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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-30269
 PIXELWORKS, INC.
  Oregon
(State or other jurisdiction of
incorporation or organization)
    
    
    
    91-1761992
(I.R.S. Employer Identification Number)8100 SW Nyberg Road, Tualatin, OR
(Address of principal executive offices)
    
    97062
(Zip code)
    
    (503) 454-1750
(Registrants telephone number,
including area code)
 
 
  o þ
  o þ
  þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ
   Documents Incorporated by Reference




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PIXELWORKS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
 TABLE OF CONTENTS
 PART IItem 1.
    
    Business.Item 1A.
    
    Risk Factors.Item 1B.
    
    Unresolved Staff Comments.Item 2.
    
    Properties.Item 3.
    
    Legal Proceedings.Item 4.
    
    Submission of Matters to a Vote of Security Holders.PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Item 6.
    
    Selected Financial Data.Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation.Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk.Item 8.
    
    Financial Statements and Supplementary Data.Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.Item 9A.
    
    Controls and Procedures.Item 9B.
    
    Other Information.PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant.Item 11.
    
    Executive Compensation.Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Item 13.
    
    Certain Relationships and Related Transactions.Item 14.
    
    Principal Accounting Fees and Services.PART IVItem 15.
    
    Exhibits, Financial Statement Schedules.SIