating that we
are not in compliance with Marketplace Rule 4450, the Minimum Bid Price rule, and that we will be given 180 days until December 17, 2007 to maintain the closing price of our shares above $1.00 for a minimum of 10 consecutive days to
regain compliance. If we do not regain compliance during that time, Nasdaq will delist our ADSs. In the event our ADSs are delisted from the Nasdaq Global Market, trading in our common stock could thereafter be conducted in the over-the-counter
markets in the so-called pink sheets or the OTC Bulletin Board. In such event, the liquidity of our ADSs would likely be impaired, not only in the number of ADSs which could be bought and sold, but also through delays in the timing of the
transactions, thereby resulting in lower prices for our ADSs than might otherwise prevail.

We are currently experiencing a high
employee turnover rate. If we cannot retain our key personnel or do not succeed in hiring and retaining qualified new employees, our sales and marketing strategies could be delayed, and our business may be adversely affected.

In light of our recent financial difficulties, we have instituted certain cost-cutting measures to reduce our operating expenses as of January 31,
2007, one of which is a 15% reduction in salaries for all non-executive employees, and 20% to 30% reduction in salaries for all executive officers. During the first half of 2007, we lost 17 employees and hired 13 new employees at our headquarters,
bringing the total number of employees at the headquarter to 87 as of June 14, 2007.

We depend highly on our sales personnel to sell
our products, many of whom would be difficult to replace as it is an important aspect of our sales strategy to have our sales personnel maintain continuous relationships with our customers to generate future businesses. As of June 14, 2007, our
marketing and sales department employed 14 employees, compared to 22 as of December 31, 2006. The loss of these employees may seriously impact our business, especially if we are unable to identify, attract and recruit qualified sales,
marketing, finance and management personnel. If we do not succeed in retaining and hiring new candidates with appropriate qualifications, our sales and marketing strategies could be negatively affected, which could reduce our future revenues and
profitability.

We have been named as defendant in certain litigation regarding intellectual property infringement, which has been
diverting management attention and has been costly and time-consuming to defend.

The semiconductor industry is characterized by
frequent litigation regarding patent and other intellectual property rights. We are currently a defendant in ongoing litigation matters regarding intellectual property infringement claims as described in Item 8 of this annual report,
Financial InformationConsolidated statements and other financial informationLegal proceedings. Although we believe that these claims are invalid and our cancellation proceedings will be successful, if the relevant patents
held by MagnaChip Semiconductor, Ltd., or MagnaChip, are found to be valid and we are held to have infringed those patents our core technology could be held to be infringing MagnaChips patents. In such an event, we may be required to pay
substantial damages and develop alternative non-infringing intellectual property or enter into intellectual license agreements with MagnaChip which may not be available on acceptable terms or at all. If such intellectual property were to become
unavailable, our business could be materially and adversely affected. Protracted litigation could also cause our customers, or potential customers, to defer or limit the purchase of our products until the resolution of such litigation. In addition,
MagnaChip may seek to obtain an injunction to prevent us from selling our products or using technology that employs the allegedly infringing intellectual property.

In addition, other companies may pursue litigation against us with respect to other claims in the future. An adverse result in any litigation regarding patent and other intellectual property rights may cause us to
incur significant expenses, subject us to liability for damages, including treble damages if we are held to have willfully infringed, and invalidate our proprietary rights. These lawsuits, regardless of their outcome, would likely be expensive to
resolve and could divert managements time and attention.

We may in the future initiate claims or litigation against third parties
for infringement of our intellectual property rights or determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could also result in significant expenses and the diversion of the attention of
our management and technical personnel.



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Although we take, and will continue to take, steps to ensure that our new products do not infringe third
party intellectual property rights, the rapid technological changes that characterize our industry require that we quickly implement new processes and components with respect to our products. Often with respect to recently developed processes and
components, a degree of uncertainty exists as to who may rightfully claim ownership rights in such processes and components. Uncertainty of this type increases the risk that other claims alleging infringement of third party rights may be brought
against us which could have a material adverse impact on our operating results and financial condition.

We have been named as a
defendant in certain shareholder class action litigation that could have a material adverse impact on our operating results and financial condition.

We are currently a defendant in ongoing shareholder class action litigation as described in Item 8 of this annual report, Financial InformationConsolidated statements and other financial
informationLegal proceedings. We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of the shareholder class action litigation. An unfavorable outcome from these
litigation matters could have a material adverse effect on our consolidated financial position, results of operations, or cash flows in the future. The litigation process may utilize a material portion of our cash resources and divert
managements attention from the day-to-day operations of our company, all of which could harm our business.

We depend on a few
key customers to generate a majority of our revenues, and if any key customer was to discontinue, significantly reduce or delay or cancel its purchases of our products, or become insolvent or declare bankruptcy, our revenues could be significantly
reduced.

A significant portion of our revenue is currently derived from a relatively small number of customers. Our top five
customers accounted for approximately 79%, 63% and 74% of our revenues in 2004, 2005 and 2006, respectively. In addition, our business with Sharp Corporation, or Sharp, through our services arrangement with Dongbu HiTek (formerly known as
Dongbu Electronics and also DongbuAnam Semiconductor Inc.) accounted for 16.1% of our total revenues in 2006. In the event one or more of our top customers were to delay or cancel their production of products incorporating
our CMOS image sensors or reduce or discontinue their dealings with us, we could suffer a significant decline in revenues.

In addition,
our customers conduct business in highly competitive and rapidly changing industries, such as mobile communications and consumer electronics. If any of our customers were to become insolvent or declare bankruptcy, we could be forced to write off
related accounts receivables which were booked as revenues. For example, two of our top ten customers in 2004 based on revenues, Maxon Telecom Co., Ltd., or Maxon, and Telson Electronics Co., Ltd., or Telson, experienced financial difficulties in
the second quarter of 2004 and are undergoing reorganization and bankruptcy, respectively. The total receivable from Maxon was approximately W1,119 million, which we have fully reserved. We cannot guarantee when or if we will
recover any of such outstanding amounts. In addition, we have written off the entire amount of receivables from Telson, which totaled W191 million. During 2006, we fully reserved the entire amount of W173 million
outstanding from VK Corporation, which filed for receivership in Korea.

Intense competition from larger and more established CMOS
image sensor manufacturers could reduce our market share, our revenues and our profits.

The CMOS image sensor market is very
competitive and is characterized by rapid technological changes, evolving standards, short product life cycles and decreasing prices. As a result, we are not able to assess our exact competitive position relative to our main competitors. We face
competition from well-established companies, such as MagnaChip, Micron Technology Inc., or Micron, OmniVision Technologies, Inc., or OmniVision, STMicroelectronics N.V. and Toshiba Corporation, that sell highly-integrated single chip CMOS image
sensors, as well as from other competitors. We expect competition in the CMOS image sensor market to continue to increase.

Compared to us,
many of our competitors have longer operating histories, greater presence in key markets, stronger name recognition, more established access to a large customer base and significantly greater financial, sales, marketing, manufacturing, distribution
and technical resources. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and customer requirements, devote greater resources to the promotion and sale of their products, or price their products more
aggressively and competitively than us.



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We cannot assure you that we will be able to compete successfully against current or potential
competitors, or that competition will not seriously harm our business by reducing our market share, our revenues and our profits.

Continuing declines in our average sales prices may result in declines in our gross margins and profits.

The CMOS
image sensor market is characterized by intense price competition. As a result, we have experienced market driven pricing pressures and a decline in average sales prices for our products, ranging from 2.8% to 40.6% decline in 2006 from 2005, which
we expect will continue in the future. Our competitors, such as Micron and OmniVision, have significantly greater financial resources to withstand pricing pressures and declining margins. If we are unable to offset declining average sales prices by
achieving manufacturing cost efficiencies, developing new products incorporating more advanced technology or adding new features, our gross margins and profits will continue to decline.

If we cannot develop and introduce new CMOS image sensors, we may not generate sufficient revenues to offset our initial product design,
development, production and marketing costs, and our gross margins and profitability will continue to decline.

The development of
new CMOS image sensors is highly complex, and we have experienced significant delays in completing the development and introduction of new products in the year-ended 2006. As our products integrate new and more advanced functions, they become more
complex and increasingly difficult to design. Our future ability to develop and introduce new products depends on a number of factors, including:



| |  |  | our accurate prediction of market requirements and evolving standards, including pixel resolution, pixel size, power requirements, optical size and other special
features;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our timely completion and introduction of new product designs;
| | - |  | --------------------------------------------------------------



| |  |  | our successful partnerships with foundries to achieve timely and high manufacturing yields; and
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | market acceptance of our new products and consumer acceptance of our customers end-products which incorporate our CMOS image sensors.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

If we cannot successfully develop and introduce new CMOS image sensors, we may not be able to generate sufficient
revenues to offset our costs, and our gross margins and profitability will continue to decline.

We may not accurately forecast
customer demand and the number of wafers we need, and therefore we may not be able to react to fluctuations in demand for our products, which could result in unsold inventory, lower revenues and declines in our gross margins.

We forecast customer demand based on a number of factors, including customer data, market intelligence and historical data. However, accurate forecasting
is a difficult process because actual customer demand often varies from customer data and projections, unexpected events occur, market intelligence can be wrong and historical data may not be reliable due to the relatively short history of the CMOS
image sensor industry. It is critical that we accurately forecast customer demand and the number of wafers we need because if customer demand falls below our forecasts, we may be required to retain excess wafer inventories, which could increase our
operating expenses and reduce our gross margins.

In addition, rapid market driven declines in the value of image sensors may result in
inventory write-downs, if the estimated realizable value for our goods in inventory is determined to be below our cost and the number of units on hand is determined to exceed the number of units that we had forecasted to sell over a certain period
of time. As a result of unsold lower grade image sensors, canceled orders from financially-troubled customers, unsold image sensors manufactured in anticipation of future orders and a rapid decline in the value of our goods in inventory, we
recognized a loss on valuation of inventory of W2,673 million and W8,148 million (US$8.8 million) in 2005 and 2006, respectively. If we are unable to more accurately forecast product demand, we face a higher risk of
excess inventory and product obsolescence, which could increase our cost of revenue and reduce our gross margins. We also may not meet customers demands in a timely manner.



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Because we depend on a single wafer foundry to manufacture all of our products, we have less
control over the wafer manufacturing process and the allocation of manufacturing capacity. If our current wafer foundry experiences any disruption, we may not be able to find a replacement foundry. This dependence may limit our ability to respond
promptly to increased customer demands, which could result in unforeseen manufacturing and operations delays and costs, harm our relationships with our key customers and lower our future revenues.

We do not own or operate a semiconductor fabrication facility. Currently, we rely on Dongbu HiTek, located in Korea, to produce all of our integrated
circuit wafers. Although we entered into a manufacturing outsource agreement in November 2005 with United Microelectronics Corporation, or UMC, we expect our reliance on Dongbu HiTek to continue until the end of 2007, as we are still undergoing
testing procedures with UMC. We expect to commence the actual manufacturing of our products at the time we release our 0.13 micron, or μm, process technology based CMOS image sensors, currently scheduled to be in the third quarter of 2007. Our
current reliance on Dongbu HiTek involves a number of significant risks, including:



| |  |  | the sudden loss of all manufacturing services;
| | - |  | ----------------------------------------------



| |  |  | the lack of guaranteed production capacity or product supply;
| | - |  | -------------------------------------------------------------



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



| |  |  | unavailability of, or delayed access to, next generation or key process technologies.
| | - |  | -------------------------------------------------------------------------------------

We do not have a long-term supply agreement with Dongbu HiTek. Instead, we secure manufacturing capacity on a rolling six-month forecast and purchase
order basis. Dongbu HiTek has no obligation to supply products to us for any specific period, in any specific quantity or at any specific price, except as set forth in a particular purchase order based on our rolling six-month forecast. Our
requirements represent a small portion of Dongbu HiTeks total manufacturing capacity, and it may reallocate capacity to more preferred customers during periods of high demand.

If our independent foundries are unable or unwilling, for any reason, to continue to manufacture our wafers in the required volumes, at acceptable
quality, yields and costs and in a timely manner, our business will be adversely affected. As a result, we would have to identify and qualify one or more substitute foundries, a time-consuming and complex process that could result in unforeseen
manufacturing and operations delays and costs. In addition, if competition for foundry capacity increases, we may be required to incur additional production costs to secure access to alternative manufacturing services, which may result in reduced
manufacturing yields and quality. If we fail to meet our wafer supply requirements in the future, our ability to win large customer orders and respond promptly to any increase in demand could be adversely affected, which could harm our relationships
with our key customers and lower our future revenues.

If the mobile camera phone market fails to grow and develop as we anticipate,
our future revenues and profits could decline.

We derived approximately 92.0% and 74.5% of our revenues from the mobile camera
phone market in each of 2005 and 2006, respectively. The remaining portions of our revenue during 2006 were derived from non-mobile applications, such as webcams, notebook embedded cameras and toys and games. We expect that our current business
model and our future success will continue to depend in large part on the continued growth of the mobile camera phone market. If the mobile camera phone market does not grow as anticipated, or if demand for our image sensors in this market
decreases, our future revenues and profits could decline.

We have a limited number of patents and pending patent applications
compared to our competitors, and we may be unable to protect adequately our existing intellectual property, which could have an adverse effect on our competitive position, and adversely impact our ability to generate revenues and profits.

Compared to our well-established competitors, we have a relatively limited number of patents and pending patent applications. We
cannot assure you that our limited number of patents, combined with trade secret laws, nondisclosure agreements and other protective methods, will be effective in protecting our proprietary technologies.

We currently have 15 patents issued in Korea and six patents issued outside of Korea, and 19 patent applications pending in Korea and nine patent
applications pending in those countries which are members of the Patent Cooperation Treaty. We cannot assure you that any patent application will be successful or, if a patent is issued, that it will be sufficiently broad to protect our technology.
In addition, it is possible that existing or future patents may be challenged, invalidated or circumvented. It may be possible for a third



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party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our
patents. To minimize this risk, we may need to spend significant resources to monitor and protect our intellectual property rights. We may not be able to detect infringement, and we may lose our competitive advantage before we detect any such
infringement, which could adversely impact our ability to generate revenues and profits.

Furthermore, our limited number of patents and
pending patent applications may limit our ability to compete effectively against our competitors with larger patent portfolios or defend against any patent infringement claims brought by those competitors. Our competitors may have developed or may
develop technologies that are protected by patents, thereby making those technologies unavailable to us or available only under unfavorable terms and conditions.

Unforeseen operational delays by our third party contractors in testing, packaging, and assembling our products can impact our ability to fulfill customer orders in time and ultimately harm our relationship with
our customers and lower our revenues.

We depend on independent contractors for testing and packaging of our CMOS image sensors and
for assembly of our camera modules. We do not receive service or capacity guarantees from our third-party contractors. Instead, we obtain services from them on a purchase order basis. Our reliance on these third-party contractors involves risks,
such as reduced control over delivery schedules, quality assurance and costs. These risks could result in product shortages or could increase our manufacturing, testing or packaging costs. If these contractors are unable or unwilling to continue to
provide testing and packaging services or fail to deliver products of acceptable quality at an acceptable cost and in a timely manner, our business would be seriously harmed. We would have to identify and qualify substitute contractors, which could
be costly, time-consuming and difficult, particularly given the limited number of alternative contractors providing the services we need. Any such unforeseen operational delays could impact our ability to fulfill customer orders in time and
ultimately harm our relationship with our customers and lower our revenues.

Increased tensions with North Korea could adversely
affect our business, financial condition and results of operations.

Relations between Korea and North Korea have been tense over
most of Koreas modern history. The level of tension between Korea and North Korea has fluctuated and may increase or change abruptly as a result of current and future events, including ongoing contacts at the highest levels of the governments
of Korea and North Korea. The level of tension between Korea and North Korea, as well as between North Korea and the United States, has increased as a result of a public announcement in February 2005 that North Korea possesses nuclear weapons and
has declared that it will not participate in the six-party talks with Korea, the United States, China, Japan and Russia. In July 2005, North Korea returned to the six-party talks and held bilateral talks with the United States to discuss the issue
of nuclear weapons. In September 2005, the six parties reached an accord, under which North Korea pledged to give up nuclear weapons and abandon existing nuclear programs in exchange for economic assistance and security assurances from the United
States. However, obstacles are expected to remain as to the interpretation and implementation of the accord. There can be no assurance that the level of tensions will not escalate. We derived 25.9% and 22.5% of our revenues in 2005 and 2006,
respectively, from our customers located in Korea. Although we do not derive any revenue from, and do not sell any of our products in, North Korea, any further increase in tensions, which may occur, for example, if high-level contacts break down or
military hostilities occur, could harm our business, financial condition and results of operations.

Risks Related to Our Common Shares and ADSs

The market price for our ADSs may be volatile, and the value of your investment in our ADSs may decrease.

The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to the factors set forth elsewhere in this section, as
well as:



| |  |  | our financial results;
| | - |  | ----------------------



| |  |  | the history of, and the prospects for, us and our industry in which we compete;
| | - |  | -------------------------------------------------------------------------------



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| |  |  | an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenues and cost structures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the present state of our development; or
| | - |  | ----------------------------------------



| |  |  | the valuation of other publicly-traded companies in our industry.
| | - |  | -----------------------------------------------------------------

In addition, from time to time, Nasdaq has experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies. As a result, investors in our ADSs may
experience a decrease in the value of our ADSs regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a companys securities, shareholders have often instituted securities class
action litigation against that company. We are currently involved in a class action suit as described in Item 8 of this annual report, Financial InformationConsolidated statements and other financial informationLegal
proceedings and an adverse ruling could have a material adverse effect on our business, financial condition and results of operations.

We will incur increased costs as a result of being a public company, which could increase our net loss.

We are a
company incorporated in Korea and operate in a business and cultural environment that is different from that of the United States. Unlike certain other Korean companies currently listed on Nasdaq, we are not a public company in Korea. As such, we
are not subject to any public reporting requirements and we are subject only to minimum corporate governance and reporting standards applicable to unlisted companies in Korea. As a public company listed on Nasdaq, we are subject to the reporting
obligations of the Securities and Exchange Commission, or SEC, which many consider to be more stringent, rigorous and expensive than those of Korea. As a result, we have been incurring greater costs for legal, accounting and other services than we
had incurred as a private company. We also incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and the National
Association of Securities Dealers, or NASD. We expect these rules and regulations will increase our legal, accounting and financial compliance costs, will make some compliance activities more time-consuming and costly and, in turn, will increase our
operating expenses and increase our net loss. We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or similar coverage. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We believe that we were a passive foreign investment company (PFIC) for 2006, which has certain adverse U.S. federal income tax
consequences to holders of common shares and ADSs.

In general, we will be considered a PFIC for U.S. federal income tax purposes
for any taxable year in which (i) 75% or more of our gross income consists of passive income or (ii) 50% or more of the average quarterly value of our assets consist of assets that produce, or are held for the production of, passive
income. Based on the price of our common shares and ADSs during our 2006 taxable year and the amount of passive assets, including cash and cash equivalents, held by us throughout that year, we believe we were a PFIC for our 2006 taxable year.
Further, there is a significant risk that we will be a PFIC for our 2007 taxable year, and we may be a PFIC for any future taxable year.

If we are a PFIC for any year that you hold common shares or ADSs, certain adverse U.S. federal income tax consequences could apply to you, including recharacterization of gains realized on the disposition of, and certain dividends received
on, the common shares or ADSs as ordinary income earned pro rata over your holding period for such common shares or ADSs, taxed at the maximum rates applicable during the years in which such income is treated as earned, and subject to punitive
interest charges for a deemed deferral benefit. You should consult your own tax advisor with respect to our potential PFIC status and the consequences to you. See Item 10. Additional Information  10.E. Taxation  U.S. Federal Income
Tax Considerations  Passive Foreign Investment Company Considerations.



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Failure to achieve and maintain effective internal control over financial reporting in accordance
with the requirements of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business, results of operations and the trading price of our ADSs.

The SEC, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on
such companies internal control over financial reporting in its annual report on Form 10-K or Form 20-F, as the case may be, that contains an assessment by management of the effectiveness of such companys internal control over financial
reporting. Under the current rules, this requirement will first apply to our annual report on Form 20-F for 2007. In addition, a public companys independent registered public accounting firm must attest to and report on managements
assessment of the effectiveness of the companys internal control over financial reporting. This attestation report will be included in our annual report on Form 20-F for 2008. In connection with the audit of our financial statements for the
years ended December 31, 2005 and December 31, 2006, our management and our independent registered public accounting firm identified certain material weaknesses in our finance teams ability to support the financial reporting
requirements of a U.S. registrant. If we are not able to properly address the material weaknesses in our internal control over financial reporting, or if our independent registered public accounting firm interprets the requirements, rules or
regulations differently from us for the Form 20-F for 2008, then it may decline to attest to our managements assessment or may issue a qualified report. In addition, during the course of such evaluation, documentation and testing, we may
identify deficiencies which we may not be able to remedy in time to meet the deadline for compliance with the requirements of Section 404. Any of these outcomes could cause investors to lose confidence in the reliability of our financial
statements, which ultimately could harm our business and negatively impact the trading price of our ADSs.

You may have difficulty
bringing an original action or enforcing any judgment obtained outside Korea against us, our directors and officers.

We are
organized under the laws of Korea, and most of our directors and officers reside in Korea. All or a significant portion of our assets, and the assets of such persons, are located outside of the United States. As a result, it may not be possible for
you to effect service of process within the United States upon these persons or to enforce against them or us court judgments obtained in the United States that are predicated upon the civil liability provisions of the U.S. federal securities laws
or of the securities laws of any state of the United States. We have, however, irrevocably appointed an agent in New York to receive service of process in any proceeding in the State of New York relating to our ADSs. Notwithstanding the foregoing,
there is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the U.S. federal securities laws or the securities laws of any state
of the United States.

Item 4. Information on the Company

A. History and development of the company

We operate as a company with limited liability under Korean law and were incorporated on
April 12, 2000. Our legal and commercial name is Pixelplus Co., Ltd. The address and telephone number of our registered office and principal place of business is: 6thFloor, Gyeonggi R&DB Center, 906-5 Iui-dong, Yeongtong-gu, Suwon-si, Gyeonggi-do 443-766, Korea, telephone number: +82-31-600-5300. Our authorized
representative in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, telephone number: +1-302-738-6680.

We first began providing our image sensors in September 2002 by marketing and selling our products primarily through our domestic direct sales force and through a network of authorized international sales agents and
distributors. Our operations are also conducted through our various subsidiaries, which are organized and operated according to the laws of their country of incorporation, and consolidated by our company.

We completed the initial public offering of 4,500,000 American Depositary Shares, or ADSs, each representing one-half of a common share, par value
W500 per share, on December 27, 2005. On December 21, 2005, we listed our ADSs on the Nasdaq under the symbol PXPL. The ADSs were offered and sold at US$8.00 per ADS. In addition, on January 25, 2006, the
underwriters exercised in full their over-allotment option and purchased an additional 675,000 ADSs representing 337,500 common shares from certain selling shareholders of our company at the initial public offering price of US$8.00 per ADS.



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Our capital expenditures were approximately, W295 million and W826
million and W1,614 million (US$1.7 million) in 2004, 2005 and 2006, respectively. These capital expenditures were for the acquisition of property and equipment. Our capital expenditures were financed primarily from the proceeds of
the initial public offering. See Item 5 of this annual report, Operating and Financial Review and ProspectsLiquidity and capital resources.

B. Business overview

We design, develop and market cost-effective CMOS image sensors for use in mobile camera phones and
other applications such as PC cameras and security and surveillance systems. Our image sensors are used to capture and convert images into digital signals for display or transmission. As a fabless semiconductor company, we are focused on creating
proprietary design technologies to develop and market image sensors with sharp, colorful, enhanced image quality, size efficiency and low power consumption, while outsourcing our manufacturing, testing and assembly requirements to independent
companies.

Our product family consists of CMOS image sensors of various specifications, which are sold as stand-alone products or
incorporated into camera modules. Our customers include some of the leading designers and manufacturers of mobile phones, camera modules and other imaging electronic products, such as BYD Co., Ltd., Cresyn, Co., Ltd., E-welly (Hong Kong) Company
Limited, Logitech Europe S.A., Seiko Precision Inc., Sharp, Sun Yang Digital Network Technology and YEL Electronics Limited. We market and sell our products primarily through our domestic direct sales force and through a network of authorized
international sales agents and distributors.

Since we first began producing our image sensors in September 2002, our revenues increased
from W17,806 million in 2003 to W35,796 million in 2004 to W41,584 million in 2005. But in 2006, we experienced a sharp decline in our revenues to W31,996 million. In 2005 and 2006,
we sold worldwide approximately 12.4 million and 13.8 million image sensors, respectively, and received royalty fees for 7.7 million and 19.4 million CMOS image sensors, respectively, designed by us and sold by Dongbu HiTek to Sharp. Royalty fees
are recorded as service revenue and are generated under our agreement with Dongbu HiTek, which sets forth that we provide image sensor design and other technical services for Dongbu HiTeks sales of CMOS image sensors to Sharp in exchange for
fees that are based on the number of image sensors manufactured.

In 2006, we suffered significant losses due to a combination of several
factors. The average selling price for our 1.3 megapixel products in chip-scale packaging (CSP) format, which was our highest selling product during 2006, decreased approximately 2.8% from US$3.91 in 2005 to US$3.80 in 2006 and we failed
to generate additional sales or receive new design wins as we faced delays in launching our next-generation of products due to the need for additional design modifications and testing processes. We are currently working vigorously to complete the
testing and launching of our next-generation products utilizing our PlusPixel2 technology in order to obtain design wins. Our ability to continue our business will depend on our ability to successfully launch our next-generation products and generate orders from our current and potential
customers.

Products

We design,
develop and market CMOS image sensors, featuring high quality resolution, high level of system integration and low power consumption. Our product portfolio consists of CMOS image sensors and System-on-a-Chip (SoC)
incorporating our CMOS image sensors of various specifications, used predominantly in mobile phone applications. We provide CMOS image sensors for the PC camera and security and surveillance system applications.

We combine our image sensor engineering and system engineering expertise to offer our customers innovative and advanced products. Our product offerings
ranges from our 0.1 megapixel CIF and 0.3 megapixel VGA products to our higher-end 1.3 megapixel super extended graphics array, or SXGA, and 2.0 megapixel ultra extended graphics array, or UXGA, products. All of our CMOS image sensors incorporate on
a single chip many high performance digital camera functions, including an integrated ISP, noise reduction circuits, color gain controller, internal timing generator and analog-to-digital converter, or ADC.

We developed our first 1.3 megapixel CMOS image sensor for commercial production in September 2003, and our first 2.0 megapixel single chip product with
auto-focus capabilities for commercial production in April 2005. In April 2005, we also integrated a four-channel motor controller into our commercially available 2.0 megapixel products to control mechanical shutter, aperture and auto focus
functions as part of our camera SoC strategy. In August 2005, we introduced our latest CIF image sensor with an optical size of 1/11 inch, one of the industrys smallest and most compact image sensors.



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Our CMOS image sensors incorporate our proprietary pixel structures and the single-chip Camera SoC
architecture to achieve high quality, multiple functionality and size efficiency, while our leading process technology facilitates high manufacturing yields. Our single-chip design enables our CMOS image sensors to combine image capturing with ISP,
color processing and image output functions. We offer a broad product portfolio, including image sensors with resolutions ranging from 0.1 to 2.0 megapixels, from which our customers can choose CMOS image sensors best suited for their application
needs.

Pixelplus CMOS Image Sensors

We derived 17.6%, 42.2% and 74.1% of our total revenues from the sale of our CMOS image sensors in 2004, 2005 and 2006, respectively. The trend in the mobile camera phone industry is toward smaller image sensors with
higher image quality. To achieve size efficiency, we are continuing to develop products with smaller optical size, such as our CIF image sensor with 1/11 inch optical size. We are also seeking to provide products with better image quality and
multiple functionality, such as our 1.3 megapixel SXGA and 2.0 megapixel UXGA products with multiple features and high system integration. In addition, we are also working with our independent foundry to improve the manufacturing process of our CMOS
image sensors, such as upgrading to a back-end over layer, or BEOL, process technology to reduce the noise and image distortion. Our current CMOS image sensor portfolio consists of the following:



|                           |  |             |  |                |  |                    |  |                                                             
|-------------------------- |  | ----------- |  | -------------- |  | ------------------ |  | ------------------------------------------------------------
|Product Group (Resolution) |  | ProductName |  | Technology(μm) |  | Optical Size(inch) |  | KeyFeatures                                                 
|CIF (0.1 megapixel)        |  | PO2010D     |  | 0.25           |  | 1/7                |  | On-chip ISP                                                 
|                           |  | PO3010K     |  | 0.18           |  | 1/11               |  | On-chip ISP, CIF shrink version                             
|                           |  | PO4010K     |  | 0.13           |  | 1/11               |  | On-chip ISP                                                 
|VGA (0.3 megapixel)        |  | PO2030N     |  | 0.25           |  | 1/4.5              |  | On-chip ISP                                                 
|                           |  | PO3030K     |  | 0.18           |  | 1/6.2              |  | VGA shrink version, upgraded BEOL process                   
|                           |  | PO5130N     |  | 0.13           |  | 1/4.2              |  | On-chip ISP, on-chip regulator                              
|SXGA (1.3 megapixel)       |  | PO2130D     |  | 0.25           |  | 1/2                |  | On-chip ISP                                                 
|                           |  | PO3130D     |  | 0.18           |  | 1/3.3              |  | SXGA shrink version                                         
|                           |  | PO3130R     |  | 0.18           |  | 1/3.3              |  | SXGA shrink version, upgraded BEOL process                  
|                           |  | PO4130K     |  | 0.15           |  | 1/3.9              |  | On-chip ISP, SXGA shrink version                            
|UXGA (2.0 megapixel)       |  | PO1200N     |  | 0.18           |  | 1/2.7              |  | On-chip ISP                                                 
|                           |  | PO1200D     |  | 0.18           |  | 1/2.7              |  | On-chip ISP, upgraded BEOL process                          
|                           |  | PA1200N     |  | 0.18           |  | 1/2.7              |  | Auto-focus, on-chip ISP                                     
|                           |  | PA1200D     |  | 0.18           |  | 1/2.7              |  | Auto-focus, on-chip ISP, upgraded BEOL process              
|                           |  | PO2200K     |  | 0.13           |  | 1/3.5              |  | Auto-focus, on-chip ISP, on-chip regulator, motor controller
|NTSC/PAL (0.2 megapixel)   |  | PC1025N     |  | 0.25           |  | 1/4                |  | Analog TV signal output                                     



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CIF. We commercialized our first 0.1 megapixel CIF image sensors in June 2004. Our CIF image
sensors are our smallest product with optical sizes from 1/7 inch to 1/11 inch. We completed development of CIF image sensors using our 0.13 μm technology with 1/11 inch optical size during the first half of 2007. This product incorporates
on-chip ISP functions. Our CIF image sensors are used mainly in dual camera mobile phones which utilize two image sensors, a CIF image sensor for video conferencing and a higher megapixel image sensor for taking digital photos. Our CIF image sensors
are sold primarily to our customers in Japan, such as Sharp and Seiko Precision Inc., due to the popularity of dual camera mobile phones in Japan, and have accounted for approximately 26.7% of our revenues in 2006, compared to approximately 10.5% of
our revenue in 2005.

VGA. We developed our first 0.3 megapixel VGA image sensors using 0.25 μm technology for commercial
production in September 2003 and using 0.18 μm BEOL process technology in May 2005. Our VGA image sensors and our camera modules incorporating VGA image sensors have accounted for 64.1% and 29.4% of our revenues in 2005 and 2006, respectively.
During the same two-year period, VGA image sensors have been the most widely used CMOS image sensor in the mobile camera phone industry, primarily due to their size, image quality and price. Our VGA image sensors range in optical size from 1/4.5
inch to 1/6.2 inch.

SXGA. We developed our first 1.3 megapixel SXGA image sensors for the mobile camera phone application using
0.25 μm technology for commercial production in December 2003, using 0.18 μm BEOL process technology in May 2005 and using 0.15 μm process technology in November 2005. We completed development of SXGA image sensors using our 0.13
μm technology with 1/4.2 inch optical size, 2.6 μm pixel-based advanced sensor, and improved ISP during the first half of 2007. This product incorporates on-chip ISP and on-chip regulator functions. Our SXGA image sensors are used
primarily in higher-end, higher resolution mobile camera phones. Our SXGA image sensors and camera modules incorporating SXGA image sensors accounted for approximately 35.8% of our revenues in 2006, compared to approximately 6.9% of our revenues in
2005. Our SXGA image sensors currently include image sensors with 1/2 inch, 1/3.3 inch and 1/3.9 inch optical sizes.

UXGA. Our 2.0
megapixel UXGA image sensors with 1/2.7 inch optical size are currently our highest-end product. We began offering our first UXGA products with auto focus in January 2005. We have also integrated motor control mechanisms for auto-focus and
mechanical shutters as well as auto-focus algorithm features into this product. We completed development of UXGA image sensors using our 0.13 μm technology with 1/3.5 inch optical size during the second half of 2006. This product incorporates
auto focus, in addition to the on-chip ISP, on-chip regulator and on-chip motor controller functions. Our UXGA products accounted for approximately 7.0% of our revenues in 2006, whereas they accounted for approximately 14.3% of our revenues in 2005.

NTSC/PAL. Our 0.2 megapixel NTSC/PAL image sensors are our only product not used in mobile camera phone applications and are
instead used in security and surveillance cameras and toys. We commercialized our first NTSC/PAL image sensors in October 2004. Our NTSC/PAL image sensors are highly-integrated products combining on a single chip CMOS image sensors, ISP, a
television encoder for both NTSC and PAL systems, which is used to convert the digital video generated from the sensors to a composite 10-bit signal, and a video discretionary access control mechanism that converts composite 10-bit signal to an
analog signal for television viewing. In 2006, our NTSC/PAL image sensors accounted for 0.2% of our revenues compared to 2.9% of our revenues in 2005.

Products to be Released

The mobile camera phone market continues to demand smaller chip size,
higher image quality and greater functionality, all at a competitive price. We are currently developing a new line of image sensors that will provide higher resolution and smaller optical size than our existing products. We are also developing
separate chips to complement our CMOS image sensors to meet the feature- and system-intensive design requirements of new emerging applications, such as in biometrics and medical devices. Our products currently under development or testing consist of
the following:



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|                                   |  |              |  |                |  |                   |  |                                                                                                                                                                                        |  |                          
|---------------------------------- |  | ------------ |  | -------------- |  | ----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|Product Group (Resolution)         |  | Product Name |  | Technology(μm) |  | OpticalSize(Inch) |  | Key Features                                                                                                                                                                           |  | ExpectedTime ofCompletion
|SXGA (1.3 megapixel)               |  | PO6130N      |  | 0.18           |  | 1/5               |  | On-chip ISP                                                                                                                                                                            |  | Second halfof 2007       
|UXGA (2.0 megapixel)               |  | PO3200K      |  | 0.18           |  | 1/4               |  | Auto focus, on chip regulator, motor controller, improved ISP with 2.2 um pixel                                                                                                        |  | Second halfof 2007       
|QXGA (3.2 megapixel)               |  | PX1320K      |  | 0.18           |  | 1/3               |  | Advanced analog processing, on-chip regulator, fast serial interface                                                                                                                   |  | First half of2008        
|NTSC (0.3 megapixel)               |  | PC1030K      |  | 0.18           |  | 1/4               |  | Analog TV NTSC signal output, auto focus, digital output                                                                                                                               |  | Second halfof 2007       
|                                   |  |              |  |                | 
|Pattern Recognition Processor SoC  |  | PM1002K      |  | 0.18           |  |                  |  | Direct sensor interface, 32-bit RISC MCU-embedded, real-time pattern recognition                                                                                                       |  | Second halfof 2007       
|Capsule Endoscope Image Sensor SoC |  | PD1010K      |  | 0.18           |  |                  |  | 0.1 megapixel, low power consumption, high sensitivity at low illumination condition, direct LED control, other highly customized features designed for capsule endoscope applications |  | First half of2007        

1/5 Inch SXGA. We expect to offer SXGA image sensors using our 0.18 μm technology
with 1/5 inch optical size, and improved ISP by the second half of 2007. This product will incorporate on-chip ISP and is currently undergoing engineering sample fabrication by our independent foundry.

1/4 Inch UXGA. We expect to offer UXGA image sensors using our 0.18 μm technology with 1/4 inch optical size, 2.2 μm pixel-based
advanced sensor, and improved ISP by the second half of 2007. This product will incorporate auto focus, on-chip ISP, and on-chip regulator functions and is currently undergoing engineering sample fabrication by our independent foundry.

QXGA. We expect to offer 3.2 megapixel quantum extended graphics array, or QXGA, image sensors using our 0.18 μm technology with 1/3 inch
optical size by the first half of 2008. We have integrated various camera SoC functions and fast serial interface to reduce noise and simplify the interface with multimedia chip. This product, which we expect to be our most advanced, is currently
undergoing engineering sample fabrication by our independent foundry.

0.3 Megapixel NTSC. We expect to offer 0.3 megapixel NTSC/PAL
image sensors using 0.18 μm technology with 1/4 inch optical size by the second half of 2007. We expect this product, which is undergoing the final phase of design by our research and development team, to be used in intercoms and automobiles,
as well as in security and surveillance system application.

Pattern Recognition Processor SoC. We expect to offer Pattern
Recognition Processor SoC, an application-specific SoC processor, by the second half of 2007. This product will be used mainly in biometric security applications for mobile phones, personal digital assistants and PC peripherals. This product
accelerates real-time pattern recognition by integrating application-specific hardware engine with a processor to aid pattern-recognition applications. Along with the chipset which consists of this product and CMOS image sensors, we also expect to
provide total mobile security solutions, including hardware chipsets, as well as firmware and software. This product is currently undergoing the final phase of design by our research and development team.



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Capsule Endoscope Image Sensor SoC. We expect to begin mass production of our Capsule Endoscope
Image Sensor SoC, an application-specific image sensor SoC for capsule endoscope applications, during the second half of 2007. The development of the product has been completed, and it is currently being tested for mass production as of the date of
this filing. This product offers size efficiency for ease of use and has special features, such as low power consumption, low illumination imaging capability, direct light emitting diode, or LED, light source control, and other highly customized
features designed for capsule endoscope applications. This product is currently undergoing the final phase of design by our research and development team.

Pixelplus Camera Modules

We derived 68.9%, 49.4% and 8.7% of our total revenues from sales of
our camera modules in 2004, 2005 and 2006, respectively. We offer a variety of custom-made camera modules incorporating our CMOS image sensors. Our camera modules, which consist mainly of an optical lens, a lens holder, a printed circuit board, a
socket that attaches the image sensor to the end-product, and our CMOS image sensor chip, allow our customers to incorporate a complete camera system into their mobile phones. We outsource the assembly of our camera modules to third party
contractors.

We began offering camera modules in June 2003 at the request of our mobile phone manufacturing customers. For 2004, 2005 and
2006, we recognized revenues of W24,663 million, W20,548 million and W2,792 million (US$3.0 million), respectively, from sales of camera modules. Our revenues from sales of our camera modules
decreased significantly in 2006 and we expect to discontinue the sale of this product line by the end of 2007. In order to continue to meet the demands of those customers continuing to require camera modules, we are currently undergoing a transition
to form a new arrangement under which we sell our CMOS image sensors to camera module assembly companies who will then assemble the camera modules and sell directly to such customers.

Services

We derived 6.8% and
16.1% of our total revenues from our engineering and technology services provided to Dongbu HiTek, our sole customer for such services, in 2005 and 2006, respectively. Under our arrangement with Dongbu HiTek, which is also our independent foundry,
we provide engineering, technology and other services, including CMOS image sensor design, product customization services, manufacturing process consulting to achieve high yield, product probe testing, customer support and technical services, to
Dongbu HiTek. Our service fee is based on the number of CMOS image sensors successfully passing the product probe test conducted by Tesna. Dongbu HiTek manufactures and sells these CMOS image sensors directly to Sharp.

Technology

We use proprietary technologies and
advanced design methodologies to design and develop CMOS image sensors that provide our customers with high levels of resolution, flexibility and image quality. The engineers who developed our proprietary pixel technologies have had experience with
CCD image sensor technology since 1989. We produce low-cost and high-quality CMOS image sensors by combining high-resolution CCD image sensor technology with scalable CMOS image sensor technology.

Pixelplus PlusPixel Technology

We have optimized the architecture of the pixel structure and the analog signal path to minimize the chip size while maintaining superior image quality. Our new second generation PlusPixel(TM) SoC image sensors deliver digital still camera
image quality based on our proprietary pixel design and know-how acquired through our engineers experience with CMOS and CCD image sensor technology. The process and technology adopted in the PlusPixel(TM) SoC image sensors will provide an
improved low-light performance and allow mobile phone manufacturers to design small form factor camera modules, which will be useful and attractive in the increasingly popular ultra-thin mobile camera phone markets.



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Pixelplus Process Know-How

We leverage our CCD image sensor technology experience and process engineering know-how to continue to improve our CMOS process technologies and advanced
pixel design methodologies. We also share our process technology and methodology know-how with our independent foundries to achieve high manufacturing yields and shorter design and production cycles. As CMOS technology evolves from 0.18 μm to
0.13 μm and 90 nanometers, we believe our proprietary pixel structures, single-chip Camera SoC architecture and efficient device engineering will provide us with a competitive advantage and enable us to deliver high quality products with high
manufacturing yields.

Pixelplus Camera SoC Technology

After photons are converted and digitized by an image sensor, our on-chip ISP engine integrates the major ISP functions, such as gamma correction, color
correction, color interpolation, edge enhancement, white balance, exposure control and back light compensation. Our camera SoC architecture further integrates additional functions, such as auto focus, JPEG image compression and motor driver
capabilities, on a single chip and enables the ISP circuits to occupy less space on a chip, reducing the overall chip size.

Seasonality

There is no particular seasonal fluctuation in our sales except that revenues from sales of our image sensors in the first quarter are typically lower
than in other quarters. This is primarily due to decreased business activities throughout Asia around the Chinese New Year holiday and other Asian holidays, which occur in January or February each year.

Sales and marketing

We generally market and sell our
products through our domestic direct sales force and through a network of authorized international sales agents and distributors. In 2006, we derived 78.1% of revenues from our direct sales force, 2.0% of revenues from our sales agents, and 19.9% of
revenues from our distributors.

We rely predominantly on our direct sales force for domestic sales. Our sales and marketing organization
has a total of 15 employees. Our sales employees, like all of our other employees, participate in our corporate profit sharing or year-end bonus system and do not receive any commission on sales. We have recently experienced significant departures
in our sales and marketing team, with two employees resigning in 2006 and one employees resigning in the first quarter of 2007. As of May 31, 2007, we had a total of 131 employees, with 55 employees in R&D, 29 employees in manufacturing, 32
employees in administration and 15 employees in sales and marketing.

We have an international network of nine independent distributors,
with two located in Korea, two in Japan, four in China and one in Hong Kong. We also have two independent sales agents, with one located in Europe and one in Korea.

We established a wholly-owned sales subsidiary, Pixelplus Shanghai Ltd. in Shanghai, China, in September 2004. Pixelplus Shanghai Ltd. entered into a selling agency agreement with Pixelplus Co., Ltd. in August 2006,
whereby Pixelplus Shanghai Ltd. will receive a commission for the sale of our products. In March 2004, we established a minority-owned subsidiary in Taiwan with Taiwanese partners that have significant local customer and supply chain relationships.
We also established a wholly-owned sales and research and development subsidiary in San Jose, California, in January 2005, and a branch office in Taiwan in March 2007. We are planning to dispose of our entire 37.5% shareholding interest in Pixelplus
Technology Inc., our Taiwan subsidiary, during the second half of 2007.

Sales Cycle

CMOS Image Sensors. We sell most of our CMOS image sensors to mobile phone manufacturers or module assembly companies that sell camera modules
under their own brand names. All of our CMOS image sensors are standardized products. The sale process begins by us qualifying with a customer to supply a specific product. After the successful completion of the qualification process, we may receive
a purchase order eight to 10 weeks prior to the desired date of delivery. For high volume orders, our customers generally provide us with three-month forecasts, which, together with our own forecasts, allow us to plan our production requirements
with our independent foundry.



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Camera Modules. Our camera modules are sold directly to mobile phone manufacturers, and most of
our camera modules are custom-made. The sales process begins when a mobile phone manufacturer delivers a mobile camera phone design to us and to other CMOS image sensor or camera module companies. Based on the customers design, we work with
our camera module assembly contractors to design a camera module prototype, which takes approximately one month. The prototype is then sent to the customer for review and testing, which generally takes one or two months. If the customer finds our
prototype acceptable, the customer will ask us, as well as other camera module makers, to submit a pricing proposal. If we are selected based on our pricing proposal, the customer will issue a purchase order approximately 10 to 12 weeks prior to the
first delivery date. We expect that we will completely phase out camera module sales in 2007 and instead sell our CMOS image sensors to module assembly companies who will then assemble the camera modules and sell them directly to their customers.

Warranties

In
accordance with industry standards, we generally provide a limited warranty to our end-customers. We have not incurred significant costs related to our warranty obligations. Our products are technically and visually tested by our customers prior to
their issuance of purchase orders and undergo multiple testing processes by Tesna after each stage of the wafer fabrication and chip scale packaging, or CSP, process. We believe these testing processes allow us to minimize the number of warranty
claims from our customers. We also receive from our independent foundry a 90-day warranty from the date of the delivery of the wafers used in our products.

Customers

In 2006, Asia accounted for 76.5% of our total revenues, with 38.0% from China, 22.5% from Korea and 16.0% from
other Asian countries, including Japan and Taiwan.

A relatively small number of customers have accounted for a significant portion of our
past revenues. In 2006, our top five customers accounted for approximately 74% of our revenues, compared to approximately 63% of our 2005 revenues. The following table provides a list of our top ten customers, their location and the category of
products purchased in 2006 attributable to each listed customer:



|                                    |  |                                |  |                  
|----------------------------------- |  | ------------------------------ |  | -----------------
|Customer                            |  | Country                        |  | ProductCategories
|BYD Co., Ltd.                       |  | China                          |  | VGA              
|Cresyn Co., Ltd.                    |  | China                          |  | VGA              
|Logitech Europe S.A.                |  | Europe, United States and Asia |  | SXGA             
|Seiko Precision Inc.                |  | Japan                          |  | CIF              
|Sharp(1)                            |  | Japan                          |  | CIF/VGA          
|Sun Yang Digital Network Technology |  | Korea                          |  | SXGA/UXGA        
|Shengyang Wetie Technology          |  | China                          |  | VGA              
|YEL Electronics Limited             |  | China                          |  | SXGA/UXGA        
|E-Welly (Hong Kong) Company Limited |  | China                          |  | VGA              
|Stone Advance Technology Limited    |  | China                          |  | SXGA/UXGA        

---

|(1) | Indirect customer under our services arrangements with Dongbu HiTek.
|--- | --------------------------------------------------------------------

Two of our distributors, YEL Electronics Limited and Shenghe Technology Limited, accounted for 8.7% and 5.1%, respectively, of our revenues in 2006. No distributor accounted for more than 10% of our revenues for that
period.



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Competition

We compete in an industry characterized by intense competition, rapid technological change, evolving industry standards, declining average selling prices and rapid product obsolescence.

We believe the principal factors affecting competition in our markets are:



| |  |  | new product development and time to market;
| | - |  | -------------------------------------------



| |  |  | pricing;
| | - |  | --------



| |  |  | product quality (including image quality, pixel and chip size and special features);
| | - |  | ------------------------------------------------------------------------------------



| |  |  | cost control;
| | - |  | -------------



| |  |  | relationships with key OEMs that incorporate image sensors into mass market applications; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | relationships with semiconductor foundries and other participants in the manufacturing chain.
| | - |  | ---------------------------------------------------------------------------------------------

Our main competition comes from other CMOS image sensor design companies and manufacturers, which include a number of well-established companies, such as
MagnaChip, Micron, OmniVision, STMicroelectronics and Toshiba Corporation. In addition, Samsung Electronics Co., Ltd., or Samsung Electronics, one of the largest corporations in Asia and one of the worlds leading mobile phone manufacturers,
has recently commenced the production of CMOS image sensors for the mobile phone application. Samsung Electronics also has a long history of working with CCD image sensors, a competing technology. Also, certain companies, like Matsushita Electric
Industrial Co., Ltd., are in the process of developing hybrid technology by mixing CMOS and CCD image sensor technologies, to compete in the same markets with our CMOS-based image sensors. For our higher-end image sensors, such as our planned 3.2
megapixel products, we also expect to compete with CCD image sensor manufacturers, such as Sony Corporation.

Our competitors include many
large domestic and international companies that have greater presence in key markets, greater access to advanced wafer foundry capacity, substantially greater financial, technical, marketing, manufacturing, distribution and other resources, broader
product lines, better access to large customer bases, greater name recognition, longer operating histories and more established strategic and financial relationships than we do. As a result, they may be able to adapt more quickly to new or emerging
technologies, customer requirements and pricing wars or devote greater resources to the promotion and sale of their products.

Intellectual property
rights

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely on a
combination of patents and trade secrets, as well as nondisclosure agreements and other methods, to protect various aspects of our products and related propriety technology and know-how. We have obtained 15 patents in Korea, two patents in Taiwan,
two patents in China, and two patents in the United States, and we have 19 patent applications pending in Korea. Our patents have terms expiring from 2021 to 2026. These patents and patent applications are intended to protect our proprietary pixel
structures, single-chip Camera SoC architecture, noise reduction and cancellation circuits, and image enhancement and color processing technologies of our image sensors.

We also enter into nondisclosure agreements with our employees and strategic partners, and we control access to and distribution of our documentation and other proprietary information. We do not license intellectual
property from third parties other than licensed specialty software for design work, such as Cadence and Synopsys.

Manufacturing

We outsource our wafer fabrication, testing, packaging and module assembly to third party contractors. This outsourcing allows us to focus on our design
strengths and minimize our fixed costs and capital expenditures while gaining access to advanced manufacturing, testing and assembly facilities. Our engineers work closely with our contractors to increase yields, lower manufacturing costs and
improve quality.



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Our average production cycle for our products ranges between 11 to 13 weeks. The following chart shows
the basic manufacturing process and approximate time required for each step, from design to product assembly and delivery to our customers.

LOGO

Wafer Fabrication

Dongbu HiTek has manufactured all of our integrated circuits since our first production model in 2002. Dongbu HiTek utilizes two CMOS wafer fabrication facilities in Korea and has the capacity to produce approximately
70,000 wafers per month. In 2006, our wafer production requirements ranged from approximately 3,000 to 5,000 wafers per month. We qualified UMC as an alternative manufacturing resource and entered into a manufacturing outsource agreement with UMC in
November 2005. Currently, UMC mostly produces test samples and has not begun mass-production of wafers for us, but is expected to begin providing large-scale wafer manufacturing services for us in the third quarter of 2007. The CIF and 1.3 megapixel
SXGA sensors that UMC will manufacture are expected to constitute approximately 20 to 30% of our total production volume in the near future.

Wafer fabrication occurs in a highly-controlled and clean environment to minimize dust and other contaminants affecting yield and quality. Despite stringent manufacturing controls, dust particles, equipment errors, minute impurities in
materials, defects in circuit design or other problems may cause wafers to be defective or individual circuits to fail. We rely on our wafer manufacturers ability to minimize such defects to maximize the yield of high-quality CMOS image sensor
chips. As part of our manufacturing outsource agreement with Dongbu HiTek, Dongbu HiTek provides us with a warranty in the form of a cash credit in the event they fail to produce a minimum number of acceptable image sensors per wafer. In addition,
Dongbu HiTek provides us with a 90-day warranty from the date of the delivery for any defective wafers used in our products. We are also required to make penalty payments to Dongbu HiTek if we do not meet certain minimum wafer orders requirements
which are based on a rolling six-month forecast of our wafer needs. To date, we have not had to make any penalty payment. Under the terms of our manufacturing outsource agreement with UMC, UMC is required to provide us with a limited warranty for a
period of one year from the date of delivery for any failure to meet a specified criteria. If the wafers fails to meet our requirements for which UMC is responsible, UMC will either replace the



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wafers without charge or refund the payments made by us within 60 calendar days of receipt of written notice from us. We are also required to provide a
rolling six-month forecast of our wafer needs to UMC, and make a penalty payment to UMC in case we do not purchase certain minimum wafers based on such forecasts. We may also be required to purchase up to 5% more than the amount we ordered, due to
the nature of varying yields of wafers meeting required standards per production cycle.

Wafer and CSP Testing

High volume product testing is a critical element in the production of CMOS image sensors. After fabrication, wafers are tested for any design or
manufacturing defect, which takes approximately two to three days. Following the completion of the wafer probe tests, our CMOS image sensor chips that will be packaged by the CSP process are tested again for integrity, a process which takes another
two to three days.

Our wafer testing and CSP testing are primarily conducted by Tesna. Tesnas facilities are located in Incheon,
Korea, and have the capacity to test 5,000 wafers per month. We hold a 13.9% equity interest in Tesna. See Item 7 of this annual report, Major Shareholders and Related Party TransactionsRelated party transactionsRelationship
with Tesna for a discussion of our relationship with Tesna.

On May 31, 2004, we entered into a testing agreement with Tesna,
which is valid until either Tesna or we give a written termination notice to the other party. Pursuant to this agreement, we provide order forecasts to Tesna on a monthly basis. Tesna is deemed to have agreed to meet the number of orders forecasted
unless it notifies us otherwise in writing within seven days of receipt of such forecast. We believe that Tesna has the intellectual property rights to the test programs it uses and develops in addition to any related probe cards.

In July 2004, we qualified King Yuan Electronics Co., Ltd. in Taiwan to provide us with an alternative source for our wafer and CSP testing services.
King Yuan Electronics Co., Ltd. currently has the capacity to test approximately 10,000 wafers per month. We did not receive any testing services from King Yuan Electronics Co., Ltd. during 2006.

CSP and COB Packaging

After
wafer fabrication and wafer testing, wafers are diced into individual die. Functional die are sorted, connected to external leads and encapsulated in plastic packages. Our chip on board, or COB, type of CMOS image sensor chips are sent directly to
our customers or camera module assembly partners without separate packaging or further testing. For our CSP type of CMOS image sensor chips which are designed for smaller-sized applications, we rely on XinTec Inc., a Taiwanese company, and WLCSP, a
Chinese company, for packaging. The CSP packaging process takes approximately three weeks, including shipping time. After CSP packaging, our CMOS image sensors are tested once again by our testing contractor, Tesna, before being shipped to our
customers or camera module assembly partners.

Camera Module Assembly

With respect to our customers who wish to purchase assembled camera modules, we customarily transact with a module maker conducting business where such
customers are located. Once the module maker receives a relevant purchase order, such module maker then assembles and supplies the required types and numbers of camera modules to those customers.

Backlog

Volatile industry conditions make customers
reluctant to enter into long-term, fixed-price contracts. Accordingly, new order volumes for our products fluctuate significantly. Orders are typically accepted with acknowledgement that the terms may be adjusted to reflect market conditions at the
date of shipment. Customers can change delivery schedules or cancel orders without significant penalty. For these reasons, we do not believe that our order backlog as of any particular date is a reliable indicator of actual sales for any succeeding
period.

Regulation

Not applicable.



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C. Organizational structure.

The following chart shows our organizational structure, our consolidated entities and our percentage equity ownership in those entities, as of May 31, 2007.

LOGO

We are a company organized under the laws of Korea and the issuer of the common shares represented by the
ADSs that are traded on Nasdaq. We have three consolidated operating subsidiaries: Pixelplus Asia Co., Limited, organized in Hong Kong; PTI, organized in Taiwan; and Pixelplus Semiconductor, Inc., organized in the United States.

D. Property, plant and equipment.

Facilities and Subsidiaries

Korea. Our principal executive and administrative offices are
located at 6thFloor, Gyeonggi R&DB Center, 906-5 Iui-dong, Yeongtong-gu, Suwon-si, Gyeonggi-do 443-766, Korea,
which is approximately 30 miles south of Seoul. We occupy approximately 2,167 square feet of office space and pay a monthly rent of W12.8 million pursuant to a lease that expires in May 6, 2010.

We believe that our existing facilities are adequate for our current requirements. In 2006, we committed to purchase office space in Pankyo Technology
Park, a new technology park just south of Seoul to which we may plan to move our permanent headquarters in the future.

China. Established in September 2004, Pixelplus Shanghai Ltd. is wholly-owned by Pixelplus Asia Co., Limited, our wholly-owned Hong Kong subsidiary, and serves as our sales and marketing headquarters for China, including Hong
Kong. The offices of Pixelplus Shanghai Ltd., our Shanghai sales and marketing subsidiary, are located at Room 2311, Huarong Building, No. 1289 Pudongnan Road, Shanghai 200122, China. Pixelplus Shanghai Ltd. occupies approximately 3,600 square
feet of office space and pays a monthly rent of approximately W6.2 million pursuant to a lease that expires on September 14, 2009. We believe that the existing facilities of Pixelplus Shanghai Ltd. are adequate for its current
requirements and that additional space can be obtained on commercially reasonable terms to meet its future requirements.

Taiwan. Established in September 2004, PTI is our consolidated subsidiary in Taiwan. We currently hold a 37.5% equity interest in PTI. PTI serves as our sales and marketing and product completion unit for China and Taiwan
markets. The facilities of PTI are located at the following locations:



| |  |  | The headquarters are located at No. 29, 6F-2, Hsinchu, Taiwan, where PTI occupies 2,690 square feet of office space and pays a monthly rent of approximately
NT$85,621 pursuant to a lease that expires on April 9, 2009;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The sales and field application engineer office is located at No. 866-10 12F, Taipei, Taiwan, where PTI occupies 2,378 square feet of office space and pays a
monthly rent of NT$50,201 pursuant to a lease that expires on May 2, 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As we have witnessed a significant
decline in revenues from PTI since the first half of 2006, and in order to manage cost efficiencies and strengthen our financial position, we plan to sell our entire 37.5% interest in PTI in the second half of 2007.

In March 2007, we opened a branch office in Taiwan to fortify our sales and marketing operations in the Taiwanese market. The address of our branch is
Room 812, 8F, No. 346, Sec. 3, Nanjing E. Rd., Songshan District, Taipei City, Taiwan. We occupy approximately 871 square feet of office space and pay a monthly rent of NT$35,000 pursuant to a lease that expires on February 25, 2008,
renewable annually. We believe the existing facilities of our Taiwanese branch office are adequate for its current requirements and that additional space can be obtained on commercially reasonable terms to meet its future requirements.

United States. Established in January 2005, Pixelplus Semiconductor, Inc. is our wholly-owned U.S. subsidiary. Pixelplus Semiconductor,
Inc. serves as our U.S. headquarters for sales and marketing and research and development. The offices of Pixelplus Semiconductor, Inc. are located at 3003 North First Street, Suite 330, San Jose, California 95134. Pixelplus Semiconductor, Inc.
occupies 1,043 square feet of office space, which serves as our U.S. headquarters for sales and marketing and research and development, and we pay a monthly rent of approximately US$2,620.5 pursuant to a lease that is renewable every six months. We
believe that the existing facilities of Pixelplus Semiconductor, Inc. are adequate for its current requirements and that additional space can be obtained on commercially reasonable terms to meet its future requirements.

Insurance

We maintain medical and accident insurance
for our employees to the extent required under Korean law. We also maintain fire insurance for our principal office in Korea. We also maintain a key-man insurance policy for any death or extraordinary disability of six members of our senior
management. Under the key-man insurance policy, we may claim an amount between approximately W200 million and W300 million for the death or extraordinary disability of any covered executive officer which causes the
termination of such officers employment. We also maintain directors and officers insurance for our directors and members of senior management.

Item 4A. Unresolved Staff Comments

Not applicable.

Item 5. Operating and Financial Review and Prospects

The following discussion is provided as a
supplement to the consolidated financial statements and footnotes appearing elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of operations.

Overview

We are a fabless semiconductor company that
designs, develops and markets high-performance, high-resolution and cost-effective CMOS image sensors. Our PlusPixel(TM) SoC image sensors provide high level system integration, multiple functionality, size efficiency and low power consumption for
use in mobile camera phones and other emerging applications, such as in PC cameras and security and surveillance systems. In 2005 and 2006, we sold worldwide approximately 12.4 million and 13.8 million image sensors, respectively, and received
royalty fees for 7.7 million and 19.4 million CMOS image sensors, respectively, designed by us and sold by Dongbu HiTek to Sharp.

We were
incorporated as a company with limited liability under Korean law on April 12, 2000, and we developed our first CMOS image sensor for mass production in July 2003. We commercialized our first 1.3 megapixel CMOS image sensor in September 2003
and our first 2.0 megapixel CMOS image sensor with auto-focus capabilities in April 2005. In August 2006, we introduced our latest VGA image sensor with an optical size of 1/8.7 inch, one of the industrys smallest and most compact image
sensors. We intend to continue developing new products aimed at providing the smallest image sensors with the highest picture



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quality and the highest integration of camera functions for use in mobile camera phones. We will also continue to focus on developing new types of image
sensors to meet the advanced design requirements of new emerging applications, such as automobiles, biometrics, pattern recognition, medical devices and toys.

Our revenues have decreased significantly in 2006 to W31,996 million (US$34.4 million), compared to W41,584 million in 2005, due to a combination of several factors, including a sharp
drop in the average selling price for our products, loss of several major customers, and delays in launching next-generation products. As a result, the balance of our cash and cash equivalents decreased to W12,224 million (US$13.1
million) as of December 31, 2006 from W31,040 million as of December 31, 2005. Ernst & Young Han Young, our independent auditors, included an explanatory paragraph relating to our ability to continue as a going concern as
described in more detail in note 2 to the audited consolidated financial statements for the year ended December 31, 2006 contained in this annual report. See Risk FactorsAdditional financing will be required if we are to sustain
our operations, repay all of our existing obligations or achieve our strategic and operating objectives.

A significant portion
of our 2005 revenues was generated from the sale of camera modules implementing our CMOS image sensors to be used in mobile camera phones. However, we began undergoing a transition to form a new arrangement in 2005 under which we sell our CMOS image
sensors to camera module assembly companies that will then assemble the camera modules and sell the camera modules directly to their customers. As a result of this change, our revenues from sales of our camera modules decreased significantly in 2006
and we expect to discontinue the sale of this product line by the end of 2007. Our dependence on the mobile camera phone market is expected to continue for the foreseeable future although we have recently expanded the market segment for our
products, resulting in 25.5% of revenue from non-mobile applications. Similar to other semiconductor industries, the CMOS image sensor industry is highly cyclical and is subject to constant and rapid technological changes, product obsolescence,
price erosion, evolving standards, short product life-cycles and fluctuations in product supply and demand.

Principal Factors Affecting Our Results of
Operations and Financial Condition

Revenues

We generate revenues primarily from sales of our CMOS image sensors, which are sold as a stand-alone product or incorporated into a camera module, and from our services. In 2004, 2005 and 2006, we derived 17.6%, 42.2%
and 74.4%, respectively, of our total revenues from sales of our CMOS image sensors and 68.9%, 49.4% and 8.7% respectively, of our total revenues from sales of our camera modules and other related parts.

In addition, we derived 6.8% and 16.1% of our total revenues in 2005 and 2006, respectively, from our services arrangements with Dongbu HiTek, which we
have categorized as services. Our current agreement to provide these services to Dongbu HiTek, which was entered into in September 2004, is for a term of one year and annually renewable unless either party delivers a 30-day prior notice
electing not to renew the agreement. Pursuant to this arrangement, we provide our CMOS image sensor design services, manufacturing process consultation, testing, customer support and other services and engineering know-how to Dongbu HiTek to
facilitate its manufacture and sale of CMOS image sensors to Sharp. Dongbu HiTek pays us a certain percentage of fees based on a combination of the number of CMOS image sensors successfully passing the product probe test conducted by Tesna on our
behalf and the sales price of the CMOS image sensors sold to Sharp. As our cost of revenues for services are primarily limited to wafer testing fees, our gross margin for services is relatively high. Presently, we do not expect to add additional
customers to our services business.

We generally sell our products in Korea through a direct sales force and in other markets, through
sales agents and distributors. Our CMOS image sensors and camera modules are predominantly sold to mobile phone manufacturers who market mobile camera phones under their own brands. We also sell to large manufacturing companies that produce mobile
camera phones for others to market under different brand names.

We generally sell our products on a purchase order basis rather than using
long-term contracts. Our customers may not cancel their purchase orders but may defer their orders without significant penalty. We engage our wafer foundry and other independent contractors to manufacture, test, package and assemble the finished
products for delivery to the customer, either after a customer order is received or in anticipation of prospective customer orders. In both circumstances, we are the primary obligor.



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Declining Average Sales Price

Because the CMOS image sensor market is characterized by intense price competition, we have experienced, and expect to continue to experience, market
driven pricing pressures and declining average sales prices for our products. Generally, prices for our products are determined based on the level of technological sophistication and the availability of the product in a specific market. As product
availability increases in a market, the average sales price of the product generally declines quickly over a period of six to 18 months. Compared to 2005, the average selling price for our CIF products in 2006 dropped 11.1%, for VGA products 20.2%
and for 2.0 megapixel CSP products 40.6%. We intend to address future declines in average sales prices by continually developing new products with higher margins, incorporating more advanced features to our existing products, and achieving
manufacturing cost efficiencies by upgrading our process technology.

Manufacturing and Other Costs

As a fabless design company, we outsource all of our capital-intensive product manufacturing processes to independent third party contractors. Costs
related to the wafer fabrication process, currently mostly outsourced to Dongbu HiTek, account for the largest portion of our cost base, and is largely determined by (i) the cost of wafers, which is the principal raw material for image sensors
and tends to be affected by the cyclical semiconductor industry and, to a lesser extent, by the pricing flexibility achieved through volume discounts, and (ii) the yield per wafer, which is the ratio of the number of functional dies on a wafer
to the maximum number of dies that can be produced on that wafer. Higher yields result in reduced costs, which permits average selling price reductions. As yields are generally affected by the design and manufacturing process technology employed, we
seek to continuously improve yields by improving our chip design and working closely with our current independent foundry on our process technology, which was upgraded from 0.25 μm, to 0.18 μm in January 2005 and further upgraded to 0.15
μm during the first half of 2007 with additional upgrades to 0.13 μm process technology scheduled in the second half of 2007.

Our other cost of revenues for our products consists principally of:



| |  |  | the cost of testing, manufacturing and packaging of our products, all of which we outsource;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | loss on valuation of inventory;
| | - |  | -------------------------------



| |  |  | the cost of salary and benefits, including stock-based compensation expenses, of our employees associated with product customization and support; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of transportation and distribution.
| | - |  | --------------------------------------------

In addition to each of the cost items above, our cost of revenues for our camera modules also includes the cost of module assembly. As we endeavor to grow our sales volumes and transition to smaller process technology, we expect to further
reduce the unit cost of our products through economies of scale and diversification of our outsourced manufacturing base. We expect our costs of international transportation and distribution to rise concurrently as we grow our international
business. Our cost of revenues for our services consists mainly of wafer testing fees related to our business with Dongbu HiTek in connection with Sharp.

Inventory Loss

We recognize a charge to our cost of revenues for losses on valuation of
inventory when the estimated realizable value for our goods in inventory is determined to be below our cost and when the number of units on hand exceeds the number of units that we forecast to sell over a certain period of time.

We have recorded charges of W8,148 million (US$8.8 million) in 2006 and W2,673 million in 2005, and may continue
to record, losses on valuation of inventory attributable to the following principal factors:



| |  |  | inventory build up of lower-grade image sensors, some of which are sold at lower prices to customers that do not require the highest quality due to the nature of
their end-products, such as PC cameras and toys;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | excess inventory build up of image sensors caused by our need to anticipate future orders, as the lead time required by our foundry to fabricate our wafers is often
longer than the lead time our customers provide to us for delivery of our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the short-term nature of purchase commitments or order cancellations, reductions or delays by a significant customer or group of customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | larger write-downs for excess camera modules due to higher per unit price than wafers or dies and more customized specifications, which limit our ability to resell
camera module inventory to other customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulty in accurately forecasting CMOS image sensor demand as we depend on order forecasts from many of our customers who themselves are susceptible to
fluctuating customer demand for mobile phones; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | susceptibility to rapidly declining average sales prices and obsolescence.
| | - |  | --------------------------------------------------------------------------

Gross Profit

Our gross profit
is affected by our revenues from our products and services and by our cost of revenues associated with our products and services. Our overall gross margin was 9.8% in 2004, 24.9% in 2005 and 2.5% in 2006. In 2004, 2005 and 2006, our gross margin for
our services revenues was 81.3%, 81.2%, and 72.2% respectively. We have experienced a decline in our gross margin as we have not been able to shift our product sales to higher margin products, while average sales prices of our existing products
declined.

Operating Expenses

Operating expenses consist primarily of our selling, general and administrative expenses and our research and development expenses.

Selling, General and Administrative. Our selling, general and administrative expenses primarily include:



| |  |  | salary and benefits for our sales, marketing and administration personnel;
| | - |  | --------------------------------------------------------------------------



| |  |  | commissions to our sales agents and other service providers;
| | - |  | ------------------------------------------------------------



| |  |  | stock option compensation expenses;
| | - |  | -----------------------------------



| |  |  | fees for professional services, such as accounting and legal;
| | - |  | -------------------------------------------------------------



| |  |  | rent for our offices; and
| | - |  | -------------------------



| |  |  | travel and entertainment expenses.
| | - |  | ----------------------------------

We expect our selling, general and administrative expenses to decrease through the various cost-cutting measures we have been implementing, such as a 15% reduction in salaries for all non-executive employees, and 20% to 30% reduction in
salaries for all executive officers starting February 2007 and a reduction in rent costs as we moved into our new headquarters in Suwon during June 2007.

Research and Development. The rapid technological change and product obsolescence that characterize our industry requires us to make regular investments in research and development. Our research and development
expenses consist primarily of:



| |  |  | expenses for design tools and software;
| | - |  | ---------------------------------------



| |  |  | research and development personnel salary and benefits
| | - |  | ------------------------------------------------------



| |  |  | costs for the construction of masks, which are prototypes made for each new product in the development stage in order for our independent foundry to test for mass
production viability; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | stock option compensation expenses for our research and development employees.
| | - |  | ------------------------------------------------------------------------------

We recognize all research and development expenses when incurred. Product development time frames vary, but in general, we incur research and development
costs six to 18 months before generating sales from new products.

As part of the Korean governments initiative to promote and
encourage the development of start-up companies in the semiconductor and other high technology industries, high technology start-up companies with industry leading technology or products are eligible for government grants. Certain of those grants
are refundable, depending on the successful development and commercialization of the technology or products, and a company receiving such government grant is required to refund up to 30% of the grant received for such development. If the development
is unsuccessful, then the company is not required to refund any portion of the grant. We received such refundable grant in recognition of our new technology inventions, such as our 1.3 megapixel CMOS image sensor, approximately in the amount of
W339 million on December 20, 2000, W339 million on June 30, 2001, W455 million on July 24, 2002 for a total amount of W1,133 million.
As we have been successful in developing and marketing the technology, we were required to refund 30% of the grant to the government in the amount of W340 million, payable in equal annual installments over three years. We have made
two such installment payments during 2005 and 2006. As of December 31, 2006, we recorded refund for government grants in the amount of W114 million (US$0.1 million), which becomes due and payable in 2007.

Other grants received from the Korean government for research and development activities and for the acquisition of fixed assets and intangible assets
totaled W26 million, W0 million and W5 million for the years ended December 31, 2004, 2005 and 2006, respectively. These grants were used to offset our acquisition costs of the acquired assets.
Grants amortized related to fixed assets and intangible assets were approximately W69 million, W71 million and W24 million for 2004, 2005 and 2006, respectively.

Stock Option Compensation Expenses

Our employees participate in a stock-based compensation plan, which is more fully described in note 18 to our consolidated financial statements. Prior to January 1, 2006, we measured compensation cost for employee stock-options at fair
value under the recognition and measurement provisions of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123). As permitted by SFAS 123, we elected to (1) expense the
fair value of its employee stock options and (2) recognize forfeitures in the period when such forfeitures occur.

Effective January 1,
2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). We have elected the modified prospective transition method for adopting SFAS 123R.

Compensation cost recognized in the year ended December 31, 2006 includes (1) compensation for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (2) compensation cost for all share-based payments granted subsequently to January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS 123R. Results for prior periods have not been restated.

We
incurred stock option compensation expenses of W494 million, W1,099 million and W2,141 million (US$2.3 million) in 2004, 2005 and 2006, respectively. These expenses were related to the amortization
of stock option compensation expenses in relation to options granted to attract and retain members of our senior management and certain employees. We may incur additional stock-based compensation expenses in connection with future stock option
grants. See note 3 to our consolidated financial statements. See Critical Accounting PoliciesAccounting for Stock Options.

Income Tax Expenses

As a designated venture company under Korean law, we are entitled to a 50% reduction in
corporate income tax rates for the year in which we first generate taxable income and the following five years if we satisfy a number of financial and non-financial criteria, including the maintenance of our status as a designated venture company.
As we first generated taxable income in 2003, we were subject to a reduced tax rate of 14.85% for that fiscal year and the same rate applied to 2004. Our tax rate has been further reduced to 13.75% for 2005 due to a general reduction in the Korean
corporate tax rate to 27.5% from 29.7%. In 2006, our tax rate was 13.75%, as we continued to qualify as a venture company. The rate of 13.75% will be effective until December 31, 2008, provided we continue to qualify as a venture company. Our
status as a designated venture company is subject to evaluation and renewal in November of each year. To qualify as a designated venture company, a company must be a small- or medium-sized enterprise under the Framework Act on Small- and
Medium-Sized Enterprises and be found to have, among other things, a superior ability to provide innovation in technology and business by the Small Business Corporation of Korea. In addition, qualified Korean venture capital investment firms must
hold an aggregate of at least 10% of the outstanding shares of such venture company for at least six months prior to the filing of the venture company application. A company may qualify as a small- and medium-sized enterprise if, among other things,
it hires less than 300 full-time employees or its paid-in-capital is W8 billion or less.



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Preferred Shares

In 2003, we issued our Series A preferred shares, which we have reflected as mezzanine equity on our consolidated balance sheet. On December 20,
2005, all of our Series A preferred shares were converted into 1,201,333 common shares in preparation for our initial public offering.

Due
to the redemption right of the holders of our Series A preferred shares, accretion was recorded to the preferred share entries on our consolidated balance sheet over various periods since their issuance dates, with corresponding non-cash charges
reflected below net income (loss) on our consolidated statements of operations for the relevant periods. As a result of the conversion of the Series A preferred shares into our common shares, the amount in excess of the par value of our common
shares to be issued was recorded to additional paid-in capital and there will be no further effect on our statement of operations. For more information on these accretion charges, see note 16 to our consolidated financial statements.

Critical Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, contingent liabilities, and revenues and expenses during the reporting period. We evaluate
our estimates on an ongoing basis based on historical experience and other assumptions we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The policies discussed below are considered by our management to be critical because they are not only important to the portrayal of our financial condition and results of operations, but also
because application and interpretation of these policies require both judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue Recognition

We
recognize revenues only when: the persuasive evidence of a sales arrangement; the price is fixed or determinable; title and risk of loss are transferred to the customer; collection of resulting receivables is considered reasonably assured; product
returns are reasonably estimable; there are no additional customer acceptance requirements; and there are no other remaining significant obligations. We provide for future returns based on historical experience at the time revenue is recognized.

For products sold in the Korean market to our customers without agreements that allow for returns or credits, revenues are recognized upon
shipment of products to the customer. For products sold in the Korean market to customers with agreements that allow for returns or credits, revenues are recognized upon product acceptance.

For products sold outside of Korea, title and risk of loss transfers to customers upon shipment, and at that point, there are no further customer
acceptance requirements or rights of return. Accordingly, revenue is recognized upon product shipment.

We recognize service revenues from
the provision of engineering and technology services, such as CMOS image sensor design services, engineering know-how, and testing services to Dongbu HiTek. We recognize the associated service revenues only upon the completion of and acceptance by
the customer of the engineering assistance performed. The revenue is based on a fixed fee, which is agreed upon prior to initiation of the engineering assistance. Our agreement to provide these services to Dongbu HiTek, which was entered into on
September 17, 2004, has a one-year term to be automatically renewed annually unless either party delivers a 30-day prior notice electing not to renew the agreement.

We provide a basic limited warranty for defective products that is normally valid for 12 months from the date of purchase. Since products are sold to customers after extensive product testing and the revenue from our
major customers in Korea is recognized after customer acceptance, which would identify any defective products, we have not experienced any significant costs to service its products sold under warranty in Korea. For products sold outside of Korea,
revenue is recognized at the point of shipment, and at that date, we accrue a liability for the estimated costs that may be incurred under the limited warranty provided to its customers. Warranty costs accrued include the costs to replace the
defective product. Total warranty costs incurred to date have not been significant.



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Allowance for Doubtful Accounts

An allowance for doubtful accounts is provided based on our managements judgment which considers historical experience and specific knowledge of
accounts that may not be collectible. Accounts receivable are charged off against allowance for doubtful accounts if all collection efforts have been exhausted and the likelihood of recovery is considered remote.

Allowance for Inventory Valuation

Inventories are stated at the lower of cost, using the weighted-average method, or market value. If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the difference
is recognized as a loss on valuation of inventories. We estimate the net realizable value for such finished goods and work-in-progress based primarily upon the latest invoice prices and current market conditions. Inventory reserves are established
when conditions indicate that the net realizable value is less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes. Reserves are also established for excess inventory based on inventory levels, as judged
by management, for each specific product. The determination of reserves for obsolete and excess inventory involves significant judgment, including the ability to forecast customer demand, trends in the development of new technology, and other market
forces affecting the price for our products. To date, we have used historical data and other industry trends to forecast customer demand and price levels. However, these estimates could vary significantly from actual results.

Stock-based Compensations

Our
employees participate in a stock-based compensation plan, which is more fully described in note 18 to our consolidated financial statements. Prior to January 1, 2006, we measured compensation cost for employee stock-options at fair value under
the recognition and measurement provisions of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123). As permitted by SFAS 123, we elected to (1) expense the
fair value of its employee stock options and (2) to recognize forfeitures in the period when such forfeitures occur.

Effective
January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). We have elected the modified prospective transition method for adopting SFAS 123R.

Compensation cost recognized in the year ended December 31, 2006 includes (1) compensation for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (2) compensation cost for all share-based payments granted subsequently to January 1, 2006,
based on the grant date fair value estimated in accordance with the original provisions of SFAS 123R. Results for prior periods have not been restated.

Stock-based compensation expense is recognized ratably over the vesting period.

As stock-based
compensation expense recognized in the 2006 statement of operations is based on awards that are ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The adoption of SFAS 123R resulted in a
cumulative effect of a change in accounting principle consisting of a benefit of W132 million in the year ended December 31, 2006, which reflects the cumulative impact of estimating future forfeitures related to non-vested
stock-options previously expensed in the statement of income under SFAS 123, rather than recording forfeitures when they occur as previously permitted.

We use the Black-Scholes option valuation model to determine the fair value of stock options at the date of grant. Refer to note 18 to our consolidate financial statements for details of the assumptions used in
calculating the fair value of our stock options.



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Impairment of Long-lived Assets

We review the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset might not be fully recoverable. When such an event occurs, we estimate the future cash flows expected to result from the use of the asset (or group of assets, including the asset in question, that represents the lowest level of
separately-identifiable cash flows) and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset or group of assets, an impairment loss is recognized in order to write-down the carrying
value of the asset or group of assets to its estimated fair value. Fair value is determined by discounting the cash flows expected to be generated by the asset, when the quoted market prices are not available for the long-lived assets. Estimated
future cash flows are based on assumptions and are subject to risk and uncertainty.

We recognized W189 million and
W41 million of impairment loss on goodwill related to Pixelplus Technology Inc. as operating expenses for the years ended December 31, 2004 and 2005, respectively, as such goodwill was not expected to be recoverable. We recognized
W156 million of impairment loss on the entire book value of Pixelplus Technology Inc.s fixed assets and intangible assets as operating expenses for the year ended December 31, 2006 as the future cash flows expected to result
from the use of Pixelplus Technology Inc.s fixed assets and intangible assets were expected to be negative for their remaining useful lives. We also recognized W133 million of impairment loss on our club membership as other
expenses for the year ended December 31, 2006 due to a decline in fair value below its carrying value as of December 31, 2006, which we believe is other than temporary.

A. Operating results.

The following table sets forth the results of our operations expressed as a
percentage of our total sales for the periods indicated. Our historical operating results are not necessarily indicative of the results for any future period.



|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | - |  | ----- | - |  | ----- | -
|                                                                                                                   |  | For the Years Ended December 31, |  
|                                                                                                                   |  | 2004                             |   |  | 2005  |   |  | 2006  |  
|Revenues:                                                                                                          |  |                                  |   |  |       |   |  |       |  
|Products                                                                                                           |  | 87.6                             | % |  | 93.0  | % |  | 83.8  | %
|Services                                                                                                           |  | 12.4                             |   |  | 7.0   |   |  | 16.2  |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Total revenues                                                                                                     |  | 100.0                            |   |  | 100.0 |   |  | 100.0 |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Cost of revenues:                                                                                                  |  |                                  |   |  |       |   |  |       |  
|Products                                                                                                           |  | 87.9                             |   |  | 73.8  |   |  | 93.0  |  
|Services                                                                                                           |  | 2.3                              |   |  | 1.3   |   |  | 4.5   |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Total cost of revenues                                                                                             |  | 90.2                             |   |  | 75.1  |   |  | 97.5  |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Gross profit                                                                                                       |  | 9.8                              |   |  | 24.9  |   |  | 2.5   |  
|Operating expenses:                                                                                                |  |                                  |   |  |       |   |  |       |  
|Selling, general and administrative                                                                                |  | 11.1                             |   |  | 15.4  |   |  | 38.2  |  
|Research and development                                                                                           |  | 8.9                              |   |  | 8.4   |   |  | 18.2  |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Total operating expenses                                                                                           |  | 20.0                             |   |  | 23.8  |   |  | 56.4  |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Income (loss) from operations                                                                                      |  | (10.2                            | ) |  | 1.1   |   |  | (54.0 | )
|Other income (expense):                                                                                            |  |                                  |   |  |       |   |  |       |  
|Interest income (expense), net                                                                                     |  | (0.6                             | ) |  | (1.3  | ) |  | 0.9   |  
|Foreign exchange gain, net                                                                                         |  | 0.9                              |   |  | 0.5   |   |  | (3.9  | )
|Others, net                                                                                                        |  | 0.0                              |   |  | 0.1   |   |  | (0.3  | )
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Total other income (expense)                                                                                       |  | 0.3                              |   |  | (0.7  | ) |  | (3.3  | )
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Income (loss) before income taxes, gain (loss) from equity method investments, dilution gain and minority interest |  | (9.9                             | ) |  | 0.4   |   |  | (57.3 | )
|Income tax expenses                                                                                                |  | 0.7                              |   |  |      |   |  |      |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Income (loss) before gain (loss) from equity method investments, dilution gain and minority interest               |  | (10.6                            | ) |  | 0.4   |   |  | (57.3 | )
|Gain (loss) from equity method investments, net                                                                    |  | (0.8                             | ) |  | 0.2   |   |  | 0.0   |  
|Dilution gain from equity method investments                                                                       |  | 0.0                              |   |  | 1.0   |   |  |      |  
|Minority interest                                                                                                  |  |                                 |   |  | 0.8   |   |  | 2.6   |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Net income (loss) before cumulative effect of change in accounting principle                                       |  | (11.4                            | ) |  | 2.4   |   |  | (54.7 | )
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Cumulative effect of change in accounting principle                                                                |  |                                 |   |  |      |   |  | 0.4   |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Net income (loss)                                                                                                  |  | (11.4                            | ) |  | 2.4   |   |  | (54.3 | )
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Accretion of preferred shares                                                                                      |  | (4.3                             | ) |  | (4.6  | ) |  |      |  
|                                                                                                                   |  |                                  |   |  |       |   |  |       |  
|Net loss attributable to common shareholders                                                                       |  | (15.7                            | ) |  | (2.2  | ) |  | (54.3 | )



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##### Table of Contents

2006 compared to 2005

Revenues

We generated total revenues of W31,996 million (US$34.4 million) in
2006, a decrease of 23.1% from our total revenues of W41,584 million in 2005.

Products. Our revenues from sales of
our products decreased by 30.6% to W26,825 million (US$28.8 million) in 2006 from W38,678 million in 2005, primarily due to a decrease in sales volume and a decrease in the average sales price of our cameral
modules.



| |  |  | CMOS Image Sensors. Our revenues from sales of our CMOS image sensors increased by 35.3% to W23,723 million (US$25.5 million) in 2006 from
W17,540 million in 2005, primarily as a result of an increase in sales of our SXGA 1.3 megapixel image sensors to Logitech, partially offset by an approximately 6% decrease in the average sales price of our CMOS image sensors. We
sold 13.3 million CMOS image sensors in 2006, compared to 9.3 million in 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Camera Modules. Our revenues from sales of our camera modules decreased by 86.4% to W2,792 million (US$3.0 million) in 2006 from
W20,548 million in 2005, primarily as a result of an approximately 84% decrease in our sales volume to 0.5 million camera modules in 2006, compared to 3.1 million in 2005, and a decrease in the average selling price by
approximately 13%.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Services. Our revenues from services increased 77.9% to W5,171 million
(US$5.6 million) in 2006 from W2,906 million in 2005, primarily as a result of an increase in Dongbu HiTeks sales volume to Sharp which increased to 19.4 million image sensors in 2006, compared to 7.7 million image
sensors sold in 2005, offset by a decrease in service fees received from Dongbu HiTek caused by an approximately 27% decrease in the average sales price of CMOS image sensors sold by Dongbu HiTek to Sharp.

Cost of Revenues

Products. Our cost of revenues from sales of our products decreased slightly by 2.9% to W29,770 million (US$32.0 million) in 2006 from W30,671 million in 2005. The percentage decrease in cost of
revenues did not correspond to the percentage decrease of revenues as a result of provisions for losses on valuation of inventory, which increased by 204.8% to W8,148 million (US$8.8 million) in 2006 from W2,673
million in 2005, primarily due to errors in forecast by us with relation to the UXGA 2.0 megapixel product. This resulted in a significant increase in our cost of sales for our products, which was offset by:



| |  |  | Total cost of outsourced manufacturing, testing and assembly of our products which decreased by 33.7% to W5,459 million (US$5.9 million) in 2006
from W8,238 million in 2005, primarily due to the lower sales volume for our camera modules in 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total cost of materials which decreased by 19.2% to W14,194 million (US$15.3 million) in 2006 from W17,557 million in 2005,
primarily due to lower per-unit cost of materials caused by a higher number of products sold using the 0.18μm technology in 2006 as compared to 2005, partially offset by an increase in costs reflecting an increase in sales volume of our CMOS
image sensors and camera modules. Products using the 0.18μm technology have lower per-unit material costs than products using the 0.25μm technology.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



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##### Table of Contents

| |  |  | Total cost of salary and benefits, including stock-based compensation expenses, of our employees and other expenses associated with outsourced product
manufacturing, customization and support decreased by 10.6% to W1,969 million (US$2.1 million) in 2006 from W2,203 million in 2005, primarily due to a reduction in salaries paid to employees engaged in the assembly
of modules, as we switched to selling our CMOS sensors in CSP format rather than further processing them into modules during 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Services. Our cost of revenues from our services increased by 163.4% to W1,438 million (US$1.5 million) in 2006 from W546 million in 2005, primarily due to a 151.9% increase in
sales to 19.4 million units in 2006 from 7.7 million in 2005.

Gross Profit

Our gross profit decreased to W788 million (US$0.9 million) in 2006 from W10,367 million in 2005, representing gross
margins of 2.5% and 24.9%, respectively. Gross margins decreased in 2006 primarily as a result of higher cost of revenues caused by an increase in provision for losses on valuation of inventory, decreasing average sales price, loss of major
customers and delays in launching our next-generation products. Our overall gross profit decrease in 2006 was offset by an increase in revenues from services

Operating Expenses

Our operating expenses increased by 82.2% to W18,054
million (US$19.4 million) in 2006 from W9,910 million in 2005, as result of increases in our selling, general and administrative and research and development expenses.

Selling, General and Administrative

Our selling, general and administrative expenses increased by 90.7% to W12,220 million (US$13.1 million) in 2006 from W6,407 million in 2005, primarily due to increases in total salary, benefits and stock
option compensation to our sales, marketing and administration employees and commissions to our international sales agents and fees to other service providers, in addition to an increase in our provision for allowance for doubtful accounts, along
with increased costs of litigation for IP and class-action litigations, and regulatory compliance costs as a public company.



| |  |  | Total salary, benefits and stock compensation to our sales, marketing and administration employees increased 79.7% to W6,611 million (US$7.1
million) in 2006 from W3,678 million in 2005. This increase was primarily due to an increase in our sales, marketing and administration personnel to 62 employees in 2006 from 55 employees in 2005, an increase in the average
compensation of those employees, W1,390 million captured as special bonus paid to our senior management during January and July 2006, and an increase in stock option compensation expenses due to options for 90,000 common shares
granted to employees in 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total commissions to international sales agents and fees to other service providers increased 122.5% to W2,138 million (US$2.3 million) in 2006
from W961 million in 2005, primarily due to an increase in fees to our independent registered public accountants for their U.S. GAAP audit services, along with increased legal fees since the IPO as a result of the patent litigation
with MagnaChip and the shareholders litigation currently being carried out against us, partially offset by a reduction in total commissions paid to international sales agents to W142 million in 2006 from W455
million in 2005 as volume of sales made by our international agents dropped in 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and Development

Our research and development expenses increased by 66.5% to W5,834 million (US$6.3 million) in 2006 from
W3,503 million in 2005, primarily as a result of our transition from 0.25 μm to 0.18 μm technology, an increase in salary and benefits for our



32



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##### Table of Contents

research and development personnel, which included W95 million of special bonuses paid on January and July 2006 for the increased
responsibilities of the management for running a publicly-listed company, and an increase of the applicable employee headcount to 52 as of December 31, 2006 from 35 as of December 31, 2005.

Other Income (Expense)

We
recorded net other expense of W1,058 million (US$1.1 million) in 2006 after recording net other expense of W315 million in 2005, principally as a result of an increase in net foreign exchange losses in 2006.

Interest Expense, Net

We recorded net interest income of W292 million (US$0.3 million) in 2006 after recording net interest expense of W539 million in 2005, primarily due to interest income received in 2006 from investing our
cash and cash equivalents, consisting of proceeds from our initial public offering. Also, we had lower interest expense in 2006 when compared with 2005 because of a decrease in our short-term and long-term borrowings in 2006 to
W7,890 million from W11,007 million in 2005, as we repaid a portion of our loans with the proceeds from our initial public offering.

Foreign Exchange Gain(loss), Net

We recorded net foreign exchange loss of W1,241
million (US$1.3 million) in 2006 after recording net foreign exchange gain of W194 million in 2005, which was attributable to the appreciation of the Korean Won against the U.S. Dollar.

Income Tax Expenses

We did
not recognize any income tax expenses in 2006 and 2005 as we did not have any taxable income.

Gain from Equity Method Investment

Our gain from equity method investment decreased by 94.1% to W5 million (US$6 thousand) in 2006 from
W85 million in 2005, reflecting reduced net income at Tesna.

Dilution Gain from Equity Method Investment and
Consolidated Subsidiary

We did not recognize any dilution gain from equity investments and consolidated subsidiary in 2006. We
recognized a dilution gain from equity method investment and consolidated subsidiary of W411 million in 2005, as a result of dilutions in our equity interests in Tesna from 20.0% to 13.9% and in PTI, our consolidated subsidiary,
from 42.9% to 31.9%, in 2005.

Minority Interest

Our minority interest increased by 139.9% to W818 million (US$0.9 million) in 2006 from W341 million in 2005, due to the
minority interest in PTI. The minority share of the loss from PTI totaled W2,286 million (US$2.5 million) in 2006. However, as PTIs equity balance became negative in 2006, we only recognized the portion of the minority share
of the loss from PTI, amounting to W818 million (US$0.9 million) with the excess amount of W1,468 million (US$1.6 million) recognized by us.

Cumulative Effect of Change in Accounting Principle

Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) for the accounting of our employees stock-based compensation plan. See
Critical Accounting Policies and EstimatesStock-based Compensation. The adoption of SFAS 123(R) resulted in a cumulative effect of a change in accounting principle consisting of a benefit of W132 million in
the year ended December 31, 2006, which reflects the cumulative impact of estimating future forfeitures related to non-vested stock-options previously expensed in the statement of income under FAS 123, rather than recording forfeitures when they
occur, as previously permitted.

Net Income (Loss)

We recognized net loss from operations of W17,369 million (US$18.7 million) in 2006, compared to a net income of W979
million in 2005, as a result of the cumulative effect of the factors described above.

Accretion of Preferred Shares

We recorded a charge to retained earnings and additional paid-in capital for accretion of preferred shares of
W1,927 million in 2005, to account for the accretion related to the redemption amounts of our Series A preferred shares until the conversion date. We recorded no such charges in 2006 as all of our outstanding preferred shares were
converted into common shares on December 20, 2005.



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##### Table of Contents

Net Loss Attributable to Common Shareholders

Our net loss attributable to common shareholders increased to W17,369 million (US$18.7 million) in 2006 from W948
million in 2005, which is equal to our total net loss as there are no outstanding preferred shares.

2005 compared to 2004

Revenues

We generated total
revenues of W41,584 million in 2005, an increase of 16.2% from our total revenues of W35,796 million in 2004.

Products. Our revenues from sales of our products increased by 23.4% to W38,678 million in 2005 from W31,356 million in 2004, primarily due to an increase in sales volume of our CMOS image sensors,
partially offset by a decrease in the average sales price of our products.



| |  |  | CMOS Image Sensors. Our revenues from sales of our CMOS image sensors increased by 178.6% to W17,540 million in 2005 from
W6,296 million in 2004, primarily as a result of an increase in sales of our VGA 0.3 megapixel image sensors to our customers in China, partially offset by an approximately 73% decrease in the average sales price of our CMOS image
sensors. We sold 9.3 million CMOS image sensors in 2005, compared to 0.9 million in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Camera Modules. Our revenues from sales of our camera modules decreased by 16.7% to W20,548 million in 2005 from W24,663
million in 2004, primarily as a result of an approximately 40.5% decrease in the average sales price of our camera modules, partially offset by an increase in our sales volume to 3.1 million camera modules sold in 2005, compared to
2.2 million in 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Services. Our revenues from services decreased by 34.5% to W2,906
million in 2005 from W4,440 million in 2004, primarily as a result of a decrease in service fees received from Dongbu HiTek caused by an approximately 37% decrease in the average sales price of CMOS image sensors sold by Dongbu
HiTek to Sharp.

Cost of Revenues

Products. Our cost of revenues from sales of our products decreased by 2.5% to W30,671 million in 2005 from W31,457 million in 2004, primarily as a result of a decrease in our
provision for losses on valuation of inventory and our cost of outsourced manufacturing in 2005, partially offset by increases in our costs of materials and salary and benefits in 2005.



| |  |  | Total provision for losses on valuation of inventory decreased by 63.6% to W2,673 million in 2005 from W7,349 million in 2004,
primarily due to a significant decrease in the amount of order cancellations from our customers in 2005. Our net loss on valuation of inventory in 2004 was primarily attributable to order cancellations from Maxon and Telson.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total cost of outsourced manufacturing, testing and assembly of our products decreased by 22.8% to W8,238 million in 2005 from
W10,674 million in 2004, primarily due to a significant reduction in the per unit cost of outsourced assembly of our camera modules in 2005 primarily attributable to our new lower-cost camera module assembly contractors in China,
partially offset by an increase in the volume of our products manufactured.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total cost of materials increased by 38.6% to W17,557 million in 2005 from W12,664 million in 2004, primarily due to increases in
sales volume of our CMOS image sensors and camera modules.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total cost of salary and benefits, including stock-based compensation expenses, of our employees and other expenses associated with outsourced product
manufacturing, customization and support increased by 186.5% to W2,203 million in 2005 from W769 million in 2004, primarily due to an increase in relevant employee headcount to 29 in 2005 from 21 in 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Services. Our cost of revenues from our services decreased by 34% to W546 million
in 2005 from W831 million in 2004, primarily due to a decrease in per unit testing fees and an increase in manufacturing yield by Dongbu HiTek which reduced the number of wafers required to be tested to achieve the same number of
usable wafers sold to Sharp by Dongbu HiTek.

Gross Profit

Our gross profit increased to W10,367 million in 2005 from W3,508 million in 2004, representing gross margins of 24.9%
and 9.8%, respectively. Gross margins increased in 2005 primarily as a result of a shift in our product mix, whereby our sales of CMOS image sensors increased from 17.6% of our total revenues in 2004 to 42.2% of our total revenues in 2005, a
decrease in our losses on valuation of inventory, a decrease in our module assembly costs and sales of products in our inventory that have previously been written off, partially offset by a decline in average sales prices of our CMOS image sensors
and camera modules and temporary lower manufacturing yields. In addition, gross margin increased as we recorded W1,406 million in gross profit on the sale of PO1030 image sensor inventory, which had been previously written off at
December 31, 2004. Costs of W2,839 million were previously expensed prior to December 31, 2004 for these units. Our overall gross profit increase in 2005 was offset by a decrease in our gross profit from services to
W2,360 million in 2005 from W3,609 million in 2004, representing gross margins of 81.2% and 81.3%, respectively.

Operating Expenses

Our operating expenses increased by 38.1% to W9,910 million in 2005 from
W7,177 million in 2004, as result of increases in our selling, general and administrative and research and development expenses.

Selling, General and Administrative

Our selling, general and administrative expenses increased by 61.6% to
W6,407 million in 2005 from W3,966 million in 2004, primarily due to increases in total salary, benefits and stock option compensation to our sales, marketing and administration employees and commissions to our
international sales agents and fees to other service providers, partially offset by a decrease in our provision for allowance for doubtful accounts.



| |  |  | Total salary, benefits and stock compensation to our sales, marketing and administration employees increased by 184.7% to W3,678 million in 2005
from W1,292 million in 2004. This increase was primarily due to an increase in our sales, marketing and administration personnel to 55 employees in 2005 from 32 employees in 2004, an increase in the average compensation of those
employees and an increase in stock option compensation expenses due to options for 187,000 common shares granted to employees in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total commissions to international sales agents and fees to other service providers increased by 110.3% to W961 million in 2005 from
W457 million in 2004, primarily due to an increase in sales by our sales agents to customers in China and increase in fees to our independent registered public accountants for their U.S. GAAP audit services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total provision for allowance for doubtful accounts decreased by 99.2% to W11 million in 2005 from W1,447 million in 2004, as none
of our top customers failed to make required payments in 2005, unlike 2004 when two of our top ten customers failed to make required payments in the aggregate amount of W1,431 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and Development

Our
research and development expenses increased by 9.1% to W3,503 million in 2005 from W3,211 million in 2004, primarily as a result of our transition from 0.25 μm to 0.18 μm technology and an increase in
salary and benefits for our research and development personnel, partially offset by a decrease in expenses for masks as we entered into a new design phase for our next generation of products, which generally precedes the prototype mask development
phase, in 2005.



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##### Table of Contents

Other Income (Expense)

We recorded net other expense of W315 million in 2005 after recording net other income of W110 million in 2004,
principally as a result of an increase in interest expenses and a decrease in net foreign exchange gain in 2005.

Interest Expense, Net

Our net interest expense increased by 134.3% to W539 million in 2005 from W230 million in 2004,
primarily due to an increase in our short-term borrowings in 2005.

Foreign Exchange Gain, Net

Our net foreign exchange gain decreased by 42.4% to W194 million in 2005 from W337 million in 2004, which was
attributable to currency fluctuations between the U.S. dollar and the Korean Won.

Income Tax Expenses

We did not recognize any income tax expenses in 2005, compared to income tax expenses of W234 million in 2004.

Gain (Loss) from Equity Method Investment

Our gain from equity method investment was W85 million in 2005, compared to a loss of W272 million in 2004, reflecting an increase in Tesnas net income in 2005 from 2004.

Dilution Gain from Equity Method Investment and Consolidated Subsidiary

We recognized a dilution gain from equity method investment and consolidated subsidiary of W337 million and W74 million
in 2005, respectively, as a result of dilutions in our equity interests in Tesna from 20.0% to 13.9% and in PTI, our consolidated subsidiary, from 42.9% to 31.9%, in 2005. We did not recognize any dilution gain from equity method investments and
consolidated subsidiaries in 2004.

Minority Interest

We recognized minority interest of W341 million in 2005 due to our 37.5% equity interest in PTI. We did not recognize any minority
interest in 2004, as PTI was accounted for under the equity method.

Net Income (Loss)

We recognized net income from operations of W979 million in 2005, compared to a net loss of W4,065 million in 2004, as a
result of the cumulative effect of the factors described above.

Accretion of Preferred Shares

We recorded a charge to retained earnings and additional paid-in capital for accretion of preferred shares of W1,927 million in 2005,
compared to W1,569 million in 2004, to account for the accretion related to the redemption amounts of our Series A preferred shares until the conversion date.

Net Loss Attributable to Common Shareholders

Our net loss attributable to common shareholders decreased to W948 million in 2005 from W5,634 million in 2004, due to increased income from operations in 2005.



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##### Table of Contents

Inflation

Inflation in Korea and our other principal markets has not had a material impact on our results of operations. Inflation in Korea was 3.6% in 2004, 2.7% in 2005 and 2.2% in 2006.

Foreign currency risk

In 2006, approximately 94% of
our total revenues were denominated in U.S. dollars. In most of the countries in which our products are sold, including Korea, the revenues generated from our customers are denominated in U.S. dollars. While we received most of our revenues in U.S.
dollars, 70.7% of our selling, general and administrative expenses and 6.3% of our cost of revenues in 2006 were denominated in Korean Won. Our financial statements are also prepared and presented in Korean Won. Appreciation or depreciation of the
Korean Won against the U.S. dollar during any given period will result in foreign currency losses or gains and affect our gross profits and net income(loss) during that period, because our revenues and our cost of revenues may be recorded in
different currencies. In 2006, we estimate that a hypothetical 10.0% appreciation of the Korean Won against the U.S. dollar would have reduced our net loss by approximately 0.58%, mainly due to foreign exchange loss from our cash and cash equivalent
in foreign currency. In addition, we estimate that a hypothetical 10.0% appreciation of the Korean Won against the U.S. dollar would have reduced our gross margin by approximately 10.68%.

In addition, we received US$33.8 million (W34,131 million applying December 31, 2005 exchange rate) in U.S. dollars from our initial
public offering in December 2005. We converted all proceeds received from the initial public offering into Korean Won in the second half of 2006. To date, we have not engaged in any foreign currency hedging activity to reduce our exposure to
exchange rate fluctuations. If necessary, we plan to enter into hedging transactions in the future to reduce our exposure to foreign currency exchange risks.

Interest Rate Risk

Our risk exposure from changes in interest rates relates primarily to the interest expense due to our
short-term and long-term borrowings and the interest income generated by excess cash invested in short-term bank deposits. Interest-earning instruments carry a degree of interest rate risk. As substantially all of our cash and cash equivalents
consist of bank deposits, we do not expect any material change with respect to our net income(loss) as a result of a 10% hypothetical interest rate change.

We may be exposed to interest rate risks on additional debt financing that we may periodically undertake to fund capital expenditures, as well as for working capital and other general corporate purposes. Upward
fluctuations in interest rates increase the cost of new debt. The interest rate that we will be able to obtain in a new debt financing will depend on market conditions at that time and may differ from the rates we have secured on our current debt.

To date, we have not entered into any hedging or derivative transaction with regard to interest rates to manage our exposure to changes in
interest rates. We currently do not have any plan to enter into such hedging or derivative transactions.

B. Liquidity and capital resources.

The following table sets forth a summary of our cash flows for the periods indicated:



|                                                             |  |                                                          |        |   |      |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------ |  | -------------------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                             |  | For the Years Ended December 31,                         |       
|                                                             |  | 2004                                                     |        |   | 2005 |   |        | 2006 |  |   | 2006    |  
|                                                             |  | (in millions of Korean Won and thousandsof U.S. dollars) |       
|Net cash provided by / (used in) operating activities        |  | W                                                        | (5,364 | ) |      | W | (2,550 | )    |  | W | (12,290 | ) |  | $ | (13,216 | )
|Net cash provided by / (used in) investing activities        |  |                                                          | (1,499 | ) |      |   | (1,264 | )    |  |   | (3,606  | ) |  |   | (3,877  | )
|Net cash provided by / (used in) financing activities        |  |                                                          | 7,718  |   |      |   | 33,615 |      |  |   | (2,918  | ) |  |   | (3,138  | )
|Effect of exchange rate changes on cash and cash equivalents |  |                                                          | 53     |   |      |   | (70    | )    |  |   | (2      | ) |  |   | (2      | )
|Net increase in cash and cash equivalents                    |  |                                                          | 908    |   |      |   | 29,731 |      |  |   | (18,816 | ) |  |   | (20,233 | )
|Cash and cash equivalents at the beginning of the year       |  |                                                          | 286    |   |      |   | 1,194  |      |  |   | 31,040  |   |  |   | 33,377  |  
|Change in consolidated subsidiary                            |  |                                                          |       |   |      |   | 115    |      |  |   |        |   |  |   |        |  
|Cash and cash equivalents at the end of the year             |  |                                                          | 1,194  |   |      |   | 31,040 |      |  |   | 12,224  |   |  |   | 13,144  |  



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Our principal capital requirements are to fund working capital needs, to meet required debt payments and
to invest in research and development. We anticipate that our existing cash balance, along with our available credit facilities, will be sufficient to meet our working capital needs, our research and development and capital expenditures needs for
2007. As of December 31, 2006 we had total long-term debt outstanding of W167 million.

Our principle sources of
liquidity are our cash, cash equivalents and available borrowings under our credit facilities of W9,200 million. As of December 31, 2006, our cash and cash equivalents balance was W12.2 billion, or 38.7% of our
total assets, a W18.8 billion decrease from W31.0 billion or 53.4% of total assets as of December 31, 2005. The decrease in cash and cash equivalents was due to cash outflow from operating activities, cash
outflows for investing activities and cash outflow from financing activities due to repayment of borrowings.

Cash used in operating
activities was W12.3 billion during the year 2006, which principally reflects the Companys net loss of W17.4 billion adjusted by non-cash items composed mainly of provision for inventory losses, accounts
receivables, and stock compensation expenses. We recorded a net loss of W17.4 billion in 2006, compared to a net income of W979 million in 2005. This decrease in cash from operating activities between the two
periods was primarily due to a net loss partially offset by provisions for inventory losses of W8,148 million during the year 2006.

Our working capital balance as of December 31, 2006 was W12.2 billion compared to W30.9 billion as of December 31, 2005. The decrease of W18.7 billion in
our working capital balance was primarily due to a W18.8 billion decrease in cash and cash equivalent, a W6.7 billion decrease in accounts receivable, net and a W3.7 billion decrease in inventories,
net, partially offset by a W7.2 billion decrease in trade accounts payable and a decrease in short term borrowings.

For
investing activities, we used cash of approximately W3,606 million in 2006 compared to W1,264 million in 2005. The increase in cash used for investing activities during the year 2006 was primarily attributable to
higher capital equipment expenditures during the year and the purchase of a golf membership. We did not consummate any business acquisitions during the year 2006.

For financing activities, we used W2,918 million for the year ended December 31, 2006, compared to a cash inflow of W33,615 million for the year ended December 31, 2005. As
we had sufficient capital resources available to serve our capital requirements we did not have significant financing activities during the year 2006. Cash outflow in 2006 was mainly for the repayment of short-term borrowings, which consisted of
loans under the revolving credit facilities with banks.

Future Financing Activities.Our primary future capital requirements on a
recurring basis will be funding working capital needs, meeting required debt payments, funding research and development, and capital expenditures. We anticipate that available borrowings under our senior credit facility, will be sufficient to meet
these capital requirements for 2007. Thereafter, we may need to incur additional debt or issue equity to fund out working capital needs. However, we cannot assure you that such financing will be available to us on acceptable terms or that such
financing will be available at all.

We had total borrowings of W9,093 million (US$9.8 million) as of December 31,
2006, compared to total borrowings of W9,238 million as of December 31, 2005. The weighted average interest rates under the terms of our borrowings were 5.71% and 5.51% as of December 31, 2005 and 2006, respectively. All
of our borrowings are loans from local banks extended to us under various secured and unsecured credit facilities.

The following table
sets forth our total borrowings as of the dates indicated:



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Short-Term Borrowings



|                                                                                                                                                                                         |  |                            |  |        |    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ------ | ---
|                                                                                                                                                                                         |  | As of December 31,         | 
|                                                                                                                                                                                         |  | 2005                       |  | 2006   |    
|                                                                                                                                                                                         |  | (in millions of KoreanWon) | 
|Loans, principally from banks:                                                                                                                                                           |  |                            |  |        |    
|Won denominated loans with weighted-average interest rates of 5.9% and 5.4% as of December 31, 2005 and 2006, due February 9, 2007
and September 12, 2007                                |  | W7,000                     |  | W6,000 | (1)
|U.S. Dollar denominated loans with weighted-average interest rates of 5.9% and 5.5% as of December 31, 2005 and 2006 due
January 12, 2007, February 14, 2007, April 2, 2007, May 2, 2007 |  | 1,474                      |  | 632    |    
|                                                                                                                                                                                         |  |                           
|Loans against receivables with weighted-average interest rate 6.2% as of December 31, 2005                                                                                               |  | 471                        |  |       |    
|Current portion of long-term borrowings                                                                                                                                                  |  | 613                        |  | 291    |    
|Cash overdraft with weighted-average interest rate of 6.1% and 7.0% as of December 31, 2005 and 2006, respectively, due September 7,
2007                                                |  | 803                        |  | 800    |    
|                                                                                                                                                                                         |  |                            |  |        |    
|Total                                                                                                                                                                                    |  | W10,361                    |  | W7,723 |    
|                                                                                                                                                                                         |  |                            |  |        |    

---

|(1) | On January 23, 2007, we entered into a new short-term borrowing contract in the form of a credit facility with the Industrial Bank of Korea, whereby we obtained
access to funds of W7,000 million, bearing interest rate at 5.9%, and repaid, in February 2007, our existing short-term borrowing from the Korea Exchange Bank amounting to W5,000 million as of December 31, 2006. We
have repaid most of the balance drawn from this credit facility and W620 million remained outstanding as of May 31, 2007. This credit facility is secured by a cash deposit of W3,500 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-Term Borrowings



|                                                                                                     |  |                            |   |  |      |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ---- | -
|                                                                                                     |  | As of December 31,         |  
|                                                                                                     |  | 2005                       |   |  | 2006 |  
|                                                                                                     |  | (in millions ofKorean Won) |  
|Unsecured loans, representing obligations principally to banks:                                      |  |                            |   |  |      |  
|Due September 30, 2007 and November 15, 2008 with interest rates ranging from 3.5% to 4.3% per annum |  | W1,259                     |   |  | W458 |  
|Less: current portion                                                                                |  | (613                       | ) |  | (291 | )
|                                                                                                     |  |                            |   |  |      |  
|Total                                                                                                |  | W646                       |   |  | W167 |  
|                                                                                                     |  |                            |   |  |      |  

Capital Resources

Our primary source of liquidity has been the net proceeds from our sale of common shares and funds from our short-term and long-term borrowings. As of
December 31, 2006, our cash and cash equivalents primarily consist of cash on hand and bank deposits. As of December 31, 2006, we had W12,224 million (US$13.1 million) in cash and cash equivalents. We have entered into
various Korean Won denominated borrowing arrangements with certain Korean domestic banks, with an aggregate maximum facility of W7,800 million and a collateralized borrowing facility of W1,400 million, of which
W7,258 million and W0 million were outstanding, at December 31, 2006, respectively. In addition, we have entered into a certain foreign currency denominated debt facility of NT$70 million, of which NT$22.1
million were outstanding at December 31, 2006. On January 23, 2007, we entered into a new short-term borrowing contract in the form of a credit facility with the Industrial Bank of Korea, whereby we obtained access to funds of
W7,000 million, bearing interest rate at 5.9%, and repaid, in February 2007, our existing short-term borrowing from the Korea Exchange Bank amounting to W5,000 million as of December 31, 2006. We have repaid most of
the balance drawn from the credit facility and W620 million remained outstanding as of May 31, 2007. This credit facility is secured by a cash deposit of W3,500 million.

We believe that our current cash, cash equivalents and proceeds from borrowings, will be sufficient to meet our capital needs, including anticipated
capital expenditures, for at least the next 12 months. Our capital requirements and liquidity will depend on many factors, including our ability to increase revenue by generating higher sales volume of high-margin products, the level at which we
maintain inventory and accounts receivables, market acceptance of our products, technological advances, costs of securing access to adequate manufacturing capacity, increases in our operating expenses and our relationship with our outsourcing
contractors. As of December 31, 2006, we had net cash and cash equivalents of W12,224 million. Even though we generated net losses in 2006, we



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continue to incur high fixed costs in order to continue our R&D efforts for development of new products, which is crucial to the continuation of our
business. To the extent that funds remaining from our initial public offering, together with existing resources and cash from operations, if any, are insufficient to fund our future activities, we may need to raise additional funds through public or
private equity or debt financing or from borrowings. Additional funds may not be available, or if available, we may not be able to obtain them on terms favorable to us or to our shareholders.

As of December 31, 2006, we have not entered into any material financial guarantee or similar commitment to guarantee the payment obligation of a
third party.

Capital Expenditures

Our capital expenditures for 2004, 2005 and 2006, which totaled W295 million, W826 million and W1,614 million (US$1.7 million), respectively, were primarily for the
acquisition of property and equipment. We anticipate that we will incur capital expenditures in the next 12 months of approximately W3,484 million (US$3.8 million), primarily for upgrade of our technology and purchase of land for
our new headquarters. In 2006, we committed to purchase office space in government-subsidized Pankyo Technology Park to move our new headquarters in the future whereby approximately W5,230 million (US$5.6 million) became payable in
installments over a three-year period, from 2006 to 2008, of which approximately W565 million has been paid in 2006 and approximately W2,333 million is due in each of 2007 and 2008.

C. Research and development, patents and licenses, etc.

We believe that our future success depends on our ability to maintain our technological competitiveness by continuing to enhance our existing products and developing new products that comply with new standards in a rapidly evolving
consumer-oriented mobile communications market. We attempt to use our CMOS image sensor design and embedded system design expertise to gain additional market share in the mobile phone market and enter into new emerging applications.

Our research and development engineers are organized into three separate groups that focus on application specific integrated circuit, or ASIC, sensors
and system applications. Our sensors team focuses on pixel design and architecture and analog circuitry design, our ASIC team concentrates on ISP algorithm and other SoC design and integration, and our system applications team focuses on product
customization, camera module design and customers system applications. We expect to hire additional engineers for peripheral circuit and system design to achieve higher functional integration on our CMOS image sensor chips.

Research and development expenses for 2004, 2005 and 2006 were approximately W3,211 million, W3,503 million and
W5,834 million (US$6.3 million), respectively. As of December 31, 2006, we had a total of 52 research and development personnel.

D. Trend information.

Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the period from January 1, 2006 to December 31, 2006 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that
caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. Off-balance sheet
arrangements.

We have no outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or
foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts.

F. Tabular disclosure of
Contractual obligations.

The following table sets forth our contractual obligations as of December 31, 2006:



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|                                 |  |        |  |                             |  |           |  |           |  |                 
|-------------------------------- |  | ------ |  | --------------------------- |  | --------- |  | --------- |  | ----------------
|                                 |  |        |  | Payment Due by Period      
|                                 |  | Total  |  | Less than 1 year            |  | 1-3 years |  | 3-5 years |  | More than 5years
|                                 |  |        |  | (in millions of Korean Won)
|Contractual Obligations          |  |        |  |                             |  |           |  |           |  |                 
|Long-term debt obligations(1)    |  | W458   |  | W291                        |  | W167      |  | W        |  | W              
|Operating lease obligations(2)   |  | 723    |  | 434                         |  | 289       |  |          |  |                
|Purchase obligations(3)          |  | 1,515  |  | 1,515                       |  |          |  |          |  |                
|Property Purchase Obligations(4) |  | 4,666  |  | 2,333                       |  | 2,333     |  |          |  |                
|                                 |  |        |  |                             |  |           |  |           |  |                 
|Total                            |  | W7,362 |  | W4,573                      |  | W2,789    |  | W        |  | W              
|                                 |  |        |  |                             |  |           |  |           |  |                 

---

|(1) | Includes current portion and excludes short-term borrowings.
|--- | ------------------------------------------------------------

|(2) | Operating lease obligations consist of operating leases for our office space.
|--- | -----------------------------------------------------------------------------

|(3) | Purchase obligations consist of purchase orders outstanding for purchase of wafers from our suppliers and are net of value-added tax, or VAT.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(4) | For purchase of property in Pankyo Technology Park.
|--- | ---------------------------------------------------

Other than our borrowings and contractual obligations set forth above, we do not have any long-term commitments.

Item 6. Directors, Senior Management and Employees

A. Directors and senior management.

Directors and Executive Officers

The following table sets forth the name, age, position and first appointment date of our directors and executive officers as of May 31, 2007:



|                |  |     |  |                                                                            |  |                                                     
|--------------- |  | --- |  | -------------------------------------------------------------------------- |  | ----------------------------------------------------
|Name            |  | Age |  | Position                                                                   |  | Date First Elected or Appointed                     
|Seo Kyu Lee     |  | 48  |  | President, Chief Executive Officer, and Director (Representative Director) |  | April 12, 2000                                      
|Sang Soo Lee    |  | 48  |  | Chief Technology Officer, Executive Vice President and Director            |  | December 1, 2004 (officer); June 30, 2005 (director)
|Hoang Taig Choi |  | 56  |  | Chief Financial Officer, Senior Vice President, and Director               |  | April 2, 2007                                       
|Hae-Su Hwang    |  | 42  |  | Chief Operating Officer                                                    |  | March 8, 2007                                       
|Dongwoo Chun    |  | 63  |  | Independent Director                                                       |  | October 14, 2005                                    
|Ha Jin Jhun     |  | 49  |  | Independent Director                                                       |  | October 14, 2005                                    
|Choong-Ki Kim   |  | 65  |  | Independent Director                                                       |  | October 14, 2005                                    
|Taek Jin Nam    |  | 41  |  | Independent Director                                                       |  | October 14, 2005                                    
|Euy Hyeon Baek  |  | 43  |  | Vice President                                                             |  | October 23, 2000                                    
|Ou Seb Lee      |  | 48  |  | Vice President                                                             |  | December 26, 2001                                   
|Chang-Soo Park  |  | 51  |  | Vice President                                                             |  | December 18, 2006                                   
|Won-Ki Kim      |  | 46  |  | Country Manager                                                            |  | November 27, 2006                                   
|Jawoong Lee     |  | 50  |  | Technical Director                                                         |  | November 1, 2005                                    
|Sung Su Lee     |  | 39  |  | Technical Director                                                         |  | August 21, 2000                                     

Executive Directors

Seo Kyu Lee is one of our founders and has served as our chief executive officer, president, representative director and chairman of the board of directors since April 2000. Mr. Lee received a
bachelors degree in physics and electronic engineering from Sogang University in 1985, a masters degree in electrical engineering from Yonsei University in 1993 and a Ph.D. in electronic and electrical engineering from Pohang University
of Science & Technology in 1997. He started his career as an engineer at LG Semiconductor Co., Ltd., or LGS, in 1984, and served in its CCD development division as design team leader and CCD research and development team leader and later as
CMOS image sensor project leader until 2000.



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Sang Soo Lee has served as our executive vice president and chief technology officer and as the
president of Pixelplus Semiconductor Inc., our U.S. subsidiary, since December 2004, and as our director since June 2005. Mr. Lee received bachelors and masters degrees in electronic engineering from Sogang University in 1982 and in
1984, respectively, and a Ph.D. in electrical and computer engineering from Carnegie Mellon University in 1993. He started his career as a device and process engineer at LGS in 1984 and has worked with Micro Linear Corp. in San Jose, California and
DataPath System in San Jose, California. Before joining us, he served as director of engineering at LSI Logic Corp. in Milpitas, California from 2000 to 2004.

Hoang Taig Choi has served as our chief financial officer since April 2, 2007. Mr. Lee received his bachelors degree in business administration from Pusan National University in 1975. He has
nearly thirty years of finance, accounting and tax experience working at LG Electronics and related LG Group companies, most recently as Vice President of Tax and Accounting at LG Phillips LCD.

Independent Directors

Under the Nasdaq listing
requirements, we are required to appoint a minimum of three independent directors, unless we receive an exemption from Nasdaq to appoint a lesser number. The independence standards under the Nasdaq rules exclude, among other things, any person who
is a current or former employee of a company, either for the current year or in the past three years, or of any of its affiliates, as well as any immediate family member of an executive officer of a listed company or of any of its affiliates.
Dongwoo Chun, Ha Jin Jhun, Choong-Ki Kim and Taek Jin Nam, representing a majority of the members of our board of directors, are our independent directors as required by the Nasdaq Stock Market, Inc. Marketplace Rules.

Dongwoo Chun has served as our independent director since October 14, 2005. Mr. Chun received a bachelors degree in 1967, a
masters degree in 1969 and a Ph.D. in electronic engineering in 1976, from Seoul National University, University of California, Berkeley and University of Texas, Austin, respectively. He started his career as a senior engineer at
Hewlett-Packard Company in 1975 and served in various senior engineer and management roles with Hyundai Electronics Industries Co., Ltd., LGS, and Silicon Magic Inc. From 2000 to 2001, he served as a vice president of the operations and image
processing department at Cirrus Logic, Inc. He then served as a statutory auditor at Dongbu HiTek from 2002 to 2005. Mr. Chun is currently an independent director of LG-Philips LCD Co., Ltd. and has served in such position since 2005.

Ha Jin Jhun has served as our independent director since October 14, 2005. Mr. Jhun received a bachelors degree in
industrial engineering from Inha University in 1984 and an MBA degree from Yonsei University in 1996. From 1998 to 2001, Mr. Jhun served as the chief executive officer of Haansoft Inc., one of the largest computer software company in Korea.
From 2001 to 2003, he served as the chief executive officer of Netian, Inc., an internet portal company. Mr. Jhun currently serves as the chief executive officer of both INKE Corporation, a globalization consulting firm for Korean venture
companies, and BonWave, Inc., a software company, since 2005.

Choong-Ki Kim has served as our independent director since
October 14, 2005. Mr. Kim received a bachelors degree in 1965 from Seoul National University, a masters degree and a Ph.D. in electrical engineering from Columbia University in 1967 and 1970, respectively. He started his career
in 1970 as a member of the research staff and a section head at Fairchild Research and Development Laboratory in Palo Alto, California and has served with Korea Electronics Technology Institute and Microelectronics Center of North Carolina. From
1994 to 2003, he served as a director at the Centre for Electro Optics. Mr. Kim has been a professor of electrical engineering and computer science department at Korea Advanced Institute of Science and Technology since 1975 and served as its
vice president from 1995 to 1998.

Taek Jin Nam has served as our independent director since October 14, 2005. Mr. Nam
previously served as our statutory auditor from April 2003 to October 14, 2005. He received a bachelors degree in business administration from Korea University in 1988 and is currently a partner at Mirae Accounting Corp., an independent
accounting firm in Korea.



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Executive Officers

Euy Hyeon Baek has served as our vice president since October 2000. From March 2004 to June 2005, Mr. Baek served as our director. Mr. Baek received a bachelors degree in computer science from
Korea National Open University in 2000 and he is currently enrolled in an MBA program at Ajou University. He started his career as an engineer at LGSs CCD development team in 1987, and also served as a manager in various CCD development teams
at LGS. He served as a manager at Hyundai Micro-Electronic Ltd. from 1999 to 2000.

Ou Seb Lee has served as our vice president
since March 2004. From March 2004 to June 2005, Mr. Lee served as our director. Mr. Lee received a bachelors degree in physics from Sogang University in 1985, a masters degree in electrical engineering from Manhattan College in
1989, and a Ph.D. in electrical engineering from Polytechnic University in 1994. Before joining us, he served as an associate professor at Hanshin University from 1996 to 2003.

Chang-Soo Park has served as our vice president of sales and marketing since December 2006. Mr. Park received his bachelors degree in
history from Kyunghee University in 1980. Mr. Park brings with him over 25 years of sales, marketing and corporate development experience, most recently having served as the vice president of sales and marketing at Kyobo Life Insurance Co.,
Ltd.

Won-Ki Kim has served as our Country Manager in Taiwan since November 27, 2006. Mr. Kim received his bachelors
degree in Electrical Engineering from Dongkuk University in 1987. Mr. Kim brings with him over 20 years of sales and marketing experience, and most recently served as Chief Marketing Officer at K9 Inc.

Jawoong Lee has served as our technical director since November 2005. Mr. Lee received a bachelors degree in electronic engineering and
a masters degree in physics from Seoul National University in 1980 and 1984, respectively, and a Ph.D. in electrical and electronic engineering from Pohang University of Science and Technology in 1993. Before joining us, he was a visiting
scientist at NanoStructures Laboratory (Research Laboratory of Electronics) at the Massachusetts Institute of Technology from 1997 to 1998, a professor of electronic engineering at Sunchon National University from 1994 to 2002, and an assistant
professor of computational sciences at the Korean Institute for Advanced Study from 2004 to 2005. Mr. Lee also served as the chief technology officer of LeeScope, Inc., an optical imaging company, in 2001.

Sung Su Lee is one of our founders and has served as our technical director since January 2004. Mr. Lee has a bachelors degree and
masters degree in electronic engineering from Pohang Institute of Science and Technology in 1993 and 1995, respectively. He started his career as multi-media processor designer at LGS in 1995 and also served as CD player photo detector
designer and LCD/PDP drive designer at LGS from 1996 to 2000. Mr. Lee first joined us in August 2000, and since then, he has helped design many of our CMOS image sensors including our VGA, CIF, UXGA, NTSC/PAL products and our CIS and JPEG
encoder.

Hae-Su Hwang has served as our chief operating officer since March 8, 2007. Mr. Hwang received his
bachelors and masters in political science from Michigan State University in 1988 and 1990, respectively. Prior to serving s our chief operating officer, Mr. Hwang most recently served as the general manager of our sales and
marketing department.

The business address of each of our directors and executive
officers is our principal executive office at 6thFloor, Gyeonggi R&DB Center, 906-5 Iui-dong, Yeongtong-gu,
Suwon-si, Gyeonggi-do 443-766. Korea.

B. Compensation.

As of the date of this annual report, we do not have any outstanding loans or credit extended to any of our directors or executive officers, and we have not provided guarantees for borrowings by any of these persons.
In 2006, the aggregate amount of compensation paid by us to all of our directors and executive officers was W3,084 million (US$3.3 million), which does not include W320 million (US$0.3 million) set aside or accrued
to provide for retirement or similar benefits to our directors and executive officers.

Under the Korean Labor Standards Act and the Korean
Act on Guarantee of Employees Severance, we are required to pay a severance amount to eligible employees, who voluntarily or involuntarily terminate their employment with us, including through retirement. The severance amount for our officers
and directors equals the monthly salary at the time of his or her departure, multiplied by the number of continuous years of service, and further multiplied by a discretionary number set forth in our severance payment regulation, which depending on
the position of the officer or director, ranges from 1.5 to 3. As of December 31, 2006, we have accrued W455 million, representing 100% of our severance liability as of such date.



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In addition, the senior management may be entitled to special severance allowances upon their individual
voluntary or involuntary termination of employment. The Compensation Committee will decide whether such severance allowances should be paid and if so, the amount of such severance allowances. The severance allowances may not exceed (i) the
annual salary, in the case of our chief executive officer and representative director, (ii) the respective nine-month salary, in the case of our executive and senior vice presidents, and (iii) the respective six-month salary, in the case
of our vice presidents and technical directors. Such severance allowances have not yet been determined for 2006 by the Compensation Committee.

On January 20 and July 25, 2006, upon approval of the Compensation Committee of our board of directors on January 13, 2006, we paid W940 million and W620 million, respectively, as a special
bonus to our senior management. This bonus was paid to compensate the members of our senior management for their increased responsibilities related to serving in the management of a publicly-traded company.

We have not entered into any service agreement that provides for benefits upon termination of service with any of our directors or executive officers.

Stock Option Plan

Under our articles
of incorporation and the Venture Business Promotion Act of Korea, we may grant stock options to certain qualified officers, employees and third parties. Set forth below are the details of our stock option plan, which is contained in our current
articles of incorporation.



| |  |  | Stock options may be granted to our officers and employees who have contributed or are qualified to contribute to our establishment, management or technical
innovation by a special resolution adopted at a shareholders meeting. However, with respect to each officer and director, the total number of options granted may not exceed 5% of the total number of our then issued and outstanding shares.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Notwithstanding the foregoing, no stock options may be granted to any person who is (i) our largest shareholder as the term is defined in Korean Securities and
Exchange Act, (ii) our major shareholders as the term is defined in Korean Securities and Exchange Act, including a holder of 10% or more of our outstanding shares, or (iii) a specially related party, as the term is defined in Korean
Securities and Exchange Act, of the persons set forth in (i) and (ii) above; provided, that we may grant stock options to a person who becomes a specially related party to the persons set forth in (i) through (iii) by becoming an
officer of our company or an officer of our affiliate.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The aggregate number of shares issuable under our stock option plan may not exceed 50% of the total number of our then issued and outstanding common shares.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At the time the stock options are exercised, we, at our board of directors determination, may (i) issue and deliver new shares, (ii) purchase and
deliver treasury shares, or (iii) pay cash or deliver treasury shares for the difference between the exercise price of stock options and the market price of such shares multiplied by the number of exercised options.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The minimum option exercise price is determined by (i) in the case of issuance and delivery of new shares, the greater of (a) the market price of our
shares calculated pursuant to the method under Article 54 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act at the time of grant of such stock options, and (b) the par value of our shares, and (ii) in the case of cash
payment or delivery of treasury shares, the market price as determined in accordance with (i) above. The above method applies to any adjustment to the exercise price of a stock option.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If stock options are granted by a special resolution adopted at a shareholders meeting, such special resolution shall include (i) the name of the
grantee, (ii) the method of granting the stock options, (iii) stock option exercise price and exercisable period, and (iv) the type and number of shares issuable upon exercise of such stock option.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Stock options may be exercised within three years commencing from two years after the date of the resolution of our shareholders meeting adopting the stock
option grant. In order to exercise his or her stock options, the grantee must have served us for more than two years from the date of the shareholders special resolution approving his or her stock option grant; provided, however, that if the
grantee dies within the vesting period, the relevant law allows the grantees heir to exercise such stock options.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our stock options may be cancelled by a resolution of our board of directors if (i) the officer or employee who holds the options voluntarily resigns from
office, (ii) the officer or employee who holds the options causes material damage to us by willful misconduct or negligence, (iii) we are unable to deliver our shares or pay the prescribed amount due to bankruptcy or dissolution, or
(iv) any cause for cancellation specified in the relevant stock option agreement occurs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31,
2006, stock options to purchase a total of 900,352 common shares have been granted, representing 14.01% of our total number of common shares issued and outstanding, of which options to purchase 591,289 common shares were granted to the six directors
and five executive officers named below, and options to purchase 690,802 common shares were granted to a total of 66 eligible employees. Pursuant to the relevant stock option agreements, each granted stock option confers the right on the grantee to
purchase one of our common shares at the applicable exercise price.

The following table sets forth the details of the stock option grants
made to our directors and executive officers, including the names of the option holders, the applicable grant date, the applicable number of options granted, the applicable exercise periods, and the applicable exercise price as of December 31,
2006.



|                   |  |               |  |                          |  |                        |  |                               |           
|------------------ |  | ------------- |  | ------------------------ |  | ---------------------- |  | ----------------------------- | ----------
|Name               |  | Date of Grant |  | Number ofGranted Options |  | Exercise Period        |  | Exercise Price(in Korean Won)
|Directors          |  |               |  |                          |  |                        |  |                               |           
|Sang Soo Lee       |  | 12/10/04      |  | 60,000                   |  | 12/10/2006 12/09/2009 |  |                               | (Won)2,000
|                   |  | 08/26/05      |  | 40,000                   |  | 08/26/2007 08/25/2010 |  |                               | 6,500     
|Moon Sung Kim(1)   |  | 03/25/05      |  | 30,000                   |  | 03/25/2007 03/24/2010 |  |                               | 6,500     
|                   |  | 08/26/05      |  | 20,000                   |  | 08/26/2007 08/25/2010 |  |                               | 6,500     
|                   |  | 03/31/06      |  | 30,000                   |  | 03/31/2008 03/30/2011 |  |                               | 18,500    
|Dongwoo Chun       |  | 11/25/05      |  | 3,000                    |  | 11/25/2007 11/24/2010 |  |                               | 6,500     
|Ha Jin Jhun        |  | 11/25/05      |  | 3,000                    |  | 11/25/2007 11/24/2010 |  |                               | 6,500     
|Choong-Ki Kim      |  | 11/25/05      |  | 3,000                    |  | 11/25/2007 11/24/2010 |  |                               | 6,500     
|Taek Jin Nam       |  | 11/25/05      |  | 3,000                    |  | 11/25/2007 11/24/2010 |  |                               | 6,500     
|                   |  |               |  |                         
|Executive Officers |  |               |  |                          |  |                        |  |                               |           
|Euy Hyeon Baek     |  | 03/14/03      |  | 119,220                  |  | 03/14/2005 03/13/2008 |  |                               | 500       
|                   |  | 04/25/03      |  | 14,391                   |  | 04/25/2005 04/24/2008 |  |                               | 500       
|                   |  | 08/26/05      |  | 20,000                   |  | 08/26/2007 08/25/2010 |  |                               | 6,500     
|Ou Seb Lee         |  | 04/25/03      |  | 35,000                   |  | 04/25/2005 04/24/2008 |  |                               | 500       
|                   |  | 12/10/04      |  | 40,000                   |  | 12/10/2006 12/09/2009 |  |                               | 2,000     
|Chang Hyun Rho     |  | 08/17/04      |  | 36,000                   |  | 08/17/2006 08/16/2009 |  |                               | 1,800     
|                   |  | 08/26/05      |  | 10,000                   |  | 08/26/2007 08/25/2010 |  |                               | 6,500     
|Jawoong Lee        |  | 08/26/05      |  | 10,000                   |  | 08/26/2007 08/25/2010 |  |                               | 6,500     
|Sung Su Lee        |  | 03/14/03      |  | 114,678                  |  | 03/14/2005 03/13/2008 |  |                               | 500       

---

|(1) | Has left the Company on February 28, 2007, and all of his unexercised options were cancelled during a board of directors meeting held on March 8, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, on March 30, 2007, we granted stock options to purchase 253,508 common shares to directors and employees
at an exercise price of W3,400.



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##### Table of Contents

C. Board practices.

Board of Directors

Our board of directors has the ultimate responsibility for the administration of our affairs. Our
articles of incorporation, as currently in effect, provide for a board of directors comprised of not less than five directors. The directors are elected at a shareholders meeting by a majority vote of the shareholders present or represented
and such majority also represents at least one-quarter of all of our issued and outstanding voting shares, so long as the quorum is met by a representation of not less than one-third of all issued and outstanding shares with voting rights. Our
directors are not required to hold any of our shares to be qualified to serve on our board of directors.

Each of our directors is elected
for a term of three years. However, if a directors term expires after the end of a fiscal year but prior to the annual general meeting of shareholders convened in respect to such fiscal year, then such directors term shall be extended
until the close of such annual general meeting of shareholders. In addition, directors may serve any number of consecutive terms and may be removed from office at the recommendation of the nomination committee in accordance with corporate governance
guidelines by a special resolution adopted at a general meeting of shareholders.

The board of directors elects one director from its
members to serve as the representative director. The representative director is authorized to represent and oversee the operation of our company. In addition, the representative director is the chairman of the board of directors.

Under the Korean Commercial Code and our articles of incorporation, any director with a special interest in an agenda item of any board meeting may not
vote on such item at the board meeting.

Committees of the Board of Directors

Under the Korean Commercial Code, a company may establish committees under its board of directors in accordance with its articles of incorporation. The
board of directors may delegate its authorities to such committees, except for the authorities to submit the agenda for general meetings of shareholders, to elect and/or remove the representative director and to establish committees and elect and/or
remove the members thereof, in addition to other authorities stipulated in the articles of incorporation. The committees are required to notify each director of all resolutions and recommendations adopted by such committees, and any director so
notified may demand a meeting of the full board of directors to review the resolution or recommendation adopted by the committees and report on and finally resolve on the matters in questions de novo. Pursuant to the Korean Commercial Code, any
committee under the board of directors must consist of two or more directors, while the audit committee must consist of at least three directors.

Under our articles of incorporation, we currently have three committees that serve under our board of directors:



| |  |  | the audit committee;
| | - |  | --------------------



| |  |  | the compensation committee; and
| | - |  | -------------------------------



| |  |  | the director nomination committee.
| | - |  | ----------------------------------

Audit Committee

Pursuant to the Korean Commercial Code and in accordance with our articles of incorporation, the
audit committee must consist of three or more directors. Our audit committee currently consists of Dongwoo Chun, Ha Jin Jhun and Taek Jin Nam. Mr. Chun previously served as a statutory auditor of Dongbu HiTek from 2002 to 2005 and Mr. Nam
served as our statutory auditor from 2003 to 2005. In their respective roles as a statutory auditor, each of Mr. Chun and Mr. Nam had responsibilities similar to those required for a member of an audit committee for Dongbu HiTek and for
our company, respectively. Our board of directors has determined that all of our audit committee members are independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15), meet the criteria for independence set forth in
Rule 10A-3(b)(1) under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, and have not participated in the preparation of the financial statements of our company or any current subsidiary of our company at any time during the
past three years. All of our independent directors are financially literate and have accounting or related financial management expertise, and Taek Jin Nam has the necessary financial sophistication under Nasdaq Marketplace Rule 4350(d)(2)(A).
Furthermore, under the Korean Commercial Code, no more than one-third of the members of the audit committee shall have any of the following qualities:



46



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| |  |  | a director or an employee serving any managerial functions in the company or a director or an employee who had served any managerial functions in the company within
the previous two years from election date;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the largest shareholder of the company, his/her spouse and lineal descendants/ascendants;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | if the largest shareholder is a corporate entity, a director, a statutory auditor, or an employee of such entity;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | spouse or lineal descendants/ascendants of a director of the company;
| | - |  | ---------------------------------------------------------------------



| |  |  | a director, a statutory auditor, or an employee of the parent company or a subsidiary of the company;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | a director, a statutory auditor, or an employee of a corporate entity having material interests in, or a close business relationship with, the company; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a director, a statutory auditor, or an employee of the other company where a director or an employee of the company serves as a director.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

The dismissal or removal of an audit committee member must be adopted by the board of directors by an affirmative vote
of at least two-thirds of all of our directors. In addition, the audit committee must elect a chairman from among its members. Our audit committee will be responsible for, among other things:



| |  |  | the integrity of our financial statements;
| | - |  | ------------------------------------------



| |  |  | the qualifications, independence and performance of our independent auditors;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the performance, budget and staffing of our internal audit functions;
| | - |  | ---------------------------------------------------------------------



| |  |  | the review and approval of all related party transactions;
| | - |  | ----------------------------------------------------------



| |  |  | our compliance with legal and regulatory requirements;
| | - |  | ------------------------------------------------------



| |  |  | the development and implementation of corporate governance principles, policies, codes of conduct and ethics relating to the operation of our board of directors and
its committees as well as our company as a whole;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | appointing, setting the compensation for, retaining, overseeing and terminating our independent auditors;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | reviewing and approving the scope and staffing of our independent auditors annual audit plan;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | establishing policies for the hiring of current and former employees of our independent auditors;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | evaluating the performance of the officers responsible for internal audit functions and making recommendations regarding the responsibilities, retention and
termination of such officers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing and approving our critical accounting policies and practices, related-party transactions and off-balance sheet transactions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviewing our internal control over financial reporting and disclosure controls and procedures in conjunction with our chief executive officer and chief financial
officer;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | appointing a compliance officer with respect to our corporate governance guidelines and codes of conduct and ethics;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | meeting annually with management to discuss compliance with our corporate governance guidelines;
| | - |  | ------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | coordinating the training of directors; and
| | - |  | -------------------------------------------



| |  |  | reporting regularly to the board of directors.
| | - |  | ----------------------------------------------

Compensation Committee

Our current compensation committee consists of Dongwoo Chun, Ha Jin
Jhun and Taek Jin Nam. Our board of directors has determined that all of our compensation committee members are independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15). Our compensation committee will be
responsible for, among other things:



| |  |  | reviewing and approving the compensation of our executive officers;
| | - |  | -------------------------------------------------------------------



| |  |  | recommendations with respect to our incentive compensation plans and equity-based plans;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | approving awards or material amendments to any employee benefit plan or stock option plan;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | overseeing regulatory compliance with respect to compensation matters; and
| | - |  | --------------------------------------------------------------------------



| |  |  | reviewing and approving all severance or similar termination payments in excess of US$100,000.
| | - |  | ----------------------------------------------------------------------------------------------

Director Nominating Committee

Our current director nominating committee consists of Dongwoo Chun, Choong-Ki Kim and Taek Jin Nam. Our board of directors has determined that all of our director nominating committee members are independent directors within the
meaning of Nasdaq Marketplace Rule 4200(a)(15). Our director nominating committee will be responsible for, among other things:



| |  |  | nominating director candidates to serve on our board of directors and recommending appointees to the committees of the board of directors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recommendations to our board of directors regarding the removal of directors;
| | - |  | -----------------------------------------------------------------------------



| |  |  | annual evaluation of our board of directors and each of its committees and members;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | recommendations to our board of directors concerning the appropriate size and needs of our board of directors; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | annual review of the compensation of members of the board of directors.
| | - |  | -----------------------------------------------------------------------

Corporate governance

Our board of directors has adopted a code of ethics for our chief executive
officer and senior financial officers and a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. Our code of ethics and code of business conduct and ethics are publicly available on our website.
In addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to the structure, procedures and committees of our board of directors. The guidelines are not
intended to change or interpret any law, or our articles of incorporation.

D. Employees.

As of December 31, 2006, we had a total of 137 full-time employees, 91 located at our headquarters in Korea and 46 located in our foreign offices in
China, Taiwan and the United States. Of the 137 full-time employees, 22 were staffed in sales and marketing, 52 in research and development, 30 in production management and quality control, and 33 in administration and management.

We do not have a labor union and none of our employees are covered by collective bargaining agreements, except for an agreement with us and our
employees, as required under Korean law, to set up procedures to formally hear complaints from our employees. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes.



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Under the Korean Labor Standard Act and the Korean Act on Guarantee of Employees Severance,
employees with more than one year of service with us are entitled to receive a severance payment upon voluntary or involuntary termination of their employment. The amount of the benefit equals the employees monthly salary, calculated by
averaging the employees daily salary for the three months prior to the date of the employees departure, multiplied by the number of continuous years of employment. As allowed under Korean law, we pay all of the accrued amounts under this
requirement to each employee, other than our officers, at the end of each fiscal year.

Pursuant to the Korean National Pension Law, our
employees are entitled to receive an annuity in the event they lose, in whole or in part, their wage earning capability. In order to fund the annuity, we are required to pay 4.5% of each employees annual wages to the National Pension
Corporation. Our employees are also required to pay 4.5% of their annual wages to the National Pension Corporation. The total amount of our payments to the National Pension Corporation in 2005 and 2006 was W73 million and
W109 million, respectively.

E. Share ownership.

The following table sets forth information known to us with respect to the beneficial ownership of our common shares as of December 31, 2006, by each person who is known to us to be the beneficial owner of more
than 5.0% of our common shares, each of our directors, each of our named executive officers and all of our directors and executive officers as a group.



|                                                             |  |                                  |  |            |  
|------------------------------------------------------------ |  | -------------------------------- |  | ---------- | -
|                                                             |  | Common Shares Beneficially Owned | 
|Name                                                         |  | Number(1)                        |  | Percent(2) |  
|Five Percent and Greater Shareholders                        |  |                                  |  |            |  
|MIC 2001-4TG Venture(3)                                      |  | 340,785                          |  | 5.30       | %
|Directors and Executive Officers(7)                          |  |                                  |  |            |  
|Seo Kyu Lee                                                  |  | 1,051,524                        |  | 16.37      |  
|Sang Soo Lee(4)                                              |  | 20,000                           |  | *          |  
|Hoang Taig Choi                                              |  |                                 |  |           |  
|Dongwoo Chun                                                 |  |                                 |  |           |  
|Ha Jin Jhun                                                  |  |                                 |  |           |  
|Choong-Ki Kim                                                |  |                                 |  |           |  
|Taek Jin Nam                                                 |  |                                 |  |           |  
|Euy Hyeon Baek(4)(5)                                         |  | 170,772                          |  | 2.63       |  
|Ou Seb Lee(4)                                                |  | 48,334                           |  | *          |  
|Jawoong Lee                                                  |  |                                 |  |           |  
|Sung Su Lee(4)(6)                                            |  | 145,646                          |  | 2.23       |  
|All directors and executive officers as a group (11 persons) |  | 1,436,276                        |  | 21.66      |  
|                                                             |  |                                  |  |            |  

---

|* | Less than 1%.
|- | -------------

|(1) | Beneficial ownership of each listed person in the table is based on the number of common shares held on December 31, 2006 and the number of common shares that can be acquired
by such person upon full exercise of all options exercisable within 60 days from December 31, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The number of common shares outstanding used in calculating the percentage for each listed person include the 6,425,072 common shares outstanding as of December 31, 2006 and the
common shares underlying the options held by such person exercisable within 60 days from December 31, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Information and Telecommunications Investment MIC 2001-4TG Venture Partnership, or MIC, is a Korean limited partnership managed by its general partner, Q Capital Partners Co., Ltd.,
or QCP, a Kosdaq registered investment banking company in Korea. The voting and investment power over shares owned by MIC is controlled and managed by QCPs investment committee. The committee members include Mr. Jong Hoo Yoo, the chief
executive officer of QCP, Mr. Jung Soo Ye, Mr. Kyu Yeob Choi and Mr. Eun Sang Yoo, all executive officers of QCP. The largest shareholder of QCP is Q Capital Holdings, Co., Ltd. owning 31.9% of QCP, while Mr. Yoo, owns 4.9% of
QCP. The address of MIC is 8th Floor, Seoul Venture Town (Aju) Bldg., 679-5, Yeoksam-Dong, Gangnam-gu, Seoul 135-978, Korea.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(4) | Includes the common shares underlying all the options held by this person and exercisable within 60 days from December 31, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 37,161 common shares held by Kun Ok Kim, who is the wife of Mr. Baek.
|--- | ------------------------------------------------------------------------------

|(6) | Includes 30,968 common shares held by Hyun Sook Kim, who is the wife of Mr. Lee.
|--- | --------------------------------------------------------------------------------

|(7) | The address of our current directors and executive officers is c/o Pixelplus Co., Ltd., 6thFloor, Gyeonggi R&DB Center, 906-5 Iui-dong, Yeongtong-gu, Suwon-si, Gyeonggi-do 443-766, Korea.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

No shareholder has different voting rights from other shareholders. We are not aware of any arrangement that may, at a
subsequent date, result in a change of control of our company.

Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

For the details of our major shareholders, please refer to Item 6 of this annual report, Directors, Senior Management and EmployeesShare
ownership.

B. Related party transactions.

Relationship with Pixelplus Technology Inc.

In September 2004, we entered into a cooperation agreement with PTI, currently
our consolidated subsidiary in Taiwan, whereby both parties have agreed to cooperate in the sale of our products and related business. This agreement is valid for a term of three years, which term will be automatically renewed annually if neither
party objects. Under this agreement, we have agreed to supply our products, allow PTI to use our trademark and provide related technical support on favorable payment terms. PTI is the exclusive distributor of our products in Taiwan. We retain the
intellectual property rights related to products we supply to PTI. Intellectual property relating to jointly-developed products will be jointly owned by PTI and us.

In August 2004, we acquired 42.9% equity interest in PTI for approximately W510 million. In February 2005, PTI issued additional shares of its capital stock in a private placement transaction in which
we did not participate and our equity interest was decreased to 31.9%. In June 2005, we made an additional capital contribution of W488 million (US$0.5 million) in PTI, which raised our equity interest from 31.9% to 37.5%.

In June 2005, we also entered into a new shareholders agreement with the other shareholders of PTI, whereby the parties agreed to
grant us the right to appoint two of the three members of PTIs board of directors. In addition, any change to PTIs board composition requires approval by more than two-thirds of the shareholders of PTI. We held 43% and 37.5% ownership
interest in PTI as of December 31, 2004 and 2005, respectively. As a result of our ability to direct the management and policies of PTI, we have changed our method of accounting for PTI from equity method to consolidated method in 2005.

Mr. Won Ki Kim, our vice president, has been a member of PTIs board of directors since December 4, 2006 and Mr. Ou
Seb Lee, our vice president, has been a member of PTIs board of directors since August 27, 2004. Mr. Won Ki Kim and Mr. Ou Seb Lee do not receive any compensation for serving as a director of PTI and do not hold any equity
interest in PTI.

Relationship with Tesna

In 2005, almost all of our wafer and CSP testing were conducted by Tesna, in which we hold a 13.9% equity interest. See Item 4 of this annual report, Information on the CompanyManufacturingWafer and CSP Testing.
We have incurred fees totaling W1,854 million, W2,142 million and W3,289 million to Tesna for its testing services in 2004, 2005 and 2006, respectively.



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On March 27, 2003, we provided an interest-free loan of approximately W457 million
to Tesna for the upgrade and improvement of its testing services. On May 27, 2004, we provided another loan in the amount of W250 million with an annual interest rate of 8.0% to Tesna to help meet its working capital
requirements. The aggregate principal amount of our loan to Tesna was W707 million, out of which W250 million in principal and W0.7 million in interest were repaid by Tesna in cash on May 31,
2004 and July 15, 2004, respectively. The remaining principal amount of approximately W457 million was offset as consideration for our purchase of a 20.0% equity interest in Tesna on May 27, 2004. On May 4, 2005,
Tesna issued additional shares to third parties, resulting in our equity interest being diluted to 13.9%. We recognized a dilution gain of W337 million (US$0.4 million) in 2005.

Relationship with Mirae Accounting and Mr. Taek Jin Nam

In February 2003, we entered into a verbal agreement with Mirae Accounting, whereby Mirae Accounting provides us with tax calculation and filing services. Mr. Taek Jin Nam, who has been our statutory auditor since April 25, 2003
and our independent director since October 14, 2005, has been an employee of Mirae Accounting during the same period. Under Korean law, a statutory auditor is a non-employee individual retained in order to review and examine (i) the agenda
for the general meeting of shareholders, (ii) the financial statements and other reports to be submitted by the board of directors at the general meeting of the shareholders and (iii) the administration of the board of directors. In
addition, since early 2005, Mirae Accounting has also been providing auditing services to Tesna. As of December 31, 2004, the total amount of fees, including value-added tax, or VAT, that we have paid to Mirae Accounting for its tax services
performed between February 2003 and December 31, 2004 is approximately W8 million. Mirae Accounting has not provided any service to us, and we have not made any payments for service to Mirae Accounting, since Mr. Nam
became our independent director.

Personal Loans to Employees

As of December 31, 2006, we had outstanding personal loans to five non-executive employees in the aggregate principal amount of W178 million (US$0.2 million). Of this amount,
(i) W20 million was extended to an employee and shareholder on December 26, 2004 at a below market annual interest rate of 3.0%, scheduled to be repaid by March 25, 2010, (ii) W60 million was
extended to an employee on February 24, 2005, scheduled to be repaid on February 23, 2012, at no interest for the first four years of the loan term and then the lowest interest rate allowed under applicable law for the remainder of the
loan term, (iii) W40 million was extended to an employee on July 24, 2003, scheduled to be repaid on July 31, 2010, at no interest for the first four years of the loan term and then the lowest interest rate allowed
under applicable law for the remainder of the loan term, (iv) W15 million was extended to an employee on July 25, 2005, scheduled to be repaid on July 24, 2012, at no interest for the first four years of the loan term
and then the lowest interest rate allowed under applicable law for the remainder of the loan term, (v) W15 million was extended to an employee on July 18, 2005, scheduled to be repaid on August 1, 2012, at no interest
for the first four years of the loan term and then the lowest interest rate allowed under applicable law for the remainder of the loan term, and (vi) W28 million was extended to an employee and shareholder on August 28,
2006 at a below market annual interest rate of 3.0%, scheduled to be repaid by August 28, 2007.

C. Interests of experts and counsel.

Not applicable.

Item 8. Financial Information

A. Consolidated statements and other financial information.

Please see our consolidated financial statements which are included in Item 18 of this annual report, Financial Statements.

Legal proceedings

On or about April 17,
2006, our chief executive officer, Seo Kyu Lee, our former chief financial officer, Moon Sung Kim, and our chief technology officer, Sang Soo Lee, were named as defendants in a purported shareholder class action lawsuit filed in the United States
District Court for the Southern District of New York, or New York Federal Court, Case No. 06-CV-2951, styled Michael Y. Kim v. Seo Kyu Lee, et al. The lawsuit alleges violations of the Securities Act and the Exchange Act during a
period from December 21, 2005 through April 11, 2006. The plaintiffs allegations concern our correction of revenue numbers for the fourth



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quarter of 2005 and fiscal year 2005 and the decision to consolidate the financial results of PTI. The plaintiff alleges that we made false and misleading
statements about these issues in our initial public offering documents and in other public statements and seeks unspecified damages. Four similar purported shareholder class action lawsuits were subsequently filed as follows:



| |  |  | On April 24, 2006, a lawsuit was filed in New York Federal Court by plaintiff Robert Corwin against our company, Case No. 06-CV-3141.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On April 25, 2006, a lawsuit was filed in New York Federal Court by plaintiff Diosma Detweiler against our company, Seo Kyu Lee, Sang Soo Lee and Moon Sung
Kim, Case No. 06-CV-3206.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 15, 2006, a lawsuit was filed in New York Federal Court by plaintiff Shu-O-Lin-Chen against our company, Seo Kyu Lee, Sang Soo Lee and Moon Sung Kim,
Case No. 06-CV-3691.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 25, 2006, a lawsuit was filed in the Supreme Court of the State of New York, County of Kings, by plaintiff Michael Rubin against our company, Seo Kyu
Lee, Sang Soo Lee, Moon Sung Kim, Dongwoo Chun, Ha Jin Jhun, Choong-ki Kim and Taek Jin Nam, Case No. 16242/2006. This action was subsequently removed to the U.S. District Court for the Eastern District of New York (Case No. CV-06-2964).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On June 16, 2006, Colin Garvey, Brett Simon, Peter Paul Enand, Alan Hedge, Cladine Kurp and James Kurp and West End
Capital Management LLC each filed a motion with the U.S. District Court for the Southern District of New York for the appointment of lead plaintiff, consolidation of the putative class actions filed in the Southern District of New York and for
approval of selection of lead counsel.

In March 2007, the United States District Court for the Southern District of New York appointed
West End Capital Management (West End) as the lead plaintiff in the consolidated class action lawsuit against us and our underwriters  Jefferies & Co., Inc., WR Hambrecht & Co., LLC and our prior auditors,
PricewaterhouseCoopers International Limited. The parties have reached an agreement on a timeline for the next phase of the litigation, and a stipulation has been entered to that effect. According to the schedule: (1) lead plaintiff West End
will file an amended complaint by June 23, 2007, which will supersede all existing class action complaints; (2) we and our underwriters will file our motions to dismiss no later than 60 days from the date the amended complaint is filed (by
August 22, 2007); (3) West End will file its opposition to the motions to dismiss no later than 60 days from the date the motions are filed (by October 21, 2007); and (4) we and our underwriters will have 30 days from the filing
of the opposition to file our replies (by November 20, 2007). Our counsel is engaged in preliminary discussions about holding a voluntary mediation to discuss settlement after the consolidated amended complaint and our motion to dismiss are
filed. Our counsel will keep us apprised of further discussions on mediation. At this time, we cannot predict the final conclusion of outcome of the shareholder litigation, including any damages which need to be paid or any amounts which may be paid
as part of a settlement.

We believe we have meritorious defenses to the claims alleged in these lawsuits and intend to defend against the
lawsuits vigorously.

On June 10, 2005, we received a letter from MagnaChip asserting that one of our 1.3 megapixel CMOS image sensors
infringes two of MagnaChips Korean patents. We have reviewed these two patents and we do not believe there is a valid claim against us under either of the patents. On July 29, 2005, we sent a response letter to MagnaChip requesting a
further elaboration of the claims mentioned in its original letter and a specific identification of the areas of alleged infringement. On August 4, 2005, MagnaChip sent a follow-up letter to us continuing to assert the claims of patent
infringement, along with alleged technical support material for its claims. On November 14, 2005, we initiated cancellation proceedings with the Intellectual Property Tribunal of the Korean Intellectual Property Office, or KIPO, to cancel and
invalidate the disputed photo diode and sensor patents claimed by MagnaChip. We plan to vigorously defend ourselves against any claim that may ensue from these allegations.

On April 3, 2006, MagnaChip filed a patent infringement lawsuit in Seoul Central District Court alleging that we infringed four of MagnaChips
Korean patents involving the (i) photo diode patent, (ii) sensor patent, (iii) color filter patent, and (iv) contact hole process patent and seeking damages of approximately W12,000 million. The four patents in
(i), (ii), (iii), and (iv) are the same patents in our current cancellation and invalidation proceedings with the Intellectual Property Tribunal in KIPO described above. We believe we have meritorious defenses to the claims alleged and intend
to defend against this lawsuit vigorously.



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In September 2006, we obtained a positive and commendatory ruling from KIPO granting our request
to effectively cancel and invalidate the disputed photo diode and sensor patents claimed by MagnaChip. From this development, in October 2006, MagnaChips claims on the photo diode and sensor patents were completely withdrawn from the Seoul
Central District Court.

In November 2006, MagnaChip filed an appeal on one specific item (out of a total of thirteen separate items) on
the sensor patent with the Patent Court, and we engaged in a hearing for that appeal in the Patent Court on June 14, 2007. In November 2006, MagnaChip filed three additional patent infringement claims in Seoul Central District Court, and we
engaged in a preliminary hearing on those infringement claims on June 13, 2007, and are scheduled to engage in the next hearing for such claims in the Seoul Central District Court on August 22, 2007. Separately on May 11, 2007, we
initiated cancellation and invalidation proceedings on these new patent infringement claims with the Intellectual Property Tribunal of KIPO, and also plan to vigorously defend against these claims in Seoul Central District Court. On
December 20, 2006, we obtained a positive and affirmative ruling from the Intellectual Property Tribunal of KIPO granting our request to effectively cancel and invalidate the disputed contact hole process patent claimed by MagnaChip. In January
2007, MagnaChip filed and appeal on the contact hole patent with the Patent Court. Unlike our favorable ruling on the disputed contact hole process patent, we did not obtain a positive ruling from the Intellectual Property Tribunal of KIPO on the
cancellation and invalidation of the disputed color filter patent alleged by MagnaChip. In January 2007, to reverse this ruling and obtain a positive decision on the color filter patent, we filed an appeal on the color filter patent with the Patent
Court.

On February 9, 2007, we obtained a positive and affirmative ruling in the patent infringement proceedings from the Seoul
Central District Court on the disputed color filter and contact hole process patents claimed by MagnaChip. In March 2007, MagnaChip filed an appeal with respect to the Seoul Central District Courts decision on the color filter and contact
hole process patents with the Seoul Court of Appeals.

On February 22, 2007, we filed a lawsuit for defamation and tortuous
interference with business relationships against MagnaChip in Seoul Central District Court. Our lawsuit sought monetary damages, plus interest, against MagnaChip. Separately, we filed a preliminary injunction against MagnaChip to obtain an order
from the Seoul Central District Court that would have required MagnaChip to refrain from engaging in certain acts which we believed had and would have continued to negatively impact our business relationships with our existing and potential
customers. However, on March 30, 2007, we completely withdrew our claims in our preliminary injunction and lawsuit for defamation and tortuous interference with business relationships against MagnaChip in Seoul Central District Court. On
May 15, 2007, MagnaChip responded by filing their own lawsuit against us in Seoul Central District Court for damages MagnaChip allegedly sustained arising from the above lawsuit we filed against them on February 22, 2007.

On October 31, 2004, we filed a claim with the Suwon District Court against Maxon, our fourth largest customer in terms of sales in 2004, for unpaid
accounts receivables in the amount of W1,392 million (US$1.5 million). On January 14, 2005, the court awarded a judgment in our favor of the full amount of our claim. However, Maxon has not paid the judgment awarded to us due
to deterioration of its financial condition. In response, we have joined the Council for Commercial Creditors of Maxon, which has been voluntarily formed by the creditors of Maxon, and have designated this Council to negotiate a settlement on our
behalf. We have provisioned 100% of the amount awarded by the court after recognition of translation loss, or approximately W1,119 million (US$1.2 million), as an allowance for doubtful accounts.

On March 22, 2005, Telson, one of our customers, was declared bankrupt by the Bankruptcy Division of the Seoul Central District Court. As a result,
a court administrator was appointed to liquidate Telson, and we have filed our claims in the amount of W191 million (US$0.2 million) with the administrator in April 2005. We have written off the entire amount of
W191 million.

Except for the legal proceedings described in this annual report, we are not currently involved in any
material litigation and we are not subject to any pending or threatened litigation or similar proceedings which could reasonably be expected, if decided adversely to us, to have a material adverse effect on our financial condition or results of
operations.



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Dividend policy

Since our inception in April 2000, we have not declared or paid any dividends on our common shares. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of
our business and do not anticipate paying any cash dividends in the foreseeable future.

B. Significant changes.

We have not experienced any significant change since the date of our audited consolidated financial statements included in this annual report.

Item 9. The Offer and Listing

A. Offer and listing details.

On December 21, 2005, we listed our ADSs, each representing one-half of a common share, on the Nasdaq National Market under the symbol
PXPL.

From January 1, 2006 to May 31, 2007, the trading price of our ADSs on Nasdaq ranged from US$12.08 to US$0.79
per ADS.

The following table provides the high and low trading prices for our ADSs on Nasdaq for (1) the first quarter of 2006 and
(2) each of the months since our initial public offering.



|                                                          |  |             |      |     |   |     
|--------------------------------------------------------- |  | ----------- | ---- | --- | - | ----
|                                                          |  | Sales Price
|                                                          |  | High        |      | Low
|Quarterly highs and lows                                  |  |             |      |     |   |     
|First Quarter of 2007                                     |  | $           | 2.15 |     | $ | 1.10
|Monthly highs and lows                                    |  |             |      |     |   |     
|July 2006                                                 |  |             | 2.20 |     |   | 1.31
|August 2006                                               |  |             | 2.40 |     |   | 1.56
|September 2006                                            |  |             | 2.10 |     |   | 1.73
|October 2006                                              |  |             | 1.87 |     |   | 1.45
|November 2006                                             |  |             | 1.75 |     |   | 1.10
|December 2006                                             |  |             | 2.95 |     |   | 1.57
|January 2007                                              |  |             | 2.15 |     |   | 1.56
|February 2007                                             |  |             | 1.78 |     |   | 1.38
|March 2007                                                |  |             | 1.50 |     |   | 1.10
|April 2007                                                |  |             | 1.35 |     |   | 1.11
|May 2007                                                  |  |             | 1.30 |     |   | 0.75
|June 2007 (for the period to and including June 22, 2007) |  |             | 0.80 |     |   | 0.79

B. Plan of distribution.

Not applicable.

C. Markets.

Our ADSs are currently listed on Nasdaq under the symbol PXPL.

D. Selling shareholders.

Not applicable.

E. Dilution.

Not applicable.



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F. Expenses of the issue.

Not applicable.

Item 10. Additional Information

A. Share capital.

The section below provides summary information relating to the material terms of our articles of incorporation and Korean law insofar as they relate to
the material terms of our share capital.

General

At December 31, 2006, our total authorized share capital consists of 10,000,000 shares, comprised of common shares, par value W500 per share and non-voting preferred shares, par value of
W500 per share.

On December 20, 2005, our articles of incorporation were amended and restated to, among other
things, remove all provisions regarding the Series A preferred shares. As of May 31, 2007, we had 6,472,073 common shares issued and outstanding.

In accordance with our articles of incorporation, we may issue non-voting participating, cumulative, preferred shares up to 2,000,000 shares and the holders of such preferred shares are entitled to receive annual
dividends as determined by the board of directors at the time of its issuance within the range between 1% to 15% of the par value of such shares, which rate will be equal to or higher than the dividend rates applicable to the holders of common
shares. If we fail to declare and pay dividend amount on the preferred shares in any given fiscal year, any unpaid portion shall be paid out prior to any distribution on the common shares at the time of dividend payments in the following fiscal
year. None of our non-voting preferred shares is currently issued or outstanding.

We have not issued any equity securities other than our
common shares. All of our issued and outstanding shares are fully paid and non-assessable and are in registered form.

Dividends

We may pay dividends to our shareholders in proportion to the number of shares owned by each shareholder, subject to certain dividend preferences of the
non-voting preferred shares. The common shares represented by the ADSs have the same dividend rights as our other common shares.

We may
declare dividends at the annual general meeting of shareholders which is held within three months after the end of each fiscal year. We pay the annual dividend shortly after the annual general meeting declaring such dividends. We may distribute the
annual dividend in cash or in shares. However, a dividend in shares must be distributed at par value, and dividends in shares may not exceed one-half of the annual dividends.

Under the Korean Commercial Code, we may pay an annual dividend only out of the excess of our net assets, on a non-consolidated basis, over the sum of
(i) our stated capital, (ii) the total amount of our capital surplus reserve and earned surplus reserve accumulated up to the end of the relevant dividend period and (iii) the earned surplus reserve to be set aside for the annual
dividend. We shall accumulate, as the earned surplus reserve, the amount of at least 1/10 of the cash dividend at each period for the settlement of accounts until such reserve reaches half of our stated capital. We may not use our legal reserves to
pay cash dividends but may transfer amounts from our legal reserves to capital stock or use our legal reserves to reduce an accumulated deficit.

We have no obligation to pay any dividend unclaimed for five years from the dividend payment date.

Since our inception, we have
not declared or paid any dividends on our share capital. Any decision to pay dividends in the future will be subject to a number of factors, including cash requirements for future capital expenditures and investments, and other factors our board of
directors may deem relevant. We have no intention of paying dividends in the near future.



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Distribution of Free Shares

In addition to paying dividends in shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus reserve or earned surplus reserve to our
stated capital in the form of shares issued without consideration. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings. We have distributed a total of 535,000 free common shares to our then
existing shareholders on September 19, 2000, and a total of 1,302,000 free common shares to our then existing shareholders on December 21, 2000. We have no intention of making such a distribution in the near future.

Preemptive Rights and Issuance of Additional Shares

We may issue authorized but unissued shares at the times and, unless otherwise provided in the Korean Commercial Code, on such terms as our board of directors may determine. We must offer new shares on uniform terms to all shareholders who
have preemptive rights and are listed on our shareholders register as of the relevant record date.

We may issue new shares pursuant
to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights if the new shares are issued:



| |  |  | through solicitation of subscription to 50 or more persons or to an underwriter for such solicitation to the extent not exceeding 50% of the then total issued and
outstanding shares;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | through a general public offering to the extent not exceeding 50% of the then total issued and outstanding shares;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | to the members of the employee stock ownership association;
| | - |  | -----------------------------------------------------------



| |  |  | upon the exercise of a stock option;
| | - |  | ------------------------------------



| |  |  | in the form of depositary receipts to the extent not exceeding 50% of the then total issued and outstanding shares;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | to induce foreign direct investment necessary for business in accordance with the Foreign Investment Promotion Act of Korea to the extent not exceeding 50% of the
then total issued and outstanding shares; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | through solicitation of subscription to 50 or more persons or to an underwriter for such solicitation for listing of our shares on the Stock Market Division or
KOSDAQ Market Division on the Korea Exchange to the extent not exceeding 50% of the then total issued and outstanding shares.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With respect to any issuance of new shares, we must give public notice to our existing shareholders at least two weeks before the relevant record date, informing them of their preemptive rights and the transferability of such preemptive
rights. We will notify the shareholders who are entitled to subscribe for newly issued shares of the subscription deadline at least two weeks prior to such deadline. If a shareholder fails to subscribe by the deadline, the shareholders
preemptive rights will lapse. Our board of directors may determine how to distribute fractional shares or shares for which preemptive rights have not been exercised.

In the case of ADS holders, the depositary will be treated as the shareholder entitled to preemptive rights.

General
Meeting of Shareholders

We hold the annual general meeting of shareholders within three months after the end of each fiscal year.
Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:



| |  |  | as necessary,
| | - |  | -------------



| |  |  | at the request of shareholders holding an aggregate of 3% or more of our outstanding shares, or
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | at the request of our audit committee.
| | - |  | --------------------------------------



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We must give shareholders written notice or electronic document setting out the date, place and agenda of
the meeting at least two weeks prior to the general meeting of shareholders. The agenda of the general meeting of shareholders is determined at the meeting of the board of directors. In addition, a shareholder holding an aggregate of 3% or more of
the outstanding shares may propose an agenda for the general meeting of shareholders. Such proposal should be made in writing at least six weeks prior to the meeting. The board of directors may decline such proposal if it is in violation of the
relevant law and regulations or our articles of incorporation. Shareholders not on the shareholders register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting.
Holders of non-voting preferred shares, unless enfranchised, are not entitled to receive notice of or vote at general meeting of shareholders.

Our shareholders meetings are held in Bundang, Korea or other adjacent areas as deemed necessary.

Voting Rights

Holders of our common shares are entitled to one vote for each share. However, any shares held by us (i.e., treasury shares) or by any corporate entity in
which we have, directly or indirectly, greater than a 10% interest, do not have voting rights. Unless our articles of incorporation explicitly state otherwise, the Korean Commercial Code permits cumulative voting pursuant to which each voting share
entitles the holder thereof to multiple voting rights equal to the number of directors to be elected at such time. Our articles of incorporation explicitly exclude cumulative voting.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting,
where the affirmative votes also represent at least one-quarter of our total voting shares then issued and outstanding. However, under the Korean Commercial Code and our articles of incorporation, the following matters require approval by the
holders of at least two-thirds of the voting shares present or represented at the meeting, where the affirmative votes also represent at least one-third of our total voting shares then issued and outstanding:



| |  |  | amending our articles of incorporation,
| | - |  | ---------------------------------------



| |  |  | removing a director,
| | - |  | --------------------



| |  |  | effecting a capital reduction,
| | - |  | ------------------------------



| |  |  | effecting any dissolution, merger or consolidation with respect to us,
| | - |  | ----------------------------------------------------------------------



| |  |  | transferring all or any significant part of our business,
| | - |  | ---------------------------------------------------------



| |  |  | acquiring all of the business of any other company or a part of the business of any other company having a material effect on our business, or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issuing new shares at a price below the par value, or any other matters for which such resolution is required under relevant law and regulations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

In general, holders of non-voting preferred shares (other than enfranchised non-voting preferred shares) are not
entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation, capital reductions or in some other cases that affect the
rights or interests of the non-voting preferred shares, approval of the holders of such class of shares is required. We must obtain the approval, by a resolution, of holders of at least two-thirds of the non-voting preferred shares present or
represented at a class meeting of the holders of such class of shares, where the affirmative votes also represent at least one-third of the total issued and outstanding shares of such class. In addition, if we are unable to pay dividends on
non-voting preferred shares as provided in our articles of incorporation, the holders of non-voting preferred shares will become enfranchised and will be entitled to exercise voting rights until the dividends are paid. The holders of enfranchised
non-voting preferred shares have the same rights as holders of voting shares to request, receive notice of, attend and vote at a general meeting of shareholders.



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Under our articles of incorporation, shareholders may exercise their voting rights by proxy. A person
with a proxy must present a document evidencing its power of attorney before the commencement of the relevant general meeting of shareholders in order to exercise voting rights.

Holders of ADSs will exercise their voting rights through the ADS depositary. Subject to the provisions of the deposit agreement, holders of ADSs will be
entitled to instruct the depositary how to vote the common shares underlying their ADSs.

Rights of Dissenting Shareholders

In some limited circumstances, including the transfer of all or any significant part of our business and our merger or consolidation with another company,
dissenting shareholders have the right to require us to purchase their shares. To exercise this right, shareholders must submit to us a written notice of their intention to dissent before the applicable general meeting of shareholders. Within 20
days after the relevant resolution is passed, the dissenting shareholders must request us in writing to purchase their shares. We are obligated to purchase the shares of dissenting shareholders within two months after receiving such request. The
purchase price for the shares is required to be determined through negotiations between the dissenting shareholders and us. If an agreement is not attained within 30 days since the receipt of the request, we or the shareholder requesting the
purchase of shares may request the court to determine the purchase price. Holders of ADSs will not be able to exercise dissenters rights unless they withdraw the underlying common shares and become our direct shareholders.

Register of Shareholders and Record Dates

Our
transfer agent, Hana Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registers transfers of shares on the register of shareholders on presentation of the share certificates.

The record date for annual dividends is December 31 of each year. For the purpose of determining shareholders entitled to vote at the annual general
meeting of shareholders, the register of shareholders is closed for the period from January 1 to the date of the annual general meeting of shareholders of each year. Further, for the purpose of determining the shareholders entitled to some
other rights pertaining to the shares, we may, on at least two weeks public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of shares and the delivery of share certificates may
continue while the register of shareholders is closed.

Annual Report

At least one week before the annual general meeting of shareholders, we must make our annual report and audited financial statements available for inspection at our principal office and at all of our branch offices.
In addition, copies of annual reports, the audited financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Transfer of Shares

There is no restriction on transfer or sale of our shares applicable to our
shareholders or holders of ADSs under our articles of incorporation and the relevant laws, except for certain procedural requirements applicable to a non-citizen or non-resident of Korea. See Exchange controls.

Under the Korean Commercial Code, the transfer of shares is effected by delivery of share certificates. However, to assert shareholders rights
against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. A non-Korean shareholder may file a
specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, a non-resident shareholder must appoint an agent authorized to receive notices on his or her behalf in Korea and
file a mailing address in Korea. The above requirement does not apply to the holders of ADSs.

Under current Korean regulations, Korean
securities companies and banks, including licensed branches of non-Korean securities companies and banks, asset management companies, futures trading companies, internationally-recognized foreign custodians and the Korea Securities Depository, or
KSD, may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of shares by non-residents or non-Koreans.



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Our transfer agent, Hana Bank, is located at 101-1, Euljiro 1-ga, Jung-gu, Seoul, Korea.

Acquisition of Our Shares

We may not acquire our own
common shares except in limited circumstances, such as reduction of capital and acquisition of our own common shares for the purpose of granting stock options to our officers and employees. Under the Korean Commercial Code, except in the case of a
capital reduction (in which case we must retire the common shares immediately), we must resell any common shares acquired by us to a third party (including to a stock option holder who exercised his or her stock option) within a reasonable time.
Corporate entities in which we own equity interest more than 50% may not acquire our common shares.

There exists no restriction which
limits the rights to own our shares or exercise voting rights on our shares or our ADSs due to their status as a non-resident or non-Korean citizen under our articles of incorporation and the applicable Korean laws, except for the procedural
requirements applicable to a non-citizen or non-resident of Korea.

Liquidation Rights

In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders
in proportion to their shareholdings.

Directors

Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation, as currently in effect, provide for a board of directors comprised of not less than five
directors. The directors are elected at a shareholders meeting by a majority vote of the shareholders present or represented and such majority also represents at least one-quarter of all of our issued and outstanding voting shares, so long as
the quorum is met by a representation of not less than one-third of all issued and outstanding shares with voting rights. Our directors are not required to hold any of our shares to be qualified to serve on our board of directors.

Each of our directors is elected for a term of three years. However, if a directors term expires after the end of a fiscal year but prior to the
annual general meeting of shareholders convened in respect to such fiscal year, then such directors term shall be extended until the close of such annual general meeting of shareholders. In addition, directors may serve any number of
consecutive terms and may be removed from office at the recommendation of the nomination committee in accordance with corporate governance guidelines by a special resolution adopted at a general meeting of shareholders.

The board of directors elects one director from its members to serve as the representative director. The representative director is authorized to
represent and oversee the operation of our company. In addition, the representative director is the chairman of the board of directors.

Under the Korean Commercial Code and our articles of incorporation, any director with a special interest in an agenda item of any board meeting may not vote on such item at the board meeting.

Other Provisions

Under our articles of
incorporation, there exists no provision (i) which may delay or prevent a change in control of us and that is triggered only in the event of a merger, acquisition or corporate restructuring, (ii) which requires disclosure of ownership
above a certain threshold, or (iii) that governs the change in capital that is more stringent than required by the applicable laws in Korea.

B.
Articles of Incorporation.

We incorporate by reference into this annual report the description of our articles of incorporation, as
amended, contained in our registration statement on Form F-1 (Registration No. 333-130116) under Description of Share Capital. Our shareholders adopted our articles of incorporation, as amended, on December 20, 2005.



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C. Material contracts.

Wafer Foundry Service Agreement

On November 3, 2003, Dongbu HiTek and O-JIN Inc. (as successor by merger to T2Net
Technology Co., Ltd.) entered into a wafer foundry service agreement with us, under which Dongbu HiTek, through T2Net (Dongbu HiTeks distributor), agreed to supply us with image sensor products and certain wafer-related processing services.
The wafer foundry service agreement states that we are to provide payments for the products and services to Dongbu HiTek through T2Net. The term of this agreement is one year and is automatically renewable for one-year periods. The agreement is
subject to termination by either party in the event of a failure to cure a breach, insolvency, bankruptcy, or an attachment over or disposition of major assets.

Basic Agreement

On September 17, 2004, Dongbu HiTek entered into a basic agreement with us, under which we provide
Dongbu HiTek with drawings, details on manufacturing process, other relevant information, and probe testing services in connection with Dongbu HiTeks supply of CMOS Image Sensors to Sharp. The basic agreement states that Dongbu HiTek provide
payment of services fees to us. The term of this agreement is one year and is automatically renewable for one-year periods. The agreement is subject to termination by either party in the event of a failure to cure a breach, impossibility of
performance, bankruptcy, or termination of the relevant agreement between Dongbu HiTek and Sharp.

Testing Agreement

On May 31, 2004, Tesna entered into a testing agreement with us, under which Tesna provides us with testing services with respect to certain wafers
and CSP packages. Under the testing agreement, we provide payment of service fees directly to Tesna. This agreement will remain effective until terminated by either party for any or no reason.

Cooperation Agreement

On September 20, 2004, we
entered into a cooperation agreement with PTI, our consolidated subsidiary in Taiwan, whereby both parties have agreed to cooperate in the sale of our products and other related business. This agreement is valid for a term of three years, which term
will be automatically renewed for one-year periods if neither party objects. Under this agreement, we have agreed to supply PTI with our products, allow PTI to use our trademark and provide PTI with related technical support. PTI is the exclusive
distributor of our products in Taiwan. We retain the intellectual property rights related to products we supply to PTI. Intellectual property relating to jointly developed products will be jointly owned by PTI and us.

Foundry Agreement

On November 22, 2005, UMC
entered into a foundry agreement with us, under which UMC provides us with certain semiconductor wafers. The term of this agreement is five years. This agreement is subject to termination by either party in the event of a failure to cure a breach,
bankruptcy, or insolvency. Further, either party may terminate this agreement by giving a one-year prior written notice to the other party. To date, UMC has not commenced commercial production of wafers for us.

Shareholders Agreement

On June 1, 2005,
we entered into a shareholders agreement with the other shareholders of PTI, whereby the parties agreed to, among other things, grant us the right to appoint two of the three members of PTIs board of directors. In addition, any change to
PTIs board composition requires approval by more than two-thirds of the shareholders of PTI.



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D. Exchange controls.

General

The Foreign Exchange Transaction Law and the Presidential Decree and regulations under such Law and Decree, or the
Foreign Exchange Transaction Laws, regulate investment in Korean securities by non-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities
only to the extent specifically allowed by such laws or otherwise permitted by the Minister of Finance and Economy, or MOFE. The Financial Supervisory Commission, or FSC, has also adopted, pursuant to its authority under the Korean Securities and
Exchange Act, regulations that restrict investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.

Under the Foreign Exchange Transaction Laws, (i) if the Government deems that it is inevitable due to the outbreak of natural calamities, wars, conflict of arms or grave and sudden changes in domestic or foreign
economic circumstances or other situations equivalent thereto, the MOFE may temporarily suspend payment, receipt or the whole or part of transactions to which the Foreign Exchange Transaction Laws apply, or impose an obligation to safe-keep, deposit
or sell means of payment in or to certain Korean governmental agencies or financial institutions, and (ii) if the Government deems that the international balance of payments and international finance are confronted or are likely to be
confronted with serious difficulty or the movement of capital between Korea and abroad brings or is likely to bring on serious obstacles in carrying out currency policies, exchange rate policies and other macroeconomic policies, the MOFE may take
measures to require any person who intends to perform capital transactions to obtain permission or to require any person who performs capital transactions to deposit part of the means of payment acquired in such transactions in certain Korean
governmental agencies or financial institutions, in each case subject to certain limitations thereunder.

Filing with Korean Government in Connection
with the Issuance of ADSs

In order for us to issue common shares represented by ADSs in an amount exceeding US$30 million, we are
required to file a prior report of the issuance with the MOFE. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.

Under current Korean laws and regulations, the depositary is required to obtain our prior consent for the number of common shares to be deposited in any given proposed deposit which exceeds the difference between
(i) the aggregate number of common shares deposited by us for the issuance of ADSs, including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs, and
(ii) the number of common shares on deposit with the depositary at the time of such proposed deposit. We have agreed to consent to any deposit so long as the deposit would not violate our articles of incorporation or applicable Korean law and
the total number of our common shares on deposit with the depositary would not exceed 2,850,000.

Share Certificates Must be Kept in Custody with an
Eligible Custodian

Under Korean law, certificates evidencing shares of Korean companies must be kept in custody with an eligible
custodian in Korea, which may in turn be required to be deposited with the KSD, if they are designated as being eligible for deposit with the KSD. Only the KSD, foreign exchange banks, including domestic branches of foreign banks, securities
companies, including domestic branches of foreign securities companies, asset management companies, futures trading companies and internationally recognized foreign custodians are eligible to act as a custodian of shares for a non-resident or
foreign investor. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service, or FSS, in circumstances where such compliance is made impracticable,
including cases where such compliance would contravene the laws of the home country of such foreign investor.

A foreign investor may
appoint one or more standing proxies from among the KSD, foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), asset management companies, futures
trading companies and internationally recognized foreign custodians, which have obtained a license to act as a standing proxy to exercise shareholders right or perform any matters related thereto if the foreign investor does not perform these
activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor of the FSS in circumstances where such compliance is made impracticable, including cases where such
compliance would contravene the laws of the home country of such foreign investor.



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Restrictions Applicable to ADSs

Once the report to the MOFE is filed in connection with the issuance of ADSs, no Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal
of shares underlying ADSs and the delivery inside Korea of shares in connection with such withdrawal. Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares,
participate in free distributions and receive dividends on shares without any further governmental approval.

Restrictions Applicable to Shares

An investment by a foreign investor (i) of not less than 10% of the outstanding shares of a Korean company, and (ii) in an
amount not less than W50 million is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Ministry of Commerce, Industry and Energy
which delegates its authority to foreign exchange banks or the Korea Trade-Investment Promotion Agency under the relevant regulations. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign
shareholding restrictions in the event that such restrictions are prescribed in each specific law which regulates the business of such Korean company.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for
stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a
deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a securities company. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale
of, any such shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any such shares held by a non-resident of Korea must be deposited either in a Won account with the investors securities
company or his Won account. Funds in the investors Won account may be transferred to the investors foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won account may also be used for
future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Securities companies and asset management companies are allowed to open foreign currency accounts and Won accounts with foreign exchange banks exclusively for accommodating foreign investors securities investments in Korea. Through
such accounts, these securities companies and asset management companies may enter into foreign exchange transactions on a limited basis, such as the conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of
foreign investors, without such investors having to open their own accounts with foreign exchange banks.

E. Taxation.

Korean Taxation

The following is a discussion of
material Korean tax consequences to owners of our ADSs and common shares that are non-resident individuals or non-Korean corporations without a permanent establishment in Korea to which the relevant income is attributable. Such non-resident
individuals or non-Korean corporations are referred to as non-resident holders below. The statements regarding Korean tax laws set forth below are based on the laws in force and as interpreted by the Korean taxation authorities as of the date
hereof. This discussion is not exhaustive of all possible tax considerations which may apply to a particular investor, and prospective investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership and
disposition of our common shares and ADSs, including specifically the tax consequences under Korean law, the laws of the jurisdiction of which they are resident, and any tax treaty between Korea and their country of residence, by consulting their
own tax advisors.



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Dividends on the Common Shares or ADSs

We will deduct Korean withholding tax from dividends paid to you (whether in cash or in common shares) at a rate of 27.5% (including resident surtax). If
we distribute to you common shares representing a capitalization of certain capital surplus reserves or asset revaluation reserves, such distribution will be subject to Korean withholding taxes, except for the distribution of common shares
representing a capitalization of paid-in capital in excess of the par value.

If you are a resident of a country that has entered into a
tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax. In order to obtain a reduced rate of withholding tax pursuant to an applicable tax treaty, you must submit to us, prior to the dividend payment date, such evidence
of tax residence as the Korean tax authorities may require in order to establish your entitlement to the benefits of the applicable tax treaty. If you hold ADSs, evidence of tax residence may be submitted to us through the depositary. Please see the
discussion under Tax Treaties below for discussion on treaty benefits.

Taxation of Capital Gains

In general, capital gains earned by you upon the transfer of our common shares or ADSs are subject to Korean withholding tax at the
lower of (i) 11% (including resident surtax) of the gross proceeds realized, and (ii) 27.5% (including resident surtax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition cost and certain
direct transaction costs), unless you are exempt from Korean income taxation under the applicable Korean tax treaty with your country of tax residence. Please see Tax Treaties below for a discussion on treaty benefits. Even if you
do not qualify for any exemption under a tax treaty, you will not be subject to the foregoing withholding tax on capital gains if you qualify for the relevant Korean tax law exemptions discussed in the following paragraphs.

With respect to our common shares, you will not be subject to Korean income taxation on capital gains realized upon the transfer of such common shares,
(i) if our common shares are listed on either the Stock Market Division of the Korea Exchange or the KOSDAQ Market Division of the Korea Exchange and transfer is made through either the Stock Market Division of the Korea Exchange or the KOSDAQ
Market Division of the Korea Exchange, (ii) if you have no permanent establishment in Korea and (iii) if you did not own or have not owned (together with any shares owned by any entity which you have a certain special relationship with and
possibly including the shares represented by the ADSs) 25% or more of our total issued and outstanding shares at any time during the calendar year in which the sale occurs or the five calendar years prior to the calendar year in which the sale
occurs.

With respect to ADSs, there are uncertainties as to whether they should be viewed as securities separate from our common shares
underlying such ADSs or as the underlying shares themselves for capital gains tax purposes, as discussed in more detail in the following paragraph. However, in either case, you will be eligible for exemptions from capital gains available under
Korean tax law (in addition to the exemption afforded under income tax treaties) if conditions discussed below are satisfied. Under a tax ruling issued by the Korean tax authority in 1995, or the 1995 tax ruling, ADSs are treated as securities
separate from the underlying shares represented by such ADSs and, based on such ruling (i) capital gains earned by you from the transfer of ADSs to another non-resident (other than to such transferees permanent establishment in Korea) are
not subject to Korean income taxation and (ii) capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from the transfer of ADSs outside Korea are exempt from Korean income taxation by virtue of the
Special Tax Treatment Control Law of Korea, or the STTCL, provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.

However, according to a recent tax ruling issued in 2004 by the Korean tax authorities regarding the securities transaction tax, or the 2004 tax ruling, depositary receipts constitute share certificates the transfer
of which is subject to the securities transaction tax. Even though the 2004 tax ruling addresses the securities transaction tax and not the income tax on capital gains, it gives rise to a question as to whether depositary shares (such as ADSs)
should be viewed as the underlying shares for capital gains tax purposes. In that case, exemptions from capital gains afforded under Korean tax law for transfers of ADSs based on the treatment of ADSs as securities separate from the underlying
shares would no longer apply (including those referred to in the 1995 tax ruling), but, instead, exemptions from capital gains for transfers of underlying shares would apply. Under such an exemption relevant to this case, capital gains from
transfers of ADSs would be exempt from Korean income tax under the STTCL if (i) the ADSs are listed on an overseas securities market that is similar to the Stock Market Division of the Korea Exchange or KOSDAQ Market Division of the Korea
Exchange and (ii) the transfer of ADSs is made through such securities market. We believe that the Nasdaq National Market would satisfy the condition described in (i) above.



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If you are subject to tax on capital gains with respect to the sale of ADSs, or of our common shares
which you acquired as a result of a withdrawal, the purchaser or, in the case of the sale of common shares on the Stock Market Division of the Korea Exchange or through a licensed securities company in Korea, the licensed securities company, is
required to withhold Korean tax from the sales price in an amount equal to 11% (including resident surtax) of the gross realization proceeds and to make payment of these amounts to the Korean tax authority, unless you establish your entitlement to
an exemption under an applicable tax treaty or domestic tax law or produce satisfactory evidence of your acquisition cost and transaction costs for the common shares or the ADSs. To obtain the benefit of an exemption from tax pursuant to a tax
treaty, you must submit to the purchaser or the securities company, or through the ADS depositary, as the case may be, prior to or at the time of payment, such evidence of your tax residence as the Korean tax authorities may require in support of
your claim for treaty benefits. Please see the discussion under Tax Treaties below for an additional explanation on claiming treaty benefits.

Tax Treaties

Korea has entered into a number of income tax treaties with other countries
(including the United States), which would reduce, or exempt from, Korean withholding tax on dividends on, and capital gains on a transfer of, our common shares or ADSs. For example, under the Korea-United States income tax treaty, Korean
withholding tax is generally reduced to 16.5% (including resident surtax) on dividends and an exemption from Korean withholding tax on capital gains is available to qualifying residents of the United States that are beneficial owners of the relevant
dividend income or capital gains.

You should inquire for yourself whether you are entitled to the benefit of an income tax treaty with
Korea. It is the responsibility of the party claiming the benefits of an income tax treaty in respect of dividend payments or capital gains to submit to us, the purchaser or the securities company, as applicable, a certificate as to its tax
residence. In the absence of sufficient proof, we, the purchaser or the securities company, as applicable, must withhold tax at the normal rates. Further, effective from July 1, 2002, in order for you to obtain the benefit of a tax exemption on
certain Korean source income (e.g., dividends and capital gains) under an applicable tax treaty, Korean tax law requires you (or your agent) to submit the application for tax exemption along with a certificate of your tax residency issued by a
competent authority of your country of tax residence. Such application should be submitted to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (i) all assets (wherever located) of the deceased if he or she was domiciled in Korea at the time of his or her death and (ii) all property located in Korea which passes on death
(irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above (based on the donees place of domicile in the case of (i) above). The taxes are imposed if the value of the relevant property is
above a limit and vary from 10% to 50% according to the value of the relevant property and the identity of the parties involved.

Under the
Korean inheritance and gift tax laws, shares issued by Korean corporations are deemed located in Korea irrespective of where the share certificates are physically located or by whom they are owned. If the tax authoritys interpretation of
treating depositary receipts as the underlying share certificates under the 2004 tax ruling applies in the context of inheritance and gift taxes as well, you or your heirs will be treated as the owner of the common shares underlying the ADSs.

At present, Korea has not entered into any tax treaty relating to inheritance or gift taxes.

Securities Transaction Tax

If
you transfer the common shares and the common shares are listed on neither the Stock Market Division of the Korea Exchange nor the KOSDAQ Market Division of the Korea Exchange, you will be subject to securities transaction tax at the rate of 0.5%.



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With respect to transfers of ADSs, depositary receipts (such as the ADSs) constitute share certificates
subject to the securities transaction tax according to the 2004 tax ruling; provided that, under the Securities Transaction Tax Law, the transfer of depositary receipts listed on the New York Stock Exchange or Nasdaq is exempt from the securities
transaction tax.

According to tax rulings issued by the Korean tax authorities in 2000 and 2002, foreign stockholders are not subject to
securities transaction tax upon the deposit of an underlying share and receipt of depositary securities or upon the surrender of depositary securities and withdrawal of the originally deposited underlying share, if no consideration is given for such
withdrawal. However, the holding of the 2004 tax ruling referred to above seems to view the ADSs as the underlying shares at least for the purpose of the securities transaction tax and, though not specifically stated, could be read to imply that the
securities transaction tax should not apply to deposits of common shares in exchange of ADSs or withdrawals of common shares upon surrender of the ADSs regardless of whether the holder is the initial holder because the transfer of ADSs by the
initial holder to a subsequent holder would have already been subject to securities transaction tax under such tax ruling.

The securities
transaction tax, if applicable, must be paid by the transferor of the shares or the rights to subscribe to such shares. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold
and pay the tax to the tax authorities. When such transfer is made through a securities company only, such securities company is required to withhold and pay the tax. Where the transfer is effected by a non-resident without a permanent establishment
in Korea, other than through a securities settlement company or a securities company, the transferee is required to withhold the securities transaction tax.

U.S. Federal Income Tax Considerations

The following is a discussion of material U.S. federal
income tax consequences of the purchase, ownership, and disposition of our common shares or our ADSs. This description does not provide a complete analysis of all potential tax consequences. The information provided below is based on the Internal
Revenue Code of 1986, as amended, or the Code, Treasury Regulations, proposed Treasury Regulations, Internal Revenue Service, or the IRS, published rulings and court decisions, all as of the date hereof. These authorities may change, possibly on a
retroactive basis, or the IRS might interpret the existing authorities differently. In either case, the tax consequences of purchasing, owning or disposing of our common shares or our ADSs could differ from those described below.

This description is general in nature and does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular investor in
light of the investors particular circumstances, or to investors subject to special treatment under U.S. federal income tax laws, such as:



| |  |  | banks or financial institutions,
| | - |  | --------------------------------



| |  |  | life insurance companies,
| | - |  | -------------------------



| |  |  | tax-exempt organizations,
| | - |  | -------------------------



| |  |  | dealers in securities or foreign currencies,
| | - |  | --------------------------------------------



| |  |  | traders in securities that elect to apply a mark-to-market method of accounting,
| | - |  | --------------------------------------------------------------------------------



| |  |  | persons holding our common shares or our ADSs as part of a position in a straddle or as part of a hedging, conversion or
integrated transaction for U.S. federal income tax purposes,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | persons subject to the alternative minimum tax provisions of the Code,
| | - |  | ----------------------------------------------------------------------



| |  |  | persons that have a functional currency other than the U.S. dollar, and
| | - |  | -------------------------------------------------------------------------



| |  |  | persons owning or treated as owning 10% or more of any class of our stock.
| | - |  | --------------------------------------------------------------------------

This description generally applies to purchasers of our common shares or our ADSs as capital assets. This description does not consider the effect of any
foreign, state, local or other tax laws that may be applicable to particular investors.



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Investors considering the purchase of ADSs should consult their own tax advisors regarding the
application of the U.S. federal income tax laws to their particular situations and the consequences of U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.

U.S. Holders

As used herein,
the term U.S. Holder means a beneficial owner of our common shares or our ADSs that is, for U.S. federal income tax purposes:



| |  |  | a citizen or resident of the United States,
| | - |  | -------------------------------------------



| |  |  | a corporation, or other entity taxable as a corporation, organized in or under the laws of the United States or any political subdivision thereof,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an estate, the income of which is subject to U.S. federal income taxation regardless of its source, or
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | a trust, if such trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes, or if (a) a court within the United States can
exercise primary supervision over its administration, and (b) one or more U.S. persons have the authority to control all of the substantial decisions of such trust.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If a partnership, including for this purpose any entity treated as a partnership for U.S. tax purposes, is a beneficial owner of our common shares or our
ADSs, the U.S. tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of our common shares or our ADSs that is a partnership and partners in such partnership
should consult their individual tax advisors about the U.S. federal income tax consequences of holding and disposing of our common shares or our ADSs.

For U.S. federal income tax purposes, U.S. Holders of our ADSs will be treated as owners of the underlying shares represented by such ADSs.

A Non-U.S. Holder is a beneficial owner of our common shares or ADSs that is not a U.S. Holder. If you are not a U.S. Holder,
this subsection does not apply to you and you should refer to Non-U.S. Holders below.

Taxation of Dividends and Other
Distributions on Our Common Shares or Our ADSs

Subject to the passive foreign investment company rules discussed below,
distributions to a U.S. Holder with respect to our common shares or our ADSs, other than pro rata distributions of our common shares, will be includible in the U.S. Holders gross income as ordinary dividend income when actually or
constructively received, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits. For this purpose, earnings and profits are computed under U.S. federal income tax principles. To the extent that
the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of your tax basis in our common shares or our ADSs, and to the extent the amount of the distribution exceeds the
U.S. Holders tax basis, the excess will be taxed as capital gain. We do not currently, nor do we intend in the future to, compute earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a
distribution will generally be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as a capital gain under the rules described above.

Dividends paid in Won will be included in a U.S. Holders income at a U.S. dollar amount based on the exchange rate in effect on the date that the
U.S. Holder (or in the case of ADSs, the depositary) receives the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If U.S. dollars are converted into Won on the date of receipt, the U.S. Holder generally should not
be required to recognize foreign currency gain or loss in respect of the payment. However, the U.S. Holder will be required to include any gain or loss in income if the U.S. Holder later exchanges the Won for U.S. dollars. The gain or loss will be
equal to the difference between the U.S. dollar value of the amount that the U.S. Holder includes in income when the dividend is received and the amount that the U.S. Holder receives on the exchange of the Won for U.S. dollars. The gain or loss
generally will be ordinary income or loss from United States sources.

Dividends will constitute foreign source income for foreign tax
credit limitation purposes. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The dividends will not be eligible for the dividends-received deduction generally allowed to U.S.
corporations. For taxable years beginning before January 1, 2009, dividends



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received by U.S. Holders who are taxed as individuals may be subject to reduced rates of taxation if our common shares or our ADSs are readily tradable on an
established securities market in the United States, such as Nasdaq, where our ADSs are listed, and holding period and other requirements are met. Dividends paid by us will not qualify for reduced rates if we are a passive foreign investment company
in the year in which the dividends are paid or in the preceding taxable year. You should consult your tax advisors regarding the application of these rules to your particular circumstances.

The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of
foreign tax credits by U.S. Holders of ADSs. Such actions could also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by U.S. Holders taxed as individuals. Accordingly, the analysis of the creditability
of foreign taxes and the availability of the reduced tax rate for dividends received by those U.S. Holders, each described above, could be affected by actions taken by the U.S. Treasury or parties to whom the ADSs are pre-released.

Taxation of Disposition of Common Shares or ADSs

Subject to the passive foreign investment company rules discussed below, a U.S. Holder will recognize taxable gain or loss on any sale or exchange of our common shares or our ADSs equal to the difference between the
amount realized for our common shares or our ADSs and the U.S. Holders tax basis in our common shares or our ADSs, determined in U.S. dollars. The gain or loss will be capital gain or loss and will be long term if the U.S. Holder has held our
common shares or our ADSs for more than one year. The maximum tax rate on long-term capital gains is 15% for U.S. Holders other than corporations, which maximum tax rate will increase under current law to 20% for dispositions occurring during
taxable years beginning on or after January 1, 2009. The deductibility of capital losses is subject to limitations. Any capital gain or loss that a U.S. Holder recognizes will generally be treated as United States source.

Passive Foreign Investment Company

Based on the price of our common shares and ADSs during our 2006 taxable year and the amount of passive assets, including cash and cash equivalents, held by us throughout that year, we believe that we were a PFIC for our 2006 taxable year.
Further, there is a significant risk that we will be a PFIC for our 2007 taxable year and we may be a PFIC for any future taxable year.

The determination of our PFIC status depends upon the composition of our assets, including goodwill, and the amount and nature of our income, from time to time. The amount of goodwill will depend in part on the market value of our common
shares or our ADSs, which may be especially volatile for a technology-related enterprise such as ours. We have limited control over these variables and accordingly there can be no assurance that we will not be considered a PFIC for any taxable year,
as PFIC status is re-tested each year and depends on the facts in the relevant year. In particular, fluctuation in the market price of our ADSs or common shares may result in us becoming a PFIC in future years.

If we are a PFIC in any year in which a U.S. Holder holds our common shares or our ADSs, the U.S. Holder generally will be subject to increased reporting
requirements and subject to increased U.S. tax liabilities on receipt of certain dividends, as described below, and on a disposition of our common shares or our ADSs in that year and all subsequent years, although a shareholder election to terminate
such deemed PFIC status may be available. U.S. Holders should consult their own tax advisors regarding our status as a PFIC, the consequences of an investment in a PFIC, and the consequences of making a shareholder election to terminate deemed PFIC
status if we no longer meet the income or asset test for PFIC status in a subsequent taxable year.

A foreign corporation is considered a
PFIC for any taxable year if either:



| |  |  | at least 75% of its gross income is passive income, or
| | - |  | ------------------------------------------------------



| |  |  | at least 50% of the value of its assets, based on an average of the quarterly values of its assets during a taxable year, is attributable to assets that produce or
are held for the production of passive income.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We will be treated as owning our proportionate share of the assets and earning our proportionate share of
the income of any other corporation in which we own, directly or indirectly, more than 25%, by value, of the stock of such corporation.

If
we are a PFIC for any taxable year during which a U.S. Holder holds our common shares or our ADSs, the U.S. Holder will be subject to the following special tax rules with respect to:



| |  |  | any excess distribution that the U.S. Holder receives on our common shares or our ADSs, and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | any gain the U.S. Holder realizes from a sale or other disposition, including a pledge, of our common shares or our ADSs,
| | - |  | -------------------------------------------------------------------------------------------------------------------------

unless the U.S. Holder makes a mark-to-market election as discussed below.

Distributions that a U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions the U.S. Holder received
during the shorter of the three preceding taxable years or the U.S. Holders holding period for our common shares or our ADSs will be treated as an excess distribution. Under these special tax rules:



| |  |  | any excess distribution on, or gain realized from a sale or other disposition of, our common shares or our ADSs will be allocated ratably over a U.S. Holders
holding period for our common shares or our ADSs,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated as ordinary income
in the year of the distribution or gain, and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount allocated to each other year will be subject to tax as ordinary income at the highest tax rate in effect for individuals or corporations, as applicable,
for that year and an interest charge will be imposed on the resulting tax attributable to each such year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The tax
liability for amounts allocated to years prior to the year of disposition or excess distribution cannot be offset by any net operating losses, and gains (but not losses) realized on the sale of our common shares or our ADSs cannot be treated as
capital, even if the U.S. Holder holds our common shares or our ADSs as capital assets.

Alternatively, a U.S. Holder of marketable
stock in a PFIC may make a mark-to-market election for such stock to elect out of the excess distribution rules discussed above. If a U.S. Holder were to make a mark-to-market election for our common shares or our ADSs, the U.S. Holder would
include in income each year an amount equal to the excess, if any, of the fair market value of our common shares or our ADSs as of the close of the taxable year over the U.S. Holders adjusted basis in such common shares or ADSs. A U.S. Holder
would be allowed a deduction for the excess, if any, of the adjusted basis of our common shares or our ADSs over their fair market value as of the close of the taxable year, but only to the extent of any net mark-to-market gains on our common shares
or our ADSs included in the U.S. Holders income for prior taxable years. Amounts included in a U.S. Holders income under a mark-to-market election, as well as gain on the actual sale or other disposition of our common shares or our ADSs,
would be treated as ordinary income. Ordinary loss treatment would also apply to the deductible portion of any mark-to-market loss on our common shares or our ADSs, as well as to any loss realized on the actual sale or disposition of our common
shares or our ADSs, but only to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares or ADSs. A U.S. Holders basis in the common shares or ADSs will be adjusted to
reflect any such income or loss amounts. The tax rules that apply to distributions by corporations which are not PFICs (other than the reduced rates for qualifying dividends received by U.S. Holders who are taxed as individuals as described above)
would apply to distributions by us.

The mark-to-market election is available only for stock and ADSs which are regularly traded on a
qualified exchange, such as Nasdaq. Under the U.S. Treasury Regulations, our common shares or our ADSs would generally be considered regularly traded if they are traded on a qualified exchange at least 15 days during each calendar quarter of the
relevant calendar year in more than de minimis quantities. You should consult your own tax advisors as to whether a mark-to-market election is available for the ADSs or advisable for your particular circumstances.



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A U.S. Holder who holds our common shares or our ADSs in any year in which we are a PFIC would be
required to file IRS Form 8621 regarding distributions received on our common shares or our ADSs and any gain realized on the disposition of our common shares or our ADSs.

Non-U.S. Holders

Subject to
the backup withholding discussion below, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on dividends paid by us with respect to our common shares or our ADSs unless the income is effectively connected with the Non-U.S.
Holders conduct of a trade or business in the United States.

Subject to the backup withholding discussion below, a Non-U.S. Holder
generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our common shares or our ADSs unless such gain is effectively connected with the Non-U.S. Holders conduct of a trade or
business in the United States or the Non-U.S. Holder is a natural person who is present in the United States for 183 days or more and has a tax home in the United States.

Dividends and gains that are effectively connected with a Non-U.S. Holders conduct of a trade or business in the United States generally will be
subject to tax in the same manner as if the Non-U.S. Holder were a U.S. Holder, except that the passive foreign investment company rules will not apply. Effectively connected dividends and gains received by a corporate Non-U.S. Holder may also be
subject to an additional branch profits tax at a 30% rate or a lower tax treaty rate.

Information Reporting and Backup Withholding

In general, information reporting requirements may apply to dividends in respect of our common shares or our ADSs or the proceeds
received on the sale, exchange or redemption of our common shares or our ADSs. Backup withholding tax may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number or certification of other exempt status or
to report interest and dividends required to be shown on its U.S. federal income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holders U.S. federal income tax
liability, provided that the appropriate returns are filed.

A Non-U.S. Holder generally will not be subject to information reporting and
backup withholding if it provides certification of its foreign status to the payor, under penalties of perjury, on IRS Form W-8BEN (or other applicable form).

F. Dividends and paying agents.

Not applicable.

G. Statement by experts.

Not applicable.

H. Documents on display.

We have previously filed
with the SEC our registration statement on Form F-1, as amended and registration form on Form F-6 under the Securities Act, covering the common shares represented by our ADSs.

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file
reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than six months after the close of each fiscal year, which close occurs on December 31. Copies of reports and other information,
when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549. You may also get information from the SEC regional offices
or by calling or writing to the SEC, upon payment of a prescribed fee. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings
with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.



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I. Subsidiary information.

For a listing of our subsidiaries, see Item 4 of this annual report, Information on the CompanyOrganizational structure.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Please refer to Item 5 of this
annual report, Operating and Financial Review and Prospects.

Item 12. Description of Securities Other than Equity Securities

Not applicable.



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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Material modifications to the
rights of security holders

Not applicable.

Use of proceeds

The following Use of proceeds information relates to our registration statement on Form F-1
(Registration No. 333-130116), or the Registration Statement, for our initial public offering and sale of 4,500,000 ADSs by our company for an offering price of US$36 million. The Registration Statement was declared effective by the Commission
on December 21, 2005. Jefferies Broadview, a division of Jefferies & Company, Inc., and WR Hambrecht + Co were the underwriters for our initial public offering.

We received net proceeds of approximately US$30.2 million from our initial public offering (after deducting underwriting discounts and other expenses
related to the offering of US$5.8 million). None of the transaction expenses included payments to directors or officers of our company, persons owning 10% or more of our equity securities or our affiliates.

Following our initial public offering, we invested the net proceeds from our initial public offering in interest-bearing money-market accounts and
deposit accounts in Korea. On January 20, and July 25, 2006 upon approval of the Compensation Committee of our board of directors on January 13, 2006, we paid W940 million and W620 million,
respectively, as a special bonus to our senior management. In addition, as of the date of this annual report, we have used approximately W10,640 million (US$11.4 million) of the net proceeds from our initial public offering for
repayment of certain outstanding debt.

We intend to use the remaining net proceeds from the offering for repayments of certain other
outstanding debt, expansion of our sales, distribution and technical support network, capital expenditures, research and development and for funding of working capital and general corporate purposes.

The amount and timing of our actual expenditures will depend on several factors, including our need for specific capital expenditures, the progress of
our research and development efforts, and the amount of cash generated or used by our ongoing operations.

Item 15. Controls and Procedures

(a) Disclosure controls and procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our internal control
over financial reporting and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2006. Based on this evaluation, our chief executive officer and chief financial officer had concluded that, as of
December 31, 2006, as a result of the material weaknesses in our internal control over financial reporting which management had identified in 2005 in connection with the preparation of our initial public offering and as further described below,
our internal control over financial reporting and procedures related thereto were still not effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our senior management including our chief executive officer and chief financial officer as
appropriate to allow timely decisions regarding required disclosure.



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(b) Internal control over financial reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management is continuously seeking to enhance our internal control over financial reporting with the objective of addressing material
weaknesses that it has identified so that our internal control can provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness, as defined under Standards of the Public Accounting Oversight Standard Board (United States), is a control
deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our management identified the following
material weaknesses in our internal control over financial reporting as of December 31, 2005 and has determined that these weaknesses remain as of December 31, 2006.



| | 1. | We did not retain accounting staff with sufficient depth and skill in the application of U.S. GAAP commensurate with the reporting requirements of a U.S. registrant. Although we had
hired two accounting team members with U.S. GAAP experience to address this problem shortly after our initial public offering, these two accountants have recently resigned. As such, this material weakness persists and could result in a material
misstatement of our consolidated financial statements due to misapplication of accounting principles.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | We did not have adequate internal review procedures and effective controls over establishing and maintaining accounting policies, consistent with U.S. GAAP, specifically related to
revenue recognition, valuation of accounts receivable, valuation of inventory, accounting for share-based compensation and consolidation accounting. This material weakness could result in a material misstatement of our consolidated financial
statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | As part of our financial statement close process, we rely heavily on spreadsheet programs to generate our financial records and data. Additionally, we do not have the appropriate
controls over the output from these spreadsheets to ensure that our consolidated financial statements are free of material misstatement or other inaccuracies resulting from computational or other output errors. This material weakness could result in
a material misstatement in our consolidated financial statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | We did not maintain an adequate periodic reconciliation process for transactions and balances between our subsidiaries, equity investees and third party contractors. This material
weakness could result in a material misstatement in a number of our financial accounts included in our consolidated financial statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(c) Changes in internal control over financial reporting

The weaknesses discussed above had been identified during our
evaluation of our internal control over financial reporting in connection with the preparation of the annual report for the year ended December 31, 2005. However, as a result of our financial and operational difficulties in 2006, we were not
able to effectively carry out all of the planned remediation efforts that we had initially planned to address during 2006.

We are aware of
the importance of maintaining controls and procedures and are working towards improving our controls and procedures. According to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we will be required to include an internal
control report of management with our annual report on Form 20-F for the first fiscal year ending on or after December 15, 2007 by June 30, 2008. The internal control report must contain (1) a statement of managements
responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control
over financial reporting, (3) managements assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over
financial reporting is effective and (4) starting with annual report on Form 20-F for the first



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fiscal year ending on or after December 15, 2008 by June 30, 2009, a statement that the registered public accounting firm that audited the
financial statements included in the annual report has issued an attestation report on managements assessment of the issuers internal control over financial reporting.

In preparing the required Section 404 evaluation described above, we are planning to perform a system and process evaluation and testing process
(and taking actions to remedy any problems) in an effort to comply with such requirements by the effective date for compliance.

In June
2006, we formed a Disclosure Committee for the purpose of designing and establishing controls and other procedures designed to ensure that (1) information required to be disclosed by us to the SEC and all Korean regulatory authorities as well
as all other written information that we will disclose to the investment community is recorded, processed, summarized and reported accurately and on a timely basis and (2) information is accumulated and communicated to management, including the
senior management officers, as appropriate to allow timely decisions regarding such required disclosure. We also established a set of disclosure guidelines setting forth recommended practices with respect to the disclosure of information to the
general public and to other external parties, as well as explanations of the underlying legal rationale for those practices.

Beginning in
the first quarter of 2007, we adopted a document retention policy and have begun utilizing a new enterprise resource planning system to support U.S. GAAP reporting and continue to customize the system to fit our accounting and financial reporting
processes.

(d) Plans for remediation efforts

To address the material weaknesses in our internal controls going forward, and to fill the positions that became available as a result of the recent departures by our accounting experts, we are currently in the process of finding
replacement personnel with qualified U.S. GAAP experience. We will implement measures to minimize our use of spreadsheets by enhancing our enterprise resource planning system and enhance our method of conducting periodic reconciliations with our
subsidiaries, equity investees and third party contractors. Although we hope to be able to address these weaknesses in a timely manner, we cannot be certain that well be successful in implementing our remedial measures or that these measures
will ensure that we achieve and maintain adequate controls over our financial processes and reporting in the future. If we fail to achieve and maintain an effective system of internal controls, we may be unable to accurately report our financial
results or reduce our ability to prevent or detect fraud.

Item 16A. Audit Committee Financial Expert

Our board of directors has determined that a member of our
audit committee, Taek Jin Nam, is an audit committee financial expert. The board of directors also determined that Mr. Nam is independent under the Nasdaq listing requirements.

Item 16B. Code of Ethics

Our board of directors has adopted a code of ethics for our chief executive
officer and senior financial officers and a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. Our code of ethics and code of business conduct and ethics are publicly available on our website at
www.pixelplus.com, and such codes are filed as exhibits to this annual report.

Item 16C. Principal Accountant Fees and Services

The following table sets forth the aggregate fees in
connection with certain professional services rendered by Samil PricewaterhouseCoopers for the years ended December 31, 2004 and 2005, and by Ernst & Young Han Young for the year ended December 31, 2006, independent registered
public accounting firms.



|                   |  |                                 |         |      |     |           |  |     |        
|------------------ |  | ------------------------------- | ------- | ---- | --- | --------- |  | --- | -------
|                   |  | For the year ended December 31,
|                   |  | 2004                            |         | 2005 |     | 2006     
|Audit fees         |  | US$                             | 126,371 |      | US$ | 519,847   |  | US$ | 425,975
|Audit related fees |  |                                 |        |      |     | 861,105   |  |     | 0      
|Tax fees           |  |                                 |        |      |     | 2,700     |  |     | 0      
|All other fees     |  |                                 |        |      |     |          |  |     |       
|                   |  |                                 |         |      |     |           |  |     |        
|Total              |  | US$                             | 126,371 |      | US$ | 1,383,652 |  | US$ | 425,975
|                   |  |                                 |         |      |     |           |  |     |        



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Ernst & Young Han Young will not be our auditor going forward. Note that we did not have any
disagreement with our auditors.

Audit Committee Pre-Approval Policy and Procedures

Our audit committee charter (adopted in November 2005) states that we will not engage our auditors to perform any non-audit services unless the audit
committee pre-approves the service.

Our audit committee pre-approved all audit and non-audit services provided by our independent public
accountant during 2006.

Item 16D. Exemptions from the Listing Standards for Audit Committee

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Neither we nor any
affiliated purchaser, as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our ADSs during the period covered by this annual report.



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PART III

Item 17. Financial Statements

We have elected to provide financial statements pursuant to Item 18.

Item 18. Financial Statements.

The consolidated financial statements for our company are included at the
end of this annual report.

Item 19. Exhibits.



|              |  |                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                            
|1.1*          |  | Articles of Incorporation of the Registrant (English translation)                                                                                                      
|              | 
|2.1*          |  | Specimen common share certificate (English translation)                                                                                                                
|              | 
|2.2*          |  | Specimen American Depositary Receipt                                                                                                                                   
|              | 
|2.3*          |  | Form of Deposit Agreement among the Registrant, JPMorgan Chase Bank, N.A., as depositary and holders of American Depositary Receipts                                   
|              | 
|4.1*          |  | Form of 2003 Stock Option Agreement (English translation)                                                                                                              
|              | 
|4.2*          |  | Form of 2004 Stock Option Agreement (English translation)                                                                                                              
|              | 
|4.3*          |  | Termination Agreement, dated November 28, 2005, by and among JATF, MIC, Korea Venture Fund, certain common shareholders and the Registrant                             
|              | 
|4.4*          |  | (Purchase) Basic Transaction Agreement, dated February 1, 2005, by and between the Registrant and Samsung Electro-Mechanics (English translation)                      
|              | 
|4.5*         |  | Wafer Foundry Service Agreement, dated November 3, 2003, by and among the Registrant, Dongbu Electronics Co., Ltd. and T2Net Technology Co., Ltd. (English translation)
|              | 
|4.6*         |  | Basic Agreement, dated September 17, 2004, by and between the Registrant and Dongbu Electronics Co., Ltd. (English translation)                                        
|              | 
|4.7*          |  | Form of Purchase Order from Ningbo Bird Co., Ltd.                                                                                                                      
|              | 
|4.8*         |  | Testing Agreement, dated May 31, 2004, by and between the Registrant and Tesna Co., Ltd. (English translation)                                                         
|              | 
|4.9*          |  | Form of Bundang Lease Agreement (English translation)                                                                                                                  
|              | 
|4.10*         |  | Loan guarantee issued by Seo Kyu Lee to Citibank (formerly known as Hanmi Bank) for the benefit of the Registrant (English translation)                                
|              | 
|4.11*         |  | Loan guarantee issued by Seo Kyu Lee to Hana Bank for the benefit of the Registrant (English translation)                                                              
|              | 
|4.12*         |  | Loan guarantee issued by Seo Kyu Lee to Industrial Bank of Korea for the benefit of the Registrant (English translation)                                               
|              | 
|4.13*         |  | Loan guarantee issued by Seo Kyu Lee to Korea Exchange Bank for the benefit of the Registrant (English translation)                                                    
|              | 
|4.14*         |  | Shareholders Agreement, dated March 7, 2003, by and among the Registrant and certain shareholders of the Registrant                                                    
|              | 
|4.15*         |  | Cooperation Agreement, dated September 20, 2004, by and between the Registrant and Pixelplus Technology Inc.                                                           
|              | 
|4.16*        |  | Foundry Agreement, dated November 22, 2005, by and between the Registrant and United Microelectronics Corporation                                                      
|              | 
|4.17^         |  | Shareholders Agreement, dated June 1, 2005, by and between the Registrant and certain other shareholders of Pixelplus Technology Inc.                                 
|              | 
|4.18         |  | Commodity Purchase Agreement, dated October 14, 2005, by and between the Registrant and Logitech Europe S.A.                                                           
|              | 
|4.19^         |  | Form of 2005 Stock Option Agreement (English Translation)                                                                                                              
|              | 
|4.20          |  | Form of 2006 Stock Option Agreement (English Translation)                                                                                                              
|              | 
|8.1^          |  | List of Subsidiaries of the Registrant                                                                                                                                 



75



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##### Table of Contents

|              |  |                                                                         
|------------- |  | ------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                             
|11.1^         |  | Code of Business Conduct and Ethics                                     
|              | 
|11.2^         |  | Code of Ethics for Chief Executive Officer and Senior Financial Officers
|              | 
|12.1          |  | Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(a) 
|              | 
|12.2          |  | Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(a) 
|              | 
|13.1          |  | Certification of Chief Executive Officer pursuant to SEC Rule 13a-14(b) 
|              | 
|13.2          |  | Certification of Chief Financial Officer pursuant to SEC Rule 13a-14(b) 

---

| | Previously filed with the relevant Registration Statement on Form F-1.
|- | ----------------------------------------------------------------------

|^ | Previously filed with the Companys 2005 Annual Report on Form 20-F.
|- | --------------------------------------------------------------------

| | Certain portions of this Exhibit have been omitted based upon a request for confidential treatment. The omitted portions have been separately submitted to the Securities and
Exchange Commission.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing its annual
report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf on this 29th day of June, 2007.



PIXELPLUS CO., LTD.By:

/s/ Hoang Taig ChoiName:

Hoang Taig ChoiTitle:

Chief Financial Officer




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##### Table of Contents

PixelPlus Co., Ltd. and subsidiaries

Index

December 31, 2005 and 2006

---



|                                                                                                                |  |           
|--------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                |  | Page(s)   
|Report of Independent Registered Public Accounting Firm                                                         |  | F-1       
|                                                                                                                | 
|Consolidated Financial Statements                                                                               |  |           
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2005 and 2006                                                    |  | F-2       
|                                                                                                                | 
|Consolidated Statements of Operations for the Years Ended December 31, 2004, 2005 and 2006                      |  | F-3       
|                                                                                                                | 
|Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2004, 2005 and 2006 |  | F-4 - F-5 
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006                      |  | F-6 - F-7 
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | F-8 - F-34



---

##### Table of Contents

|     |  |                                                                                                         |  |                                  
|---- |  | ------------------------------------------------------------------------------------------------------- |  | ---------------------------------
|LOGO |  | n  ERNST & YOUNG HANYOUNG Taeyoung Bldg., 3F~8F 10-2,
Yeoido-dong, Youngdeungpo-gu, Seoul 150-777 Korea |  | n   Phone: 3787-6600Fax:
783-5890

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Pixelplus Co., Ltd.

We have audited the accompanying consolidated balance sheet of Pixelplus Co., Ltd. (the Company) as of December 31, 2006, and the related
statements of operations, shareholders equity, and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2006 financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December
31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, the Company adopted, as of January 1, 2006, the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2,
the Company has incurred significant operating losses in the year ended December 31, 2006 and working capital decreased significantly between December 31, 2005 and 2006. These conditions raise substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regard to these matters are also described in Note 2. The 2006 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

LOGO

June 8, 2007



F-1



---

##### Table of Contents

PIXELPLUS CO., LTD.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2005 and 2006

---

(Korean won in millions and U.S. dollar in thousands)



|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | ------------ |  | - | ------- | -
|                                                                                                                                                               |  | 2005 |        |   | 2006 |   |         | (Note 4)2006 | 
|                                                                                                                                                               |  |      |        |   |      |   |         | (Unaudited)  | 
|ASSETS                                                                                                                                                         |  |      |        |   |      |   |         |              |  |   |         |  
|Cash and cash equivalents (Note 5)                                                                                                                             |  | W    | 31,040 |   |      | W | 12,224  |              |  | $ | 13,144  |  
|Restricted cash (Notes 3 and 12)                                                                                                                               |  |      | 1,412  |   |      |   | 945     |              |  |   | 1,016   |  
|Accounts receivable, net (Note 6)                                                                                                                              |  |      | 11,695 |   |      |   | 4,989   |              |  |   | 5,365   |  
|Inventories, net (Note 7)                                                                                                                                      |  |      | 8,708  |   |      |   | 4,986   |              |  |   | 5,361   |  
|Other current assets (Note 10)                                                                                                                                 |  |      | 1,377  |   |      |   | 2,244   |              |  |   | 2,413   |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|Total current assets                                                                                                                                           |  |      | 54,232 |   |      |   | 25,388  |              |  |   | 27,299  |  
|                                                                                                                                                               |  |      |       
|Memberships                                                                                                                                                    |  |      |       |   |      |   | 1,686   |              |  |   | 1,813   |  
|Property and equipment, net (Note 9)                                                                                                                           |  |      | 1,209  |   |      |   | 2,149   |              |  |   | 2,311   |  
|Other non-current assets (Note 10)                                                                                                                             |  |      | 2,678  |   |      |   | 2,365   |              |  |   | 2,543   |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|Total assets                                                                                                                                                   |  | W    | 58,119 |   |      | W | 31,588  |              |  | $ | 33,966  |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|                                                                                                                                                               |  |      |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                           |  |      |        |   |      |   |         |              |  |   |         |  
|Trade accounts payable (Note 14)                                                                                                                               |  | W    | 10,558 |   |      | W | 3,361   |              |  | $ | 3,614   |  
|Other accounts payable (Notes 11, 14)                                                                                                                          |  |      | 1,255  |   |      |   | 1,306   |              |  |   | 1,405   |  
|Short-term borrowings (Note 12)                                                                                                                                |  |      | 10,361 |   |      |   | 7,723   |              |  |   | 8,304   |  
|Other current liabilities (Note 13)                                                                                                                            |  |      | 1,189  |   |      |   | 827     |              |  |   | 889     |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|Total current liabilities                                                                                                                                      |  |      | 23,363 |   |      |   | 13,217  |              |  |   | 14,212  |  
|                                                                                                                                                               |  |      |       
|Long-term borrowings (Note 12)                                                                                                                                 |  |      | 646    |   |      |   | 167     |              |  |   | 179     |  
|Other non-current liabilities                                                                                                                                  |  |      | 341    |   |      |   | 468     |              |  |   | 503     |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|Total liabilities                                                                                                                                              |  |      | 24,350 |   |      |   | 13,852  |              |  |   | 14,894  |  
|                                                                                                                                                               |  |      |       
|Commitments and contingencies (Note 17)                                                                                                                        |  |      |        |   |      |   |         |              |  |   |         |  
|                                                                                                                                                               |  |      |       
|Minority interest                                                                                                                                              |  |      | 819    |   |      |   |        |              |  |   |        |  
|                                                                                                                                                               |  |      |       
|Stockholders equity:                                                                                                                                          |  |      |        |   |      |   |         |              |  |   |         |  
|Common shares: W500 par value; authorized 10,000,000 shares; issued and outstanding 6,055,333 and 6,425,072 shares at
December 31, 2005 and 2006, respectively |  |      | 3,028  |   |      |   | 3,213   |              |  |   | 3,454   |  
|Additional paid-in capital                                                                                                                                     |  |      | 37,471 |   |      |   | 39,495  |              |  |   | 42,469  |  
|Accumulated other comprehensive loss                                                                                                                           |  |      | (100   | ) |      |   | (154    | )            |  |   | (165    | )
|Accumulated deficit                                                                                                                                            |  |      | (7,449 | ) |      |   | (24,818 | )            |  |   | (26,686 | )
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|Total stockholders equity                                                                                                                                     |  |      | 32,950 |   |      |   | 17,736  |              |  |   | 19,072  |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  
|Total liabilities and stockholders equity                                                                                                                     |  | W    | 58,119 |   |      | W | 31,588  |              |  | $ | 33,966  |  
|                                                                                                                                                               |  |      |        |   |      |   |         |              |  |   |         |  

See accompanying notes.



F-2



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##### Table of Contents

PIXELPLUS CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2004, 2005 and 2006

---

(Korean won in millions and U.S. dollar in thousands, except per share amounts)



|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ------------- | - |  | - | --------- | -
|                                                                                                                   |  | 2004 |           |   | 2005 |   |           | 2006 |  |   | (Note 4) 2006 |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   | (Unaudited)   |  
|Revenues (Note 20):                                                                                                |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Products                                                                                                           |  | W    | 31,356    |   |      | W | 38,678    |      |  | W | 26,825        |   |  | $ | 28,844    |  
|Services                                                                                                           |  |      | 4,440     |   |      |   | 2,906     |      |  |   | 5,171         |   |  |   | 5,560     |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|                                                                                                                   |  |      | 35,796    |   |      |   | 41,584    |      |  |   | 31,996        |   |  |   | 34,404    |  
|                                                                                                                   |  |      |           |  
|Cost of revenues:                                                                                                  |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Products                                                                                                           |  |      | 31,457    |   |      |   | 30,671    |      |  |   | 29,770        |   |  |   | 32,011    |  
|Services                                                                                                           |  |      | 831       |   |      |   | 546       |      |  |   | 1,438         |   |  |   | 1,546     |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|                                                                                                                   |  |      | 32,288    |   |      |   | 31,217    |      |  |   | 31,208        |   |  |   | 33,557    |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Gross profit                                                                                                       |  |      | 3,508     |   |      |   | 10,367    |      |  |   | 788           |   |  |   | 847       |  
|                                                                                                                   |  |      |           |  
|Operating expenses:                                                                                                |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Selling, general and administrative                                                                                |  |      | 3,966     |   |      |   | 6,407     |      |  |   | 12,220        |   |  |   | 13,139    |  
|Research and development                                                                                           |  |      | 3,211     |   |      |   | 3,503     |      |  |   | 5,834         |   |  |   | 6,273     |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|                                                                                                                   |  |      | 7,177     |   |      |   | 9,910     |      |  |   | 18,054        |   |  |   | 19,412    |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Income (loss) from operations                                                                                      |  |      | (3,669    | ) |      |   | 457       |      |  |   | (17,266       | ) |  |   | (18,565   | )
|                                                                                                                   |  |      |           |  
|Other income (expenses):                                                                                           |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Interest income (expense), net                                                                                     |  |      | (230      | ) |      |   | (539      | )    |  |   | 292           |   |  |   | 314       |  
|Foreign exchange gain (loss), net                                                                                  |  |      | 337       |   |      |   | 194       |      |  |   | (1,241        | ) |  |   | (1,334    | )
|Others, net                                                                                                        |  |      | 3         |   |      |   | 30        |      |  |   | (109          | ) |  |   | (117      | )
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|                                                                                                                   |  |      | 110       |   |      |   | (315      | )    |  |   | (1,058        | ) |  |   | (1,137    | )
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Income (loss) before income taxes, gain (loss) from equity method investments, dilution gain and minority interest |  |      | (3,559    | ) |      |   | 142       |      |  |   | (18,324       | ) |  |   | (19,702   | )
|Income tax expenses (Note 15)                                                                                      |  |      | 234       |   |      |   |          |      |  |   |              |   |  |   |          |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Income (loss) before gain (loss) from equity method investments, dilution gain and minority interest               |  |      | (3,793    | ) |      |   | 142       |      |  |   | (18,324       | ) |  |   | (19,702   | )
|                                                                                                                   |  |      |           |  
|Gain (loss) from equity method investments, net                                                                    |  |      | (272      | ) |      |   | 85        |      |  |   | 5             |   |  |   | 6         |  
|Dilution gain from equity method investment and consolidated subsidiary (Note 8)                                   |  |      |          |   |      |   | 411       |      |  |   |              |   |  |   |          |  
|Minority interest                                                                                                  |  |      |          |   |      |   | 341       |      |  |   | 818           |   |  |   | 879       |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Net income (loss) before cumulative effect of change in accounting principle                                       |  |      | (4,065    | ) |      |   | 979       |      |  |   | (17,501       | ) |  |   | (18,817   | )
|Cumulative effect of change in accounting principle                                                                |  |      |          |   |      |   |          |      |  |   | 132           |   |  |   | 141       |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Net income (loss)                                                                                                  |  | W    | (4,065    | ) |      | W | 979       |      |  | W | (17,369       | ) |  | $ | (18,676   | )
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Accretion of preferred shares (Note 16)                                                                            |  |      | (1,569    | ) |      |   | (1,927    | )    |  |   |              |   |  |   |          |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Net loss attributable to common shareholders                                                                       |  | W    | (5,634    | ) |      | W | (948      | )    |  | W | (17,369       | ) |  | $ | (18,676   | )
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Loss per sharebasic and diluted:                                                                                  |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Before cumulative effect of change in accounting principle                                                         |  |      | (2,353    | ) |      |   | (356      | )    |  |   | (2,798        | ) |  |   | (3.01     | )
|Cumulative effect of change in accounting principle                                                                |  |      |          |   |      |   |          |      |  |   | 21            |   |  |   | 0.02      |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Loss per sharebasic and diluted (Note 19)                                                                         |  | W    | (2,353    | ) |      | W | (356      | )    |  | W | (2,777        | ) |  | $ | (2.99     | )
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  
|Weighted average number of shares basic and diluted (Note 19)                                                     |  |      | 2,604,000 |   |      |   | 2,664,862 |      |  |   | 6,254,054     |   |  |   | 6,254,054 |  
|                                                                                                                   |  |      |           |   |      |   |           |      |  |   |               |   |  |   |           |  

See accompanying notes.



F-3



---

##### Table of Contents

PIXELPLUS CO., LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

Years ended December 31, 2004, 2005 and 2006

---

(Korean won in millions)



|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|-------------------------------------------------------- |  | ------------ |  | ----------------- | ----- | ------- | ----------------------------- | ------ | ---- | ----------- | - | ------- | ------------------------ |  | --------- | ------- | - |  | - | ------- | -
|                                                         |  | Common stock |  | AdditionalPaid-in |       |         | AccumulatedOtherComprehensive |        |      | Accumulated |   |         | TotalStockholdersEquity | 
|                                                         |  | Shares       |  | Amount            |       | Capital |                               |        | Loss |             |   | Deficit |                          |  | (Deficit) |        
|Balances at January 1, 2004                              |  | 2,604,000    |  | W                 | 1,302 |         | W                             |       |      |             | W |        |                          |  | W         | (2,388  | ) |  | W | (1,086  | )
|Stock options (Note 18)                                  |  |             |  |                   |      |         |                               | 494    |      |             |   |        |                          |  |           |        |   |  |   | 494     |  
|Accretion of preferred stock (Note 16)                   |  |             |  |                   |      |         |                               | (494   | )    |             |   |        |                          |  |           | (1,075  | ) |  |   | (1,569  | )
|Currency translation adjustment                          |  |             |  |                   |      |         |                               |       |      |             |   | (40     | )                        |  |           |        |   |  |   | (40     | )
|Net loss                                                 |  |             |  |                   |      |         |                               |       |      |             |   |        |                          |  |           | (4,065  | ) |  |   | (4,065  | )
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Total comprehensive loss                                 |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   | (5,674  | )
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Balances at December 31, 2004                            |  | 2,604,000    |  |                   | 1,302 |         |                               |       |      |             |   | (40     | )                        |  |           | (7,528  | ) |  |   | (6,266  | )
|Conversion of preferred stock to common shares (Note 16) |  | 1,201,333    |  |                   | 601   |         |                               | 7,923  |      |             |   |        |                          |  |           |        |   |  |   | 8,524   |  
|Issuance of common shares, net                           |  | 2,250,000    |  |                   | 1,125 |         |                               | 29,476 |      |             |   |        |                          |  |           |        |   |  |   | 30,601  |  
|Stock options (Note 18)                                  |  |             |  |                   |      |         |                               | 1,099  |      |             |   |        |                          |  |           |        |   |  |   | 1,099   |  
|Accretion of preferred stock (Note 16)                   |  |             |  |                   |      |         |                               | (1,027 | )    |             |   |        |                          |  |           | (900    | ) |  |   | (1,927  | )
|Currency translation adjustment                          |  |             |  |                   |      |         |                               |       |      |             |   | (60     | )                        |  |           |        |   |  |   | (60     | )
|Net income                                               |  |             |  |                   |      |         |                               |       |      |             |   |        |                          |  |           | 979     |   |  |   | 979     |  
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Total comprehensive loss                                 |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   | (1,008  | )
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Balances at December 31, 2005                            |  | 6,055,333    |  |                   | 3,028 |         |                               | 37,471 |      |             |   | (100    | )                        |  |           | (7,449  | ) |  |   | 32,950  |  
|Issuance of common shares, net (Note 18)                 |  | 369,739      |  |                   | 185   |         |                               | 15     |      |             |   |        |                          |  |           |        |   |  |   | 200     |  
|Stock options (Note 18)                                  |  |             |  |                   |      |         |                               | 2,141  |      |             |   |        |                          |  |           |        |   |  |   | 2,141   |  
|Cumulative effect of change in accounting principle      |  |             |  |                   |      |         |                               | (132   | )    |             |   |        |                          |  |           |        |   |  |   | (132    | )
|Currency translation adjustment                          |  |             |  |                   |      |         |                               |       |      |             |   | (54     | )                        |  |           |        |   |  |   | (54     | )
|Net loss                                                 |  |             |  |                   |      |         |                               |       |      |             |   |        |                          |  |           | (17,369 | ) |  |   | (17,369 | )
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Total comprehensive loss                                 |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   | (17,423 | )
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Balances at December 31, 2006                            |  | 6,425,072    |  | W                 | 3,213 |         | W                             | 39,495 |      |             | W | (154    | )                        |  | W         | (24,818 | ) |  | W | 17,736  |  
|                                                         |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  

(continued)

See
accompanying notes.



F-4



---

##### Table of Contents

PIXELPLUS CO., LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

Years ended December 31, 2004, 2005 and 2006

---

(U.S. dollar in thousands)

(Note 4) (Unaudited)



|                                                    |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------ |  | ----------------- | ----- | ------- | ----------------------------- | ------ | ---- | ----------- | - | ------- | ------------------------ |  | --------- | ------- | - |  | - | ------- | -
|                                                    |  | Common stock |  | AdditionalPaid-in |       |         | AccumulatedOtherComprehensive |        |      | Accumulated |   |         | TotalStockholdersEquity | 
|                                                    |  | Shares       |  | Amount            |       | Capital |                               |        | Loss |             |   | Deficit |                          |  | (Deficit) |        
|Balances at December 31, 2005                       |  | 6,055,333    |  | $                 | 3,255 |         | $                             | 40,292 |      |             | $ | (107    | )                        |  | $         | (8,010  | ) |  | $ | 35,430  |  
|Issuance of common shares, net                      |  | 369,739      |  |                   | 199   |         |                               | 17     |      |             |   |        |                          |  |           |        |   |  |   | 216     |  
|Stock options                                       |  |             |  |                   |      |         |                               | 2,301  |      |             |   |        |                          |  |           |        |   |  |   | 2,301   |  
|Cumulative effect of change in accounting principle |  |             |  |                   |      |         |                               | (141   | )    |             |   |        |                          |  |           |        |   |  |   | (141    | )
|Currency translation adjustment                     |  |             |  |                   |      |         |                               |       |      |             |   | (58     | )                        |  |           |        |   |  |   | (58     | )
|Net loss                                            |  |             |  |                   |      |         |                               |       |      |             |   |        |                          |  |           | (18,676 | ) |  |   | (18,676 | )
|                                                    |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Total comprehensive loss                            |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   | (18,734 | )
|                                                    |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  
|Balances at December 31, 2006                       |  | 6,425,072    |  | $                 | 3,454 |         | $                             | 42,469 |      |             | $ | (165    | )                        |  | $         | (26,686 | ) |  | $ | 19,072  |  
|                                                    |  |              |  |                   |       |         |                               |        |      |             |   |         |                          |  |           |         |   |  |   |         |  

See accompanying notes.



F-5



---

##### Table of Contents

PIXELPLUS CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2005 and 2006

---

(Korean won in millions and U.S. dollar in thousands)



|                                                                              |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------------- | - |  | - | ------- | -
|                                                                              |  | 2004 |        |   | 2005 |   |        | 2006 |  |   | (Note 4) 2006 |  
|                                                                              |  |      |        |   |      |   |        |      |  |   | (Unaudited)   |  
|Cash flows from operating activities:                                         |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Net income (loss)                                                             |  | W    | (4,065 | ) |      | W | 979    |      |  | W | (17,369       | ) |  | $ | (18,676 | )
|Adjustments to reconcile net income to net cash used in operating activities: |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Depreciation and amortization                                                 |  |      | 308    |   |      |   | 577    |      |  |   | 797           |   |  |   | 856     |  
|Provision for allowance for doubtful accounts                                 |  |      | 1,447  |   |      |   | 11     |      |  |   | 812           |   |  |   | 873     |  
|Stock compensation expenses                                                   |  |      | 494    |   |      |   | 1,099  |      |  |   | 2,141         |   |  |   | 2,301   |  
|Loss (gain) from equity method investments, net                               |  |      | 272    |   |      |   | (85    | )    |  |   | (5            | ) |  |   | (6      | )
|Dilution gain from equity method investment and consolidated subsidiary       |  |      |       |   |      |   | (411   | )    |  |   |              |   |  |   |        |  
|Provision for inventory losses                                                |  |      | 7,349  |   |      |   | 2,673  |      |  |   | 8,148         |   |  |   | 8,761   |  
|Minority interest                                                             |  |      |       |   |      |   | (341   | )    |  |   | (818          | ) |  |   | (879    | )
|Cumulative effect of change in accounting principle                           |  |      |       |   |      |   |       |      |  |   | (132          | ) |  |   | (141    | )
|Others, net                                                                   |  |      | (654   | ) |      |   | 26     |      |  |   | 1,140         |   |  |   | 1,225   |  
|Changes in operating assets and liabilities:                                  |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Restricted cash                                                               |  |      | (604   | ) |      |   | 62     |      |  |   | 467           |   |  |   | 502     |  
|Accounts receivable                                                           |  |      | (1,363 | ) |      |   | (6,117 | )    |  |   | 5,523         |   |  |   | 5,939   |  
|Inventories                                                                   |  |      | (7,792 | ) |      |   | (4,035 | )    |  |   | (4,426        | ) |  |   | (4,759  | )
|Other current assets                                                          |  |      | 314    |   |      |   | (440   | )    |  |   | (681          | ) |  |   | (732    | )
|Other non-current assets                                                      |  |      | (90    | ) |      |   | (760   | )    |  |   | 18            |   |  |   | 19      |  
|Trade accounts payable                                                        |  |      | (1,450 | ) |      |   | 3,676  |      |  |   | (7,172        | ) |  |   | (7,712  | )
|Other accounts payable                                                        |  |      | 264    |   |      |   | 622    |      |  |   | (90           | ) |  |   | (97     | )
|Other current liabilities                                                     |  |      | 181    |   |      |   | 70     |      |  |   | (361          | ) |  |   | (388    | )
|Other non-current liabilities                                                 |  |      | 25     |   |      |   | (156   | )    |  |   | (282          | ) |  |   | (302    | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Total adjustments                                                             |  |      | (1,299 | ) |      |   | (3,529 | )    |  |   | 5,079         |   |  |   | 5,460   |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Net cash used in operating activities                                         |  |      | (5,364 | ) |      |   | (2,550 | )    |  |   | (12,290       | ) |  |   | (13,216 | )
|                                                                              |  |      |        |  
|Cash flows from investing activities:                                         |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Proceeds from repayment of loans by affiliates and employees                  |  |      |       |   |      |   | 6      |      |  |   | 8             |   |  |   | 9       |  
|Payments on loans to affiliates and employees                                 |  |      | (32    | ) |      |   | (90    | )    |  |   | (30           | ) |  |   | (32     | )
|Proceeds from repayment of short-term financial instruments                   |  |      |       |   |      |   |       |      |  |   | 60            |   |  |   | 64      |  
|Payment on long-term financial instruments                                    |  |      | (35    | ) |      |   | (60    | )    |  |   | (120          | ) |  |   | (129    | )
|Acquisition of property and equipment                                         |  |      | (295   | ) |      |   | (826   | )    |  |   | (1,614        | ) |  |   | (1,735  | )
|Acquisition of memberships                                                    |  |      |       |   |      |   |       |      |  |   | (1,820        | ) |  |   | (1,957  | )
|Acquisition of investments                                                    |  |      | (653   | ) |      |   |       |      |  |   | (78           | ) |  |   | (84     | )
|Acquisition of intangible assets                                              |  |      | (484   | ) |      |   | (294   | )    |  |   | (12           | ) |  |   | (13     | )
|                                                                              |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Net cash used in investing activities                                         |  |      | (1,499 | ) |      |   | (1,264 | )    |  |   | (3,606        | ) |  |   | (3,877  | )
|                                                                              |  |      |        |  
|Cash flows from financing activities:                                         |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Repayments of borrowings                                                      |  |      | (8,693 | ) |      |   | (7,610 | )    |  |   | (12,211       | ) |  |   | (13,131 | )
|Proceeds from borrowings                                                      |  |      | 16,411 |   |      |   | 9,238  |      |  |   | 9,093         |   |  |   | 9,778   |  
|Issuance of common shares, net                                                |  |      |       |   |      |   | 31,987 |      |  |   | 200           |   |  |   | 215     |  
|                                                                              |  |      |        |   |      |   |        |      |  |   |               |   |  |   |         |  
|Net cash provided by (used in) financing activities                           |  |      | 7,718  |   |      |   | 33,615 |      |  |   | (2,918        | ) |  |   | (3,138  | )

(Continued)

See
accompanying notes.



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##### Table of Contents

PIXELPLUS CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2005 and 2006

---

(Korean won in millions and U.S. dollar in thousands)



|                                                                                                    |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ | ---- |  | - | ------------ | - |  | - | ------- | -
|                                                                                                    |  | 2004 |       | 2005 |   |        | 2006 |  |   | (Note 4)2006 |  
|                                                                                                    |  |      |       |      |   |        |      |  |   | (Unaudited)  |  
|Effect of exchange rate changes on cash and cash equivalents                                        |  |      | 53    |      |   | (70    | )    |  |   | (2           | ) |  |   | (2      | )
|                                                                                                    |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                |  |      | 908   |      |   | 29,731 |      |  |   | (18,816      | ) |  |   | (20,233 | )
|Cash and cash equivalents at the beginning of the year                                              |  |      | 286   |      |   | 1,194  |      |  |   | 31,040       |   |  |   | 33,377  |  
|Change in consolidated subsidiary                                                                   |  |      |      |      |   | 115    |      |  |   |             |   |  |   |        |  
|                                                                                                    |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|Cash and cash equivalents at the end of the year                                                    |  | W    | 1,194 |      | W | 31,040 |      |  | W | 12,224       |   |  | $ | 13,144  |  
|                                                                                                    |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|Supplemental cash flow information:                                                                 |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|Cash paid for interest                                                                              |  | W    | 261   |      | W | 567    |      |  | W | 377          |   |  | $ | 405     |  
|                                                                                                    |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|Cash paid for income taxes                                                                          |  | W    | 148   |      | W | 264    |      |  | W | 30           |   |  | $ | 32      |  
|                                                                                                    |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|                                                                                                    |  |      |       |     
|Non-cash financing activities:                                                                      |  |      |       |      |   |        |      |  |   |              |   |  |   |         |  
|Conversion from loans to investments on equity method investee                                      |  | W    | 457   |      | W |       |      |  | W |             |   |  | $ |        |  
|Conversion of 1,441,600 shares of series A convertible redeemable preferred shares to common shares |  |      |      |      |   | 8,524  |      |  |   |             |   |  |   |        |  

See accompanying notes.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|1. | Corporate information
|-- | ---------------------

Pixelplus Co., Ltd.
and its subsidiaries (hereinafter referred to collectively as the Company) design, develop and market semiconductor image sensor devices. The Companys main product, an image sensor device, is used to capture an image and is used in
a number of commercial and consumer mass market applications. The Company operates in one business segment, the design, manufacture and distribution of semiconductor image sensor devices. The Company was incorporated in Suwon, the Republic of Korea
in April 2000, and commenced commercial production of its Complementary Metal Oxide Semiconductor (CMOS) image sensor product in July 2003.

On December 21, 2005, the Company sold 4,500,000 American Depository Shares (ADSs), each representing one-half of a common share of the Company, in the Companys initial public offering
(IPO). The Companys ADSs trade on The Nasdaq National Market under the symbol PXPL. The ADSs were offered and sold at $8.00 per ADSs. The net proceeds to the Company of the IPO after underwriter discounts and fees of
W2,308 million was W34,131 million. The Company incurred expenses of W3,530 million related to the IPO and deducted the expense from the net proceeds received by the Company. The Companys IPO
expense of W3,530 million consists of professional fees, registration fees, and printing expenses incurred in relation to the Companys IPO.



|2. | Going concern
|-- | -------------

The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Companys assets and the satisfaction of liabilities in the normal course of business.

The Company incurred net losses of W17,369 million and negative cash flows from operations of W12,290
million in 2006. In addition, the Companys working capital decreased from W30,869 million at December 31, 2005 to W12,171 million at December 31, 2006 and it had an accumulated deficit of
W24,818 million as of December 31, 2006. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans with regard to these matters are as follows:



| | - |  | Focus on the development of new generation products in the first half of 2007 and the development of its highly innovative image recognition System-On-A-Chip;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - |  | Continue to focus on enhancing the production yields for all its products in order to increase efficiencies and drive down costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| | - |  | Monitor and implement cost control initiatives to conserve cash. As part of the cost cutting measures, the Company has downsized the number of its employees by 10%
as of May 31, 2007 compared to January 31, 2007 and reduced fixed costs through salary cuts by 15% for employees and 20% to 30% for directors and executive officers effective February 1, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the Company is expecting a steady and consistent increase in sales, especially in China. On January 23, 2007, the Company entered into
a new short-term borrowing contract in the form of a credit facility with the Industrial Bank of Korea, whereby it obtained access to funds of W7,000 million bearing interest rate at 5.9%, and repaid the Companys existing
short-term borrowing from the Korea Exchange Bank amounting to W5,000 million as of December 31, 2006 in February 2007. The Company has repaid most of the balance drawn from the credit facility and W620 million
remained outstanding as of May 31, 2007. This credit facility is secured by a cash deposit of W3,500 million.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|2. | Going concern (contd)
|-- | ----------------------



The accompanying consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty. Management believes the Companys existing unrestricted cash and cash equivalents will be sufficient to meet the Companys planned expenditures through at least December 31, 2007, although there
can be no assurance the Company will not require additional funds.

In addition, the Company has substantial doubt about one of its
consolidated subsidiaries, Pixelplus Technology Inc. (PTI), ability to continue as a going concern because of significant decrease in revenues and increase in accumulated deficits. With regard to this matter, the Company reviewed
the reasonableness of PTIs cash flow projection and business plans for 2007 and evaluated its assets and liabilities based on net realizable value. As a result, the Company recorded impairment losses on PTIs property and equipment and
intangible assets totaling W156 million in 2006. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty except for PTIs assets
and liabilities.

Furthermore, the Company intends to sell its entire 37.5% interest in PTI in the second half of 2007 as there has been a
significant decline in revenues from PTI since the first half of 2006, and in order to manage cost efficiencies and strengthen its financial position. In March 2007, the Company opened a branch office in Taiwan to fortify its sales and marketing
operations in the Taiwanese market.



|3. | Summary of significant accounting policies
|-- | ------------------------------------------

Basis of financial statement preparation

The consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States of America (US GAAP). Significant accounting policies followed by the Company in the preparation of the accompanying consolidated financial statements are summarized below.

Principles of consolidation

The Company consolidates its majority-owned subsidiaries unless control is temporary or does not rest with the majority owner. The consolidated financial statements include the accounts of all controlled subsidiaries,
which consist of the following:



|                             |  |              
|---------------------------- |  | -------------
|Subsidiary                   |  | Ownership (%)
|Pixelplus Asia Co., Ltd.     |  | 100.00       
|Pixelplus Shanghai Ltd.      |  | 100.00       
|Pixelplus Semiconductor Inc. |  | 100.00       
|Pixelplus Technology Inc.    |  | 37.50        

All significant inter-company accounts and transactions have been eliminated. The equity and loss
from operations attributable to the minority shareholder interests, which relate to Pixelplus Technology Inc. (PTI), are shown separately in the balance sheets and statements of operations, respectively. Losses in excess of the minority
interest in the equity of PTI are recognized by the Company, as the minority interests do not have a binding obligation to fund those losses.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



Consolidation of Pixelplus Technology Inc.

Pixelplus Technology Inc. was incorporated in Taiwan on March 17, 2004. PTIs primary business is to manufacture modules purchased from the
Company into CMOS image sensor or distribute the Companys products in forms of wafers, chips or modules. The Company held 43%, 37.5% and 37.5% ownership interest in PTI as of December 31, 2004, 2005 and 2006, respectively. The chief
executive officer of PTI, together with his relatives held 33.5%, 33.1% and 33.1% ownership interest in PTI as of December 31, 2004, 2005 and 2006, respectively. Accordingly, for the year ended December 31, 2004 and the period from
January 1, 2005 through May 31, 2005, the Company accounted for its investment in PTI under the equity method of accounting as it exercised significant influence over the operations of PTI.

On June 1, 2005, the Company entered into a new shareholders agreement with other shareholders
of PTI which granted the Company the right to elect two out of the total three board of directors of PTI without owning a majority of the voting shares. This shareholders agreement effectively granted the Company with the ability to control
and direct management and polices of PTI. In addition, any change to this board composition requires approval by more than 2/3of the shareholders of PTI. Since the Company holds more than 1/3of the outstanding shares of
PTI, any change to the board composition arrangement would require its approval. Accordingly, PTI is deemed a consolidated subsidiary of the Company, effective as of June 1, 2005.

Use of estimates

The
preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. The most significant
estimates and assumptions relate to the allowance for uncollectible accounts receivables, the allowance for inventory obsolescence and valuation allowance on deferred taxes, specific contingencies such as product warranties, litigation and patent
infringement. Although these estimates are based on managements best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from the estimates.

Foreign currency translation and transactions

The Company uses its local currencies as its functional currencies. The Company uses the end of period exchange rates to translate assets and liabilities and the average exchange rates for revenues, expenses and cash
flows. Capital accounts of a permanent nature, including sales of common and preferred stock, are translated using historical exchange rates. The resulting translation adjustments are recorded as other comprehensive income or expenses, included in
shareholders equity.

Net gains and losses resulting from foreign exchange transactions are included in foreign currency gains
(losses) in the statement of operations.

Revenue recognition

The Company recognizes revenues only when: the persuasive evidence of a sales arrangement exists; the price is fixed or determinable; title and risk of
loss are transferred to the customer; collection of resulting receivables is considered reasonably assured; product returns are reasonably estimable; there are no additional customer acceptance requirements; and there are no other remaining
significant obligations. The Company provides for future returns based on historical experience at the time revenue is recognized.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



For products sold in the Korean market to its customers without agreements that allow for returns or
credits, revenues are recognized upon shipment of products to the customer. For products sold in the Korean market to customers with agreements that allow for returns or credits, revenues are recognized upon product acceptance.

For products sold outside of Korea, title and risk of loss transfers to customers upon shipment, and at that point, there are no further customer
acceptance requirements or rights of return. Accordingly, revenue is recognized upon product shipment.

The Company recognizes service
revenues from the provision of engineering and technology services, such as CMOS image sensor design services, engineering know-how, and testing services to DongbuAnam Semiconductor (Dongbu). The Company recognizes the associated service
revenues only upon the completion of and acceptance by the customer of the engineering assistance performed. The revenue is based on a fixed fee, which is agreed upon prior to initiation of the engineering assistance. The Companys agreement to
provide these services to Dongbu, which was entered into on September 17, 2004, has a one-year term to be automatically renewed annually unless either party delivers a 30-day prior notice electing not to renew the agreement.

The Company provides a basic limited warranty for defective products that is normally valid for 12 months from the date of purchase. Since products are
sold to customers after extensive product testing and the revenue from the Companys major customers in Korea is recognized after customer acceptance, which would identify any defective products, the Company has not experienced any significant
costs to service its products sold under warranty in Korea. For products sold outside of Korea, revenue is recognized at the point of shipment, and at that date, the Company accrues a liability for the estimated costs that may be incurred under the
limited warranty provided to its customers. Warranty costs accrued include the costs to replace the defective product. Total warranty costs incurred to date have not been significant.

Research and development

Research and development costs are expensed as incurred.

Stock-based compensation

The Companys employees participate in a stock-based compensation plan, which is more fully described in Note 18. Prior to January 1, 2006, the
Company measured compensation cost for employee stock-options at fair value under the recognition and measurement provisions of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation
(SFAS 123). As permitted by SFAS 123, the Company elected to (1) expense the fair value of its employee stock options and (2) to recognize forfeitures in the period when such forfeitures occur.

Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). The Company
has elected the modified prospective transition method for adopting SFAS 123R.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



Compensation cost recognized in the year ended December 31, 2006 includes (1) compensation
for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (2) compensation cost for all share-based
payments granted subsequently to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123R. Results for prior periods have not been restated.

Stock-based compensation expense is recognized ratably over the vesting period.

As stock-based compensation expense recognized in the 2006 statement of operations is based on awards that are ultimately expected to vest, it has been
reduced for estimated forfeitures. FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The adoption of SFAS 123(R) resulted in a cumulative effect of a change in accounting principle consisting of a benefit of
W31 million in the year ended December 31, 2006, which reflects the cumulative impact of estimating future forfeitures related to non-vested stock-options previously expensed in the statement of income under
FAS 123, rather than recording forfeitures when they occur as previously permitted.

The Company uses the Black-Scholes option valuation
model to determine the fair value of stock options at the date of grant. Refer to Note 18 for details of the Companys assumptions used in calculating the fair value of its stock options.

Income taxes

The Company
accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, income taxes are accounted for under the asset and liability method. Deferred taxes are determined
based upon differences between the financial reporting and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. A valuation allowance is provided on deferred tax
assets to the extent that it is more likely than not that such deferred tax assets will not be realized. The total income tax provision includes current tax expenses under applicable tax regulations and the changes in the balance of deferred tax
assets and liabilities. Benefits from tax credits are reflected in earnings.

Equity method investments

Investments in entities in which the Company can exercise significant influence, but owns less than a majority equity interest are accounted for using the
equity method of accounting. The Companys unrealized profit arising from sales by the Company to equity method investee are eliminated to the extent of the Companys ownership.

In the event of equity financing by any of these entities equity method investee or consolidated subsidiary, in which the Company does not participate or
does not maintain its ownership percentage, a dilution gain or loss results. The Companys policy is to recognize these gains or losses in its consolidated statement of operations.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



Basic and diluted net income (loss) per share

The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings per Share under the provisions of which basic
income (loss) per share is computed by dividing the net income (loss) available to holders of common shares for the period by the weighted average number of common shares outstanding during the period. The calculation of diluted
income (loss) per share excludes potential common share if the effect of such share is anti-dilutive.

Cash equivalents

The Company considers all highly liquid investments purchased with a maturity at the date of purchase of three months or less to be
cash equivalents.

Restricted cash

Restricted cash, which has been set aside as collateral for borrowings, was approximately W1,412 million and W945 million as of December 31, 2005 and 2006,
respectively, and is included within current assets in the accompanying consolidated balance sheets.

Allowance for doubtful
accounts

An allowance for doubtful accounts is provided based on managements judgment which considers historical experience
and specific knowledge of accounts that may not be collectible. Accounts receivable are charged off against allowance for doubtful accounts if all collection efforts have been exhausted and the likelihood of recovery is considered remote.

Inventories

Inventories are stated at the lower of cost or market, using the weighted average method. If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the difference is
recognized as a loss on valuation of inventories. Inventory reserves are established when conditions indicate that the net realizable value is less than cost due to physical deterioration, obsolescence, changes in price levels, or other causes.
Reserves are also established when the number of units on hand exceeds the number of units that the Company forecasts to sell over a certain period of time.

Property and equipment

Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are calculated using the double declining method over the estimated useful lives of 5 years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful
lives of the assets, generally 5 years. When property or equipment is retired or otherwise disposed of, the net book value of the asset is removed from the Companys accounts and any net gain or loss is included in the Companys results of
operations.

Government grants

As part of the Korean governments initiative to promote and encourage the development of start-up companies in certain high technology industries, high technology start-up companies with industry leading
technology or products are eligible for government grants. Government grants received by the Company from the Korean government to assist with specific research and development activities are deducted from those research and development costs
incurred, in the period in which the related expenses are incurred, to the extent that they are non-refundable. Grants used for the acquisition of fixed assets and intangible assets were deducted from the acquisition costs of the acquired assets,
and amortized over the useful lives of the related assets.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



Certain grants are refundable, depending on the successful development and commercialization of the
technology or products, and a company receiving such government grant is required to refund up to 30% of the grant received for such development. The Company recognizes such refundable government grants received as liabilities. The Company received
such refundable grant totaling W1,133 million through 2002 and as the it has been successful in developing and marketing the technology, the Company was required to refund 30% of the grant to the government in the amount of
W340 million, payable in equal annual installments over three years. The Company has made two such installment payments during 2005 and 2006. As of December 31, 2006, the Company has provided one promissory note amounting to
W114 million for the remaining refundable grants payable in 2007 which is recorded in other accounts payable.

Impairment of long-lived assets

The Company reviews the carrying value of its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset might not be fully recoverable. When such an event occurs, the Company estimates the future cash flows expected to result from the use of the asset (or group
of assets, including the asset in question, that represents the lowest level of separately-identifiable cash flows) and its eventual disposition. If the undiscounted expected future cash flows are less than the carrying amount of the asset or group
of assets, an impairment loss is recognized in order to write-down the carrying value of the asset or group of assets to its estimated fair value. Fair value is determined by discounting the cash flows expected to be generated by the asset, when the
quoted market prices are not available for the long-lived assets. Estimated future cash flows are based on assumptions and are subject to risk and uncertainty.

The Company recognized W189 million and W41 million of impairment loss on goodwill related to PTI as operating expenses for the years ended December 31, 2004 and 2005,
respectively, as such goodwill was not expected to be recoverable. The Company recognized W156 million of impairment loss on the entire book value of PTIs fixed assets and intangible assets as operating expenses for the year
ended December 31, 2006 as the future cash flows expected to result from the use of PTIs fixed assets and intangible assets were expected to be negative for their remaining useful lives. The Company also recognized W133
million of impairment loss on its club membership as other expenses for the year ended December 31, 2006 due to a decline in fair value below its carrying value as of December 31, 2006, which the Company believed is other than temporary.

Severance benefits

In accordance with the Korean Law on Guarantee of Employeess Severance and Retirement Benefits, employees terminating their employment with at least one year of service are entitled to severance and benefits. Employees are entitled to
receive severance benefits annually or upon termination of employment based on their length of service and rate of pay during the year or at the time of termination. Accrued severance benefits are estimated assuming eligible employees were to
terminate their employment at the balance sheet date. Annual accrued benefits are expensed. The Company pays accrued severance benefits to certain employees annually, except amounts payable to certain executives that are accrued as a liability,
payable upon departure or termination.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



The Company expects to pay the following severance benefits, which are currently accrued for the
Companys obligation through December 31, 2006, to its executives including directors other than the chief executive officer if they terminate their retirement upon their normal retirement age (Korean won in millions):



|            |  |        |    
|----------- |  | ------ | ---
|Years       |  | Amount
|2007        |  | W      |   
|2008        |  |        |   
|2009        |  |        |   
|2010        |  |        |   
|2011        |  |        | 180
|2012 ~ 2016 |  |        | 489
|            |  |        |    
|Total       |  | W      | 669
|            |  |        |    

The above amounts were determined based on the employees current salary rates and the number
of service years that will be accumulated upon their retirement date. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement age.

The Company is required to pay 4.5% of each employees annual wages to the National Pension Corporation. The total amount of contributions made to
the National Pension Corporation in 2005 and 2006 was W73 million and W109 million, respectively.

Fair value of financial instruments

The Companys financial instruments, including cash
and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair values due to the short-term maturity of these instruments. The Companys long term borrowings
approximate their fair values as they contain interest rates that vary according to market interest rates.

Recent accounting
pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments (SFAS 155), which amends SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities (SFAS 133), and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 140). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments
to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interest that itself is a derivative instrument. The adoption of SFAS 155 is not expected to have a significant impact on the Companys statements of financial position, results of operations and disclosures.



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PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|3. | Summary of significant accounting policies (contd)
|-- | ---------------------------------------------------



In July 2006, the FASB issued Financial Interpretation No. 48, Accounting
for Uncertainty in Income Taxesan interpretation of SFAS 109 (FIN 48), which clarifies the accounting for income taxes. Among other provisions, FIN 48 specifies how tax benefits for uncertain tax positions are to be
recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and
interim-period guidance. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective for the Company from January 1, 2007. The adoption of FIN 48 is not expected to have a material impact on the
Companys financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157) which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided a company has not yet issued financial
statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material impact on its financial position, results of operations or
cash flows.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement PlansAn Amendment of FASB No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the companys balance sheet, and
changes in the funded status be reflected in comprehensive income, effective fiscal years ending after December 15, 2006. The standard also requires companies to measure the funded status of the plan as of the date of its fiscal year-end,
effective for fiscal years ending after December 15, 2008. The adoption of SFAS 158 is not expected to have a material impact on the Companys financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not believe the adoption of SFAS 159 will have a material impact on its financial
position, results of operations or cash flows.



|4. | Convenience translation into United States dollar amounts
|-- | ---------------------------------------------------------

The Company reports its consolidated financial statements in the Korean won. The United States dollar (US dollar) amounts disclosed in the accompanying financial statements are presented solely for the
convenience of the reader, and have been translated at the rate of 930 Korean won to one U.S. dollar, which is the noon buying rate of the US Federal Reserve Bank of New York in effect on December 31, 2006. Such translations should not be
construed as representations that the Korean won amounts represent, have been, or could be, converted into, United States dollars at that or any other rate. The U.S. dollar amounts are unaudited and are not presented in accordance with generally
accepted accounting principles either in Korea or the United States of America.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|5. | Cash and cash equivalents
|-- | -------------------------

Cash and cash
equivalents as of December 31, 2005 and 2006 comprise the following (Korean won in millions)



|                  |  |      |        |      |   |       
|----------------- |  | ---- | ------ | ---- | - | ------
|                  |  | 2005 |        | 2006
|Petty cash        |  | W    | 4      |      | W | 8     
|Cash held at bank |  |      | 31,036 |      |   | 2,536 
|Time deposits     |  |      |       |      |   | 9,680 
|                  |  |      |        |      |   |       
|                  |  | W    | 31,040 |      | W | 12,224
|                  |  |      |        |      |   |       

As of December 31, 2005 and 2006, W31,018 million and
W1,980 million, respectively, of cash and cash equivalents were denominated in various foreign currencies, mostly in United States dollar.



|6. | Accounts receivable, net
|-- | ------------------------

Accounts
receivable as of December 31, 2005 and 2006 comprise the following (Korean won in millions):



|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                      |  | 2005 |        |   | 2006 |  
|Trade accounts receivables            |  | W    | 12,542 |   |      | W | 7,036  |  
|Trade notes receivable                |  |      | 460    |   |      |   | 61     |  
|                                      |  |      |        |   |      |   |        |  
|                                      |  |      | 13,002 |   |      |   | 7,097  |  
|Less: allowance for doubtful accounts |  |      | (1,307 | ) |      |   | (2,108 | )
|                                      |  |      |        |   |      |   |        |  
|                                      |  | W    | 11,695 |   |      | W | 4,989  |  
|                                      |  |      |        |   |      |   |        |  

Accounts receivable pledged as collateral for short-term borrowings at December 31, 2005 and
2006 amounted to W471 million and nil, respectively.

Changes in the allowance for doubtful accounts receivable for the
years ended December 31, 2004, 2005 and 2006, are as follows (Korean won in millions):



|                                              |  |      |       |   |      |   |       |  |   |       |  
|--------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                                              |  | 2004 |       |   | 2005 |   | 2006  | 
|Balance at the beginning of the year          |  | W    | 40    |   |      | W | 1,296 |  | W | 1,307 |  
|Provision for allowance for doubtful accounts |  |      | 1,447 |   |      |   | 11    |  |   | 812   |  
|Write-offs and deductions                     |  |      | (191  | ) |      |   |      |  |   | (11   | )
|                                              |  |      |       |   |      |   |       |  |   |       |  
|Balance at the end of the year                |  | W    | 1,296 |   |      | W | 1,307 |  | W | 2,108 |  
|                                              |  |      |       |   |      |   |       |  |   |       |  



|7. | Inventories
|-- | -----------

Inventories as of
December 31, 2005 and 2006 comprise the following (Korean won in millions):



|                                     |  |      |        |   |      |   |         |  
|------------------------------------ |  | ---- | ------ | - | ---- | - | ------- | -
|                                     |  | 2005 |        |   | 2006 |  
|Finished goods                       |  | W    | 2,108  |   |      | W | 5,074   |  
|Work in process                      |  |      | 7,374  |   |      |   | 7,120   |  
|Raw materials                        |  |      | 6,311  |   |      |   | 5,931   |  
|                                     |  |      |        |   |      |   |         |  
|                                     |  |      | 15,793 |   |      |   | 18,125  |  
|Less: provision for inventory losses |  |      | (7,085 | ) |      |   | (13,139 | )
|                                     |  |      |        |   |      |   |         |  
|                                     |  | W    | 8,708  |   |      | W | 4,986   |  
|                                     |  |      |        |   |      |   |         |  



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|7. | Inventories (contd)
|-- | --------------------



In 2006, the Companys business model changed from primarily selling camera modules to CMOS
image sensors. Effectively, the Company reclassified CMOS image sensors that were previously classified as work in process into finished goods in 2006.

Changes in the allowance for inventory losses for the years ended December 31, 2004, 2005 and 2006, are as follows (Korean won in millions):



|                                     |  |      |       |   |      |   |        |      |  |   |        |  
|------------------------------------ |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                     |  | 2004 |       |   | 2005 |   |        | 2006 | 
|Balance at the beginning of the year |  | W    | 2,009 |   |      | W | 8,886  |      |  | W | 7,085  |  
|Provision for inventory losses       |  |      | 7,349 |   |      |   | 2,673  |      |  |   | 8,148  |  
|Write-offs and deductions            |  |      | (472  | ) |      |   | (4,602 | )    |  |   | (2,094 | )
|Other                                |  |      |      |   |      |   | 128    |      |  |   |       |  
|                                     |  |      |       |   |      |   |        |      |  |   |        |  
|Balance at the end of the year       |  | W    | 8,886 |   |      | W | 7,085  |      |  | W | 13,139 |  
|                                     |  |      |       |   |      |   |        |      |  |   |        |  



|8. | Dilution
|-- | --------

In February and May 2005, PTI and
Tesna Inc. (Tesna), respectively, issued additional common shares but the Company did not participate in the issuances. After the issuances of shares by PTI and Tesna, the Companys ownership interests in PTI and Tesna decreased
from 42.9% to 31.9% and 20.0% to 13.9%, respectively. As a result, the Company recorded dilution gains of W74 million and W337 million relating to additional shares issued by PTI and Tesna, respectively.

In addition, PTI issued additional common shares in June 2005. The Company participated in the issuance, resulting in an increase in the Companys
ownership interest in PTI from 31.9% to 37.5%.



|9. | Property and equipment
|-- | ----------------------

Property and
equipment as of December 31, 2005 and 2006 comprise the following (Korean won in millions):



|                               |  |      |        |   |      |   |        |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                               |  | 2005 |        |   | 2006 |  
|Machinery                      |  | W    | 293    |   |      | W | 705    |  
|Vehicles                       |  |      | 221    |   |      |   | 149    |  
|Tools and equipment            |  |      | 324    |   |      |   | 255    |  
|Furniture                      |  |      | 672    |   |      |   | 1,054  |  
|Construction-in-progress       |  |      |       |   |      |   | 585    |  
|Software                       |  |      | 944    |   |      |   | 1,139  |  
|Leasehold improvement          |  |      | 404    |   |      |   | 398    |  
|                               |  |      |        |   |      |   |        |  
|                               |  |      | 2,858  |   |      |   | 4,285  |  
|Less: accumulated depreciation |  |      | (1,609 | ) |      |   | (2,121 | )
|government grants, net         |  |      | (40    | ) |      |   | (15    | )
|                               |  |      |        |   |      |   |        |  
|                               |  | W    | 1,209  |   |      | W | 2,149  |  
|                               |  |      |        |   |      |   |        |  

For the years ended December 31, 2004, 2005 and 2006, the Company recognized
W301 million, W474 million and W618 million in depreciation and amortization expense, respectively.



F-18



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|9. | Property and equipment (contd)
|-- | -------------------------------



The Company is a member of Pankyo Silicon Park Development Consortium (the Association).
The Association, composed of 34 member corporations including the Company, entered into a contract on September 20, 2006 with Gyeonggi Innovation Corporation to construct a building within Pankyos land development district. The Company
paid W20 million and W565 million in 2004 and 2006, respectively, as an investment in the Association. The Company is to make additional payments of W2,333 million each in 2007 and 2008, as
installment payments for the purchase of office space in the building. As of December 31, 2006, the amount of W585 million that the Company has paid for the land purchase has been accounted for as construction-in-progress.



|10. | Other current and non-current assets
|--- | ------------------------------------

Other
current assets as of December 31, 2005 and 2006 comprise the following (Korean won in millions):



|                          |  |      |       |      |   |      
|------------------------- |  | ---- | ----- | ---- | - | -----
|                          |  | 2005 |       | 2006
|Other accounts receivable |  | W    | 766   |      | W | 967  
|Prepaid expenses          |  |      | 481   |      |   | 532  
|Advance payments          |  |      | 52    |      |   | 432  
|Others                    |  |      | 78    |      |   | 313  
|                          |  |      |       |      |   |      
|                          |  | W    | 1,377 |      | W | 2,244
|                          |  |      |       |      |   |      

Other accounts receivable as of December 31, 2005 and 2006 include value-add tax receivable
of W687 million and W531 million, respectively.

Other non-current assets as of December 31, 2005 and
2006 comprise the following (Korean won in millions):



|                          |  |      |       |      |   |      
|------------------------- |  | ---- | ----- | ---- | - | -----
|                          |  | 2005 |       | 2006
|Guarantee deposits        |  | W    | 1,067 |      | W | 1,050
|Equity method investments |  |      | 1,065 |      |   | 1,071
|Intangible assets         |  |      | 277   |      |   | 28   
|Others                    |  |      | 269   |      |   | 216  
|                          |  |      |       |      |   |      
|                          |  | W    | 2,678 |      | W | 2,365
|                          |  |      |       |      |   |      

As of December 31, 2006, the Company has a 13.92% ownership interest in Tesna. Despite only
holding a 13.92% ownership interest, the Company accounts for its investment in Tesna under the equity method of accounting because it has the ability to exercise significant influence through a direct participation in Tesnas board of
directors.



F-19



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|11. | Other accounts payable
|--- | ----------------------

Other accounts
payable as of December 31, 2005 and 2006 comprise the following (Korean won in millions):



|                             |  |      |       |      |   |      
|---------------------------- |  | ---- | ----- | ---- | - | -----
|                             |  | 2005 |       | 2006
|R&D related expenses payable |  | W    | 221   |      | W | 530  
|Accounts payable - Tesna     |  |      |      |      |   | 220  
|Refundable government grants |  |      | 113   |      |   | 114  
|Others                       |  |      | 921   |      |   | 442  
|                             |  |      |       |      |   |      
|                             |  | W    | 1,255 |      | W | 1,306
|                             |  |      |       |      |   |      



|12. | Borrowings
|--- | ----------

The details of short-term
borrowings as at December 31, 2005 and 2006 are as follows (Korean won in millions):



|                                                                                                                   |  |      |        |      |   |      
|------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | -----
|                                                                                                                   |  | 2005 |        | 2006
|Loans, principally from banks:                                                                                     |  |      |        |      |   |      
|Won denominated loans with weighed-average interest rates of 5.9% and 5.4% in 2005 and 2006, respectively          |  | W    | 7,000  |      | W | 6,000
|US$ and NT$ denominated loans with weighted-average interest rates of 5.9% and 5.5% in 2005 and 2006, respectively |  |      | 1,474  |      |   | 632  
|Loans against receivables with weighted-average interest rate of 6.2% in 2005                                      |  |      | 471    |      |   |     
|Cash overdraft with weighted-average interest rate of 6.1% and 7.0% in 2005 and 2006, respectively                 |  |      | 803    |      |   | 800  
|Current portion of long-term borrowings                                                                            |  |      | 613    |      |   | 291  
|                                                                                                                   |  |      |        |      |   |      
|                                                                                                                   |  | W    | 10,361 |      | W | 7,723
|                                                                                                                   |  |      |        |      |   |      

The Companys restricted cash are pledged as collateral for the repayment of the Korean won
denominated loans from the Korea Exchange Bank and the Industrial Bank of Korea amounting to W3,300 million as of December 31, 2005 and the Korea Exchange Bank amounting to W5,000 million as of
December 31, 2006.

The details of long-term borrowings are as follows (Korean won in millions):



|                                                                           |  |      |       |   |      |   |      |  
|-------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | -
|                                                                           |  | 2005 |       |   | 2006 |  
|Unsecured loans, representing obligations principally to banks:            |  |      |       |   |      |   |      |  
|Due 2007 to 2008 with interest rates ranging from 3.50% to 4.33% per annum |  | W    | 1,259 |   |      | W | 458  |  
|Less: current portion                                                      |  |      | (613  | ) |      |   | (291 | )
|                                                                           |  |      |       |   |      |   |      |  
|                                                                           |  | W    | 646   |   |      | W | 167  |  
|                                                                           |  |      |       |   |      |   |      |  



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|12. | Borrowings (contd)
|--- | -------------------



The Company has entered into various Korean won denominated borrowing arrangements with certain
Korean domestic banks, with an aggregate maximum facility of W7,800 million and a collateralized borrowing facility of W1,400 million, of which W7,258 million and nil, respectively, were outstanding
at December 31, 2006. In addition, the Company has entered into various foreign currency denominated debt facilities of US$500 thousand (W465 million) and NT$70,000 thousand (W1,998 million) at
December 31, 2006, of which NT$22,113 thousand (W632 million) were outstanding as at December 31, 2006.

The
aggregate annual maturities of long-term borrowings as of December 31, 2006 are as follows (Korean won in millions):



|     |  |        |    
|---- |  | ------ | ---
|     |  | Amount
|2007 |  | W      | 291
|2008 |  |        | 167
|     |  |        |    
|     |  | W      | 458
|     |  |        |    



|13. | Other current liabilities
|--- | -------------------------

Other current
liabilities as of December 31, 2005 and 2006 comprise the following (Korean won in millions):



|                                |  |      |       |      |   |    
|------------------------------- |  | ---- | ----- | ---- | - | ---
|                                |  | 2005 |       | 2006
|Accrued expenses                |  | W    | 921   |      | W | 452
|Advance payments from customers |  |      | 168   |      |   | 270
|Others                          |  |      | 100   |      |   | 105
|                                |  |      |       |      |   |    
|                                |  | W    | 1,189 |      | W | 827
|                                |  |      |       |      |   |    



|14. | Related party transactions
|--- | --------------------------

The Company has
a 13.92% ownership interest in Tesna as of December 31, 2005 and 2006. All of the Companys wafer and Chip Scale Package testing are conducted by Tesna and transactions between the Company and Tesna for the years ended December 31,
2005 and 2006 are as follows (Korean won in millions):



|                                   |  |      |       |      |   |      
|---------------------------------- |  | ---- | ----- | ---- | - | -----
|                                   |  | 2005 |       | 2006
|Purchases (testing fee) - Tesna    |  | W    | 2,142 |      | W | 3,289
|Purchases (tangible asset) - Tesna |  |      |      |      |   | 281  
|                                   |  |      |       |      |   |      
|                                   |  | W    | 2,142 |      | W | 3,570
|                                   |  |      |       |      |   |      



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|14. | Related party transactions (contd)
|--- | -----------------------------------



Related account balances as of December 31, 2005 and 2006 between the Company and Tesna are as
follows (Korean won in millions):



|                               |  |      |     |      |   |    
|------------------------------ |  | ---- | --- | ---- | - | ---
|                               |  | 2005 |     | 2006
|Trade accounts payable - Tesna |  | W    | 551 |      | W | 569
|Other accounts payable - Tesna |  |      |    |      |   | 220
|                               |  |      |     |      |   |    
|                               |  | W    | 551 |      | W | 789
|                               |  |      |     |      |   |    

The Companys chief executive officer had provided guarantees totaling
W10,408 million relating to the Companys borrowing agreements with various foreign and domestic banks. Effective May 31, 2006, the chief executive officer no longer provides guarantees under any loan agreement of the
Company.

The Company had loans outstanding from employees of W156 million and W178 million as of
December 31, 2005 and 2006, respectively.

On January 20, 2006 and July 25, 2006, upon approval of the Compensation
Committee, the Company paid W940 million and W620 million, respectively, as a special bonus to its senior management for their increased responsibilities related to serving in the management of a publicly-traded
company.



|15. | Income tax expenses
|--- | -------------------

The components of
current income tax expenses are as follows (Korean won in millions):



|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|---------------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ------- | -
|                                   |  | 2004 |        |   | 2005 |   |      | 2006 | 
|Income (loss) before income taxes: |  |      |        |   |      |   |      |      |  |   |         |  
|Domestic                           |  | W    | (3,469 | ) |      | W | 889  |      |  | W | (13,868 | )
|Foreign                            |  |      | (90    | ) |      |   | (747 | )    |  |   | (4,456  | )
|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|                                   |  | W    | (3,559 | ) |      | W | 142  |      |  | W | (18,324 | )
|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|                                   |  |      |       
|Current income taxes:              |  |      |        |   |      |   |      |      |  |   |         |  
|Domestic                           |  | W    | 234    |   |      | W |     |      |  | W |        |  
|Foreign                            |  |      |       |   |      |   |     |      |  |   |        |  
|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|                                   |  | W    | 234    |   |      | W |     |      |  | W |        |  
|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|                                   |  |      |       
|Deferred income taxes:             |  |      |        |   |      |   |      |      |  |   |         |  
|Domestic                           |  | W    |       |   |      | W |     |      |  | W |        |  
|Foreign                            |  |      |       |   |      |   |     |      |  |   |        |  
|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|                                   |  | W    |       |   |      | W |     |      |  | W |        |  
|                                   |  |      |        |   |      |   |      |      |  |   |         |  
|Total income tax expense           |  | W    | 234    |   |      | W |     |      |  | W |        |  
|                                   |  |      |        |   |      |   |      |      |  |   |         |  



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|15. | Income tax expenses (contd)
|--- | ----------------------------



The tax effects of temporary differences that give rise to significant portions of the deferred
income tax assets and deferred income tax liabilities at December 31, 2005 and 2006 are as follows (Korean won in millions):



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2005 |        |   | 2006 |  
|Current deferred income tax asset (liabilities):     |  |      |        |   |      |   |        |  
|Accounts receivable                                  |  | W    | 198    |   |      | W | 544    |  
|Inventory                                            |  |      | 997    |   |      |   | 2,104  |  
|Others                                               |  |      | 141    |   |      |   | (226   | )
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | 1,336  |   |      |   | 2,422  |  
|Less: Valuation allowance                            |  |      | (1,336 | ) |      |   | (2,422 | )
|                                                     |  |      |        |   |      |   |        |  
|Current deferred income tax assets (liabilities)     |  | W    |       |   |      | W |       |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |     
|Non-current deferred income tax asset (liabilities): |  |      |        |   |      |   |        |  
|Intangible assets                                    |  | W    | 252    |   |      | W | 157    |  
|Tax credit carryforwards                             |  |      | 352    |   |      |   | 1,238  |  
|Tax loss carryforwards                               |  |      | 237    |   |      |   | 1,561  |  
|Equity method investments                            |  |      | (67    | ) |      |   | (67    | )
|Other                                                |  |      | 37     |   |      |   | 92     |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | 811    |   |      |   | 2,981  |  
|Less: Valuation allowance                            |  |      | (811   | ) |      |   | (2,981 | )
|                                                     |  |      |        |   |      |   |        |  
|Non-current deferred income tax assets (liabilities) |  | W    |       |   |      | W |       |  
|                                                     |  |      |        |   |      |   |        |  

As of December 31, 2006, the Company has net operating loss and research tax credit
carryforwards of W10,607 million and W1,238 million, respectively. If not utilized, net operating loss and research tax credit carryforwards will expire through 2011.

A valuation allowance on deferred income tax assets is recognized when it is more likely than not that the deferred tax assets will not be realized.
Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Companys ability to generate taxable income within the period during which the temporary differences reverse, the outlook for
the economic environment in which the Company operates, and the overall future industry outlook. Based upon analysis of these factors, the Company has determined that it is more likely than not that it will not be able to realize its net deferred
tax assets in all jurisdictions in which it operates. Accordingly, the Company has recorded a full valuation allowance of W2,147 million and W5,403 million, on its consolidated net deferred tax
assets at December 31, 2005 and 2006, respectively.

The general statutory income tax rate in Korea, including tax surcharges, was
approximately 29.7% in 2004 and 27.5% in 2005 and 2006. The Company is entitled to a reduced tax rate at 50% of the general statutory tax rate pursuant to the Special Tax Treatment Control Law of Korea, which is applied to certain designated venture
companies. The Company must reapply for its designation as a venture company every year. However, it is uncertain as to whether the Company will obtain this designation in the future. For presentation purposes, in the accompanying financial
statements footnotes, deferred income taxes as of December 31, 2006 were calculated based on the rate of 13.75%.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|15. | Income tax expenses (contd)
|--- | ----------------------------



A reconciliation of income tax expense at the Korean statutory income tax rate to actual income tax
expense is as follow (Korean won in millions):



|                                                                         |  |      |        |   |      |   |      |      |  |   |         |  
|------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ------- | -
|                                                                         |  | 2004 |        |   | 2005 |   |      | 2006 | 
|Income (loss) from continuing operations for the years ended December 31 |  | W    | (3,559 | ) |      | W | 142  |      |  | W | (18,324 | )
|Statutory tax rates                                                      |  |      | 29.7   | % |      |   | 27.5 | %    |  |   | 27.5    | %
|                                                                         |  |      |        |   |      |   |      |      |  |   |         |  
|Tax expense (benefit) at Korean statutory tax rate                       |  |      | (1,057 | ) |      |   | 39   |      |  |   | (5,039  | )
|Tax exemption(1)                                                         |  |      | 528    |   |      |   | (20  | )    |  |   | 2,520   |  
|Differences in statutory tax rate in subsidiaries                        |  |      | (1     | ) |      |   | (52  | )    |  |   | (421    | )
|Permanent difference                                                     |  |      | (127   | ) |      |   | 64   |      |  |   | 591     |  
|Tax credit                                                               |  |      | (321   | ) |      |   | (340 | )    |  |   | (885    | )
|Change in statutory tax rate                                             |  |      | 130    |   |      |   |     |      |  |   |        |  
|Increase in valuation allowance                                          |  |      | 1,087  |   |      |   | 309  |      |  |   | 3,234   |  
|Others                                                                   |  |      | (5     | ) |      |   |     |      |  |   |        |  
|                                                                         |  |      |        |   |      |   |      |      |  |   |         |  
|Total income tax expense                                                 |  | W    | 234    |   |      | W |     |      |  | W |        |  
|                                                                         |  |      |        |   |      |   |      |      |  |   |         |  

| | 
| | 

| | (1) | Tax exemption represents the effect of a reduced tax rate at 50% from the general statutory tax rates the Company is entitled to in 2004, 2005 and 2006.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

There was no income tax expense charged to or credited from other comprehensive income, gain (loss) from equity method investments and dilution gain from
equity method investments and the consolidated subsidiary for the years ended December 31, 2005 and 2006.



|16. | Convertible redeemable preferred shares
|--- | ---------------------------------------

On
March 17, 2003, the Company issued 1,441,600 shares of the Series A convertible redeemable preferred shares (Series A preferred) at W3,421 per share for total cash proceeds of W4,919 million, net of
issuance costs. On December 20, 2005, the Company issued additional 1,201,333 common shares due to exercise of the conversion rights on Series A preferred shares.

On December 20, 2005, 1,441,600 Series A convertible redeemable preferred shares were converted into 1,201,333 common shares. In addition, on January 25, 2006, pursuant to the Underwriting
Agreement dated December 20, 2005, certain existing shareholders sold 675,000 ADSs as a result of underwriters exercise of their over-allotment option.

The Series A preferred shares outstanding for the two years ended December 31, 2005 was as follows (Korean won in millions):



|                                                  |  |                    |   |  |        |        |  
|------------------------------------------------- |  | ------------------ | - |  | ------ | ------ | -
|                                                  |  | Series A Preferred |  
|                                                  |  | Shares             |   |  | Amount |       
|January 1, 2004                                   |  | 1,441,600          |   |  | W      | 5,975  |  
|Accretion of redemption                           |  |                   |   |  |        | 1,569  |  
|Translation adjustment                            |  |                   |   |  |        | (768   | )
|                                                  |  |                    |   |  |        |        |  
|December 31, 2004                                 |  | 1,441,600          |   |  |        | 6,776  |  
|Accretion of redemption                           |  |                   |   |  |        | 1,927  |  
|Translation adjustment                            |  |                   |   |  |        | (179   | )
|Conversion of Series A Preferred to Common shares |  | (1,441,600         | ) |  |        | (8,524 | )
|                                                  |  |                    |   |  |        |        |  
|December 31, 2005                                 |  |                   |   |  | W      |       |  
|                                                  |  |                    |   |  |        |        |  



F-24



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|16. | Convertible redeemable preferred shares (contd)
|--- | ------------------------------------------------



Characteristics of the Series A preferred shares are described below:

Voting rights

The holders of the
Series A preferred have voting rights, equivalent to that of holders of the Companys common shares and vote together as one class with the common shareholders.

Liquidation preference

In the event of any liquidation, or similar winding up of the Company, the
holders of the Series A preferred shall receive the Korean Won equivalent of US$2.77 per share; plus interest on the original issuance, calculated at 30% per annum compounded annually, accrued from the issuance date of the Series A preferred to
the date of liquidation; plus all declared, but unpaid dividends on such Series A preferred shares, accrued to the date of liquidation.

At
liquidation, if the assets available to be distributed among the holders of the Series A preferred are insufficient to permit payment to such holders of the full liquidation amount described above, then the entire remaining assets of the Company
legally available for distribution to such holders shall be distributed ratably among the holders of the Series A preferred.

Conversion

Prior to the completion of a qualified initial public offering (IPO), each Series A preferred is
convertible, at the option of the holder, into a number of fully paid common shares as is determined by dividing US$2.77, by the applicable conversion price, in effect at the time of conversion, which, with effect from March 31, 2004 was
revised to US$3.33. If any Series A preferred have not been converted into common shares as of the date one business day prior to the pricing of the qualified IPO, such Series A preferred shall be automatically converted to common shares without any
further action by, consent of or notice from, the respective holders of such Series A preferred. On December 20, 2005, all Series A preferred were converted into common shares by the exercise of this conversion right.

Dividends

Holders of the Series A
preferred are entitled to an annual per share dividend equal to 68% of the par value of the Series A preferred, payable when and if declared at a general meeting of the shareholders. The dividends are cumulative and are payable prior to any payment
of any dividend with respect to the common shares. The Company has not declared any dividends on its preferred or common shares through December 31, 2005.

Redemption

Subject to any legal restrictions on the Companys redemption of shares, the holders
of the outstanding Series A preferred may require the Company to redeem all or part of the outstanding Series A preferred at any time from January 1, 2007 to December 31, 2008. Under certain circumstances, prior to December 31, 2006,
the holders of the outstanding Series A preferred may require the Company to redeem the Series A preferred which include the Companys violation or breech of the Series A Subscription Agreement, or the Commercial Code of the Securities Exchange
Act of Korea, or if the Company becomes insolvent or bankrupt.



F-25



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|16. | Convertible redeemable preferred shares (contd)
|--- | ------------------------------------------------



To the extent permitted under applicable law, the redemption price for each share of Series A
preferred shall be: 100% of the original issue price for each Series A preferred; plus interest on the original issue price, calculated at 30% per annum compounded annually, accrued from the issuance date of the Series A preferred shares to the
date of redemption; plus all declared but unpaid dividends on each Series A preferred share held by such holder, accrued to the date of redemption.

Accretion of Redemption

The Series A preferred are redeemable for an amount in excess of their issuance price. As a result,
the difference between the redemption value and the issuance price of the Series A preferred increases the carrying value of the Series A preferred and is being charged to paid in capital and accumulated deficit. The Company recorded full redemption
accretion for Series A preferred until the date of conversion.



|17. | Commitments and contingencies
|--- | -----------------------------

Purchase
agreement

In 2004, the Company entered into a purchase commitment with DongbuAnam Semiconductor (Dongbu), its primary wafer
manufacturer, such that it will be required to make penalty payments, based on a percentage of the order, and the timing of the notification of the shortfall, if it does not meet certain purchase quantities previously forecasted. The Company has not
been required to make any penalty payments under this agreement from 2004 to 2006, and determined that no purchase commitment liability is required at December 31, 2005 and 2006, based on historical experience and anticipated purchases in the
first six months of 2007. Meanwhile, the Company purchased approximately 93% and 95% of its raw materials from Dongbu in 2005 and 2006.

Operating leases

The Company is obligated under several non-cancelable operating leases for its office premises, dormitory
rent and vehicle rents. Rental expense incurred under these operating leases was approximately W82 million, W302 million and W495 million for the years ended December 31, 2004, 2005 and 2006,
respectively.

Future minimum operating lease payments with initial terms of one or more years of December 31, 2006 are as follows
(Korean won in millions):



|                    |  |                        |    
|------------------- |  | ---------------------- | ---
|                    |  | Minimum lease payments
|2007                |  | W                      | 434
|2008                |  |                        | 234
|2009                |  |                        | 55 
|2010 and thereafter |  |                        |   
|                    |  |                        |    
|Total               |  | W                      | 723
|                    |  |                        |    



F-26



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|17. | Commitments and contingencies (contd)
|--- | --------------------------------------



Pankyo office

As described in Note 9 to the consolidated financial statements, the Company is a member of Pankyo Silicon Park Development Consortium (the Association). The Association, composed of 34 member corporations
including the Company, entered into a contract on September 20, 2006 with Gyeonggi Innovation Corporation to construct building with in Pankyos land development district. The Company paid W20 million and
W565 million in 2004 and 2006, respectively, as an investment in the Association. The Company is to make payments of W2,333 million each in 2007 and 2008, as installment payments for the purchase of office space in
the building.

Patent infringement lawsuits

In April 2006, MagnaChip Semiconductor, Ltd. (MagnaChip) filed a lawsuit against the Company in Seoul Central District Court (Seoul Court), alleging that the Company infringed four of its
patents and seeking damages of approximately W12,000 million. As a result of the lawsuit, in February 2007, the Company obtained a positive and affirmative ruling from the Seoul Court. In March 2007, MagnaChip filed an appeal with
respect to the Seoul Courts decision with the Seoul Court of Appeals.

In addition to the above lawsuit, in November 2006, MagnaChip
filed three additional patent infringement claims in Seoul Court seeking damages of approximately W150 million. On May 11, 2007, the Company has initiated cancellation and invalidation proceedings on the three
additional patent infringement claims with the Intellectual Property Tribunal of KIPO. The Company has not recognized any losses in these financial statements because the Company cannot determine the final outcome of the court proceedings in the
Seoul Court, including any damages which need to be paid or any amounts which may be paid in settlement at this time.

Class action
lawsuit

On April 11, 2006, the Company issued a press release titled Pixelplus Issues Corporate Announcements, after
which certain plaintiffs announced that they filed lawsuits against the Company based on claims arising out of U.S. securities and exchange laws. The lawsuit alleges violations of the Securities Exchange Act of 1934 during a period from
December 21, 2005 through April 11, 2006. The plaintiffs allegations concern the Companys correction of revenue numbers for the fourth quarter of 2005 and fiscal year 2005 and the decision to consolidate the financial results
of PTI. The plaintiff alleges that the Company made false and misleading statements about these issues in its IPO documents and in other public statements and seeks unspecified damages. In March 2007, the Southern District Court of New York
(New York Court) appointed West End Capital Management as the lead plaintiff in the consolidated class action. As of April 17, 2007, the Companys counsel is in the process of discussing a schedule with the plaintiffs
lead counsel wherein lead counsel will file a consolidated amended complaint by June 23, 2007, and the Companys counsel will then have up to 60 days from the date the amended complaint is filed to file the Companys motion to
dismiss. If such schedule is adopted, the motion to dismiss should be heard by the New York Court in or around late fall of 2007.

At this
time, the Company cannot predict the final conclusion of outcome of the shareholder litigation, including any damages which need to be paid or any amounts which may be paid in settlement.



F-27



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|17. | Commitments and contingencies (contd)
|--- | --------------------------------------



Received guarantees

As of December 31, 2006, the Company has received guarantees for its short-term and long-term borrowings from various third parties:
W442 million from Korea Technology Credit Guarantee Fund and W10 million from Seoul Guarantee Insurance Co., Ltd. In return for these guarantees, the Company paid a service fee of approximately 0.9%, 1.0% and 1.3%
in 2004, 2005 and 2006 of its guaranteed amounts, respectively.

Others

In addition to the normal statutory severance allowances (see Note 3), executives may be entitled to special severance allowances upon their voluntary or
involuntary termination of employment. The Compensation Committee will decide whether such a severance should be paid and if so, how much will be paid. The special severance allowance, however, cannot exceed (i) annual salary for chief
executive officer, (ii) nine-month salary for executive and senior vice presidents, and (iii) six-month salary for vice presidents and technical directors. Based on such rules, the maximum special severance allowance that can be paid, if
granted by the Compensation Committee, is W806 million; however, it has not been recognized in the financial statements as of and for the year ended December 31, 2006, since such special severance allowance has not been granted
by the Compensation Committee as of year end. The Company, in the past, has not granted such special severance and does not have any plan to grant such special severance to executives.



|18. | Stock option grants
|--- | -------------------

As of December 31,
2006, the Company has one share-based compensation plan (the 2003 plan), which is described below.

For the years ended December 31,
2004, 2005 and 2006, the Company recognized stock-based compensation expense in the amount of W494 million, W1,099 million and, W2,141 million respectively.

Stock options may be granted to the Companys directors and employees and certain third parties who have contributed to the Companys
establishment, management or innovation in technology, or who are capable of making such contribution. Stock options may only be granted if approved by a special resolution of the Companys shareholders meeting. Additionally, the total number
of shares into which the options are exercisable may not exceed 50% of the total number of the Companys then issued and outstanding shares. The minimum option exercise price is determined by the greater of (a) the valuation price of
shares calculated pursuant to the method under Article 54 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act in Korea at the date of grant of such stock options or (b) the par value of the shares.

Stock options may be exercised within three years commencing from two years after the date of the resolution of the shareholders meeting adopting
the stock option grant. In order to exercise his or her stock options, the grantee must have served us for more than two years from the date of the shareholders special resolution approving his or her stock option grant.



F-28



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|18. | Stock option grants (contd)
|--- | ----------------------------



The following table summarizes the stock option activity for the years ended December 31, 2004,
2005 and 2006:



|                                                  |  |                        |   |  |                                          |        |                                                    |   |       
|------------------------------------------------- |  | ---------------------- | - |  | ---------------------------------------- | ------ | -------------------------------------------------- | - | ------
|                                                  |  | Number ofstock options |   |  | Weighted-averageexercise price per share |        | Weighted-average fair valueat grant date per share
|Stock options outstanding as of January 1, 2004   |  | 773,191                |   |  | W                                        | 500    |                                                    | W | 1,202 
|Granted                                           |  | 183,000                |   |  |                                          | 1,961  |                                                    |   | 3,003 
|                                                  |  |                        |   |  |                                          |        |                                                    |   |       
|Stock options outstanding as of December 31, 2004 |  | 956,191                |   |  |                                          | 780    |                                                    |   | 1,547 
|Granted                                           |  | 240,400                |   |  |                                          | 6,500  |                                                    |   | 17,605
|Forfeited                                         |  | (3,000                 | ) |  |                                          | 2,000  |                                                    |   | 3,200 
|                                                  |  |                        |   |  |                                          |        |                                                    |   |       
|Stock options outstanding as of December 31, 2005 |  | 1,193,591              |   |  |                                          | 1,929  |                                                    |   | 4,777 
|Granted                                           |  | 105,000                |   |  |                                          | 11,643 |                                                    |   | 5,263 
|Forfeited                                         |  | (28,500                | ) |  |                                          | 6,026  |                                                    |   | 18,679
|Exercised                                         |  | (369,739               | ) |  |                                          | 542    |                                                    |   | 1,207 
|                                                  |  |                        |   |  |                                          |        |                                                    |   |       
|Stock options outstanding as of December 31, 2006 |  | 900,352                |   |  | W                                        | 3,501  |                                                    | W | 5,859 
|                                                  |  |                        |   |  |                                          |        |                                                    |   |       

A summary of option activity under the plan as of December 31, 2006, and changes during the
year then ended is as follows (Korean won in millions, except for weighted average exercise price):



|                                            |  |           |   |  |                              |        |   |                                         |     |                         |   |      
|------------------------------------------- |  | --------- | - |  | ---------------------------- | ------ | - | --------------------------------------- | --- | ----------------------- | - | -----
|Options                                     |  | Shares    |   |  | Weightedaverageexerciseprice |        |   | Weightedaverageremainingcontractualterm |     | Aggregateintrinsicvalue
|Outstanding at January 1, 2006              |  | 1,193,591 |   |  | W                            | 1,929  |   |                                         |     |                         |   |      
|Granted                                     |  | 105,000   |   |  |                              | 11,643 |   |                                         |     |                         |   |      
|Exercised                                   |  | (369,739  | ) |  |                              | (542   | ) |                                         |     |                         |   |      
|Forfeited or expired                        |  | (28,500   | ) |  |                              | 6,026  |   |                                         |     |                         |   |      
|                                            |  |           |   |  |                              |        |   |                                         |     |                         |   |      
|Outstanding at December 31, 2006            |  | 900,352   |   |  | W                            | 3,501  |   |                                         | 2.5 |                         | W | 2,123
|                                            |  |           |   |  |                              |        |   |                                         |     |                         |   |      
|Vested and exercisable at December 31, 2006 |  | 580,452   |   |  | W                            | 918    |   |                                         | 1.7 |                         | W | 481  
|                                            |  |           |   |  |                              |        |   |                                         |     |                         |   |      

The total intrinsic value of options exercised during the year ended December 31, 2006 was
W246 million and cash received from option exercise for the year ended December 31, 2006 was W200 million.

A summary of the status of the Entitys non-vested shares as of December 31, 2006 and changes during the year ended December 31, 2006 is as follows (Korean won in units):



F-29



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|18. | Stock option grants (contd)
|--- | ----------------------------



|                                |  |         |  |                                       |       
|------------------------------- |  | ------- |  | ------------------------------------- | ------
|Non-vested shares               |  | Shares  |  | Weighted averageGrant-date fair value
|Non-vested at January 1, 2006   |  | 420,400 |  | W                                     | 11,352
|Granted                         |  | 105,000 |  |                                       | 5,263 
|Vested                          |  | 177,000 |  |                                       | 2,997 
|Forfeited                       |  | 28,500  |  |                                       | 18,679
|                                |  |         |  |                                       |       
|Non-vested at December 31, 2006 |  | 319,900 |  |                                       | 13,323
|                                |  |         |  |                                       |       

The total fair value of shares vested during the years ended December 31, 2005 and 2006 was
W929 million and W530 million, respectively.

On August 17, 2004, December 10,
2004, March 25, 2005, August 26, 2005, November 25, 2005, March 31, 2006 and December 27, 2006 the Company granted individuals options to purchase 36,000, 147,000, 40,000, 184,400, 16,000, 45,000 and
60,000 common shares of the Company at exercise prices of W1,800, W2,000, W6,500, W6,500, W6,500, W18,500 and W6,500,
respectively. The option holders may exercise their stock options within three years commencing from two years after the date of stock option grant, provided they have worked for the Company for two years or more after the date of grant.

The stock options outstanding as of December 31, 2006 were in the following exercise prices (Korean won in units):



|               |        |                         |         |                                             |    
|-------------- | ------ | ----------------------- | ------- | ------------------------------------------- | ---
|Exercise price |        | Number of stock options |         | Weighted-average
remaining contractual life
|W              | 500    |                         | 415,452 |                                             | 1.2
|               | 1,800  |                         | 24,000  |                                             | 2.6
|               | 2,000  |                         | 141,000 |                                             | 3.0
|               | 6,500  |                         | 274,900 |                                             | 3.9
|               | 18,500 |                         | 45,000  |                                             | 4.3
|               |        |                         |         |                                             |    
|               | Total  |                         | 900,352 |                                             | 2.5
|               |        |                         |         |                                             |    

Based on the vesting schedule of options, the number of exercisable stock option is 580,452 with a
weighted average exercise price of W918 as of December 31, 2006.

The Company uses the Black-Scholes
model to determine the fair value of equity-based awards at the date of grant. The risk free interest rate is based on the U.S. federal government zero-coupon bonds for three years which are expected life of the options. Expected volatilities are
based on comparable publicly-traded companies volatilities for options granted prior to the completion of IPO and the Companys stock price for options granted after the completion of IPO which was comparable with volatilities of the
comparable publicly-traded companies over the expected life of the options granted. The expected life of options granted is estimated based on historical exercise patterns, which the Company believes are representative of future behavior. The
Company estimates the forfeiture rate based on historical experience of its stock option awards that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from the Companys estimate, the stock-based
compensation expense could be significantly different from what the Company has recorded in the current period. The weighted average assumptions used to determine the fair value of the stock-options granted in the years ended December 31, 2004,
2005 and 2006 are as follows:



F-30



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|18. | Stock option grants (contd)
|--- | ----------------------------



|                                            |  |         |   |  |         |   |  |         |  
|------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                            |  | 2004    |   |  | 2005    |   |  | 2006    |  
|Expected dividend yield                     |  |        |   |  |        |   |  |        |  
|Risk free interest rate                     |  | 3       | % |  | 3.6     | % |  | 4.8     | %
|Expected volatility                         |  | 75      | % |  | 65      | % |  | 83      | %
|Expected life (in years)                    |  | 3 years |   |  | 3 years |   |  | 3 years |  
|Weighted average fair value of common stock |  | 4,344   |   |  | 22,622  |   |  | 11,204  |  

As of December 31, 2006, total unrecognized compensation cost related to non-vested
stock-options granted by the Company amounted to W1,530 million. That cost is expected to be recognized as follows (Korean won in millions):



|     |  |        |      
|---- |  | ------ | -----
|Year |  | Amount
|2007 |  | W      | 1,424
|2008 |  |        | 106  
|     |  |        |      
|     |  | W      | 1,530
|     |  |        |      

In addition, on March 30, 2007, the Company granted additional stock options to purchase
253,508 common shares at an exercise price of W3,400.



|19. | Loss per share
|--- | --------------

The following table sets
forth the computation of basic and diluted loss per share attributable to common stockholders for the years ended December 31, 2004, 2005 and 2006 (Korean won in millions except for per share amounts):



|                                                                                                          |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                          |  | 2004 |           |   | 2005 |   |           | 2006 | 
|Numerator :                                                                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Net loss attributable to common shareholders                                                              |  | W    | (5,634    | ) |      | W | (948      | )    |  | W | (17,369   | )
|Cumulative dividends on preferred sharesnot declared                                                     |  |      | (493      | ) |      |   |          |      |  |   |          |  
|                                                                                                          |  |      |           |   |      |   |           |      |  |   |           |  
|Net loss attributable to common shareholders after allocation of cumulative dividends on preferred shares |  | W    | (6,127    | ) |      | W | (948      | )    |  | W | (17,369   | )
|                                                                                                          |  |      |           |   |      |   |           |      |  |   |           |  
|Denominator :                                                                                             |  |      |           |   |      |   |           |      |  |   |           |  
|Weighted average outstanding shares                                                                       |  |      | 2,604,000 |   |      |   | 2,664,862 |      |  |   | 6,254,054 |  
|                                                                                                          |  |      |           |   |      |   |           |      |  |   |           |  
|Loss per sharebasic and diluted                                                                          |  | W    | (2,353    | ) |      | W | (356      | )    |  | W | (2,777    | )
|                                                                                                          |  |      |           |   |      |   |           |      |  |   |           |  

As the Company incurred a loss in all periods, the Series A redeemable convertible preferred
shares and stock options were excluded from the computation of diluted loss per share as they had an anti-dilutive effect.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|19. | Loss per share (contd)
|--- | -----------------------



Weighted average outstanding shares for the years ended December 31, 2004, 2005
and 2006 are calculated as follows:



|     |  |                                     |  |                      |  |                |  |                
|---- |  | ----------------------------------- |  | -------------------- |  | -------------- |  | ---------------
|Year |  | Period                              |  | Issued common shares |  | Number of days |  | Weighted number
|2004 |  | 1.1 ~ 12.31                         |  | 2,604,000            |  | 366            |  | 953,064,000    
|     |  |                                     |  |                      |  |                |  | ÷366           
|     |  |                                     |  |                      |  |                |  |                
|     |  | Weighted average outstanding shares |  |                      |  | 2,604,000     
|     |  |                                     |  |                      |  |                |  |                
|2005 |  |                                     |  |                      |  |                |  |                
|     |  | 1.1 ~ 12.31                         |  | 2,604,000            |  | 365            |  | 950,460,000    
|     |  | 12.21 ~ 12.31                       |  | 1,201,333(*1)        |  | 11             |  | 13,214,663     
|     |  | 12.28 ~ 12.31                       |  | 2,250,000(*2)        |  | 4              |  | 9,000,000      
|     |  |                                     |  |                      |  |                |  |                
|     |  |                                     |  |                      |  |                |  | 972,674,663    
|     |  |                                     |  |                      |  |                |  | ÷365           
|     |  |                                     |  |                      |  |                |  |                
|     |  | Weighted average outstanding shares |  |                      |  | 2,664,862     
|     |  |                                     |  |                      |  |                |  |                
|2006 |  | 1.1 ~ 12.31                         |  | 6,055,333            |  | 365            |  | 2,210,196,545  
|     |  | 1.17 ~ 12.31                        |  | 108,139(*2)          |  | 349            |  | 37,740,511     
|     |  | 8.21 ~ 12.31                        |  | 261,600(*2)          |  | 133            |  | 34,792,800     
|     |  |                                     |  |                      |  |                |  |                
|     |  |                                     |  |                      |  |                |  | 2,282,729,856  
|     |  |                                     |  |                      |  |                |  | ÷365           
|     |  |                                     |  |                      |  |                |  |                
|     |  | Weighted average outstanding shares |  |                      |  | 6,254,054     
|     |  |                                     |  |                      |  |                |  |                

---

|(*1) | Conversion of preferred shares
|---- | ------------------------------

|(*2) | Issuance of common shares
|---- | -------------------------

Below are the numbers of
potential securities available for conversion into common shares as of December 31, 2004, 2005 and 2006 if the Company had net income attributable to common shareholders.



|                                        |  |           |  |           |  |        
|--------------------------------------- |  | --------- |  | --------- |  | -------
|                                        |  | 2004      |  | 2005      |  | 2006   
|Redeemable convertible preferred shares |  | 1,441,600 |  |          |  |       
|Stock options                           |  | 956,191   |  | 1,193,591 |  | 900,352



|20. | Segment and geographic information
|--- | ----------------------------------

The
Company has only one reportable segment. The financial information presented below by geographic area is in accordance with the Companys accounting policies as described in Note 3 to the consolidated financial statements.



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|20. | Segment and geographic information (contd)
|--- | -------------------------------------------



The following is a summary of revenues by geographic region based on the location of the customer for
the years ended December 31, 2004, 2005 and 2006 (Korean won in millions):



|                           |  |      |        |      |   |        |  |   |       
|-------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                           |  | 2004 |        | 2005 |   | 2006  
|Republic of Korea          |  | W    | 24,895 |      | W | 10,762 |  | W | 7,199 
|Peoples Republic of China |  |      | 7,659  |      |   | 25,655 |  |   | 12,157
|Other Asian countries      |  |      | 3,220  |      |   | 4,863  |  |   | 5,123 
|United States of America   |  |      | 1      |      |   | 184    |  |   | 7,517 
|Others                     |  |      | 21     |      |   | 120    |  |   |      
|                           |  |      |        |      |   |        |  |   |       
|                           |  | W    | 35,796 |      | W | 41,584 |  | W | 31,996
|                           |  |      |        |      |   |        |  |   |       

The Companys long-lived assets by geographic region for the years ended December 31,
2005 and 2006 are as follows (Korean won in millions):



|                           |  |      |       |      |   |      
|-------------------------- |  | ---- | ----- | ---- | - | -----
|                           |  | 2005 |       | 2006
|Republic of Korea          |  | W    | 1,201 |      | W | 2,082
|Peoples Republic of China |  |      | 101   |      |   | 67   
|Taiwan, Republic of China  |  |      | 165   |      |   |     
|United States of America   |  |      | 19    |      |   | 28   
|                           |  |      |       |      |   |      
|                           |  | W    | 1,486 |      | W | 2,177
|                           |  |      |       |      |   |      

The Companys revenues from significant customers for the years ended December 31, 2004,
2005 and 2006 as a percentage of revenue were as follows:



|                                                       |  |      |   |  |      |   |  |      |  
|------------------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                                       |  | 2004 |   |  | 2005 |   |  | 2006 |  
|Logitech                                               |  |     |   |  |     |   |  | 23   | %
|Dongbu Electronics (formerly DongbuAnam Semiconductor) |  | 12   | % |  | 7    | % |  | 16   | %
|Cresyn                                                 |  |     |   |  | 9    | % |  | 15   | %
|Seiko Precision Inc.                                   |  |     |   |  | 2    | % |  | 11   | %
|YEL Electronics                                        |  | 1    | % |  | 16   | % |  | 9    | %
|Shenzhen Shenghe Technology                            |  |     |   |  | 12   | % |  | 5    | %
|Ningbo Bird Sagem Co., Ltd.                            |  | 21   | % |  | 20   | % |  |     |  
|Samsung Electro-Mechanics                              |  | 25   | % |  | 1    | % |  |     |  
|Maxon Telecom Co., Ltd.                                |  | 12   | % |  |     |   |  |     |  

The following is a summary of revenues by product for the years ended December 31, 2004, 2005
and 2006 (Korean won in millions):



|               |  |      |        |      |   |        |  |   |       
|-------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|               |  | 2004 |        | 2005 |   | 2006  
|Module         |  | W    | 24,663 |      | W | 20,548 |  | W | 2,792 
|Wafer and chip |  |      | 6,296  |      |   | 17,540 |  |   | 23,723
|Services       |  |      | 4,440  |      |   | 2,906  |  |   | 5,171 
|Others         |  |      | 397    |      |   | 590    |  |   | 310   
|               |  |      |        |      |   |        |  |   |       
|               |  | W    | 35,796 |      | W | 41,584 |  | W | 31,996
|               |  |      |        |      |   |        |  |   |       



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##### Table of Contents

PIXELPLUS CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2005 and 2006

---



|21. | Subsequent events
|--- | -----------------

In March 2007, the
Company opened a branch office in Taiwan to fortify its sales and marketing operations in the Taiwanese market. The Company intends to sell its entire 37.5% interest in PTI in the second half of 2007 as there has been a significant decline in
revenues from PTI since the first half of 2006, and in order to manage cost efficiencies and strengthen its financial position.

In June
2007, the Company moved its headquarters office from Bundang to Suwon, Korea.



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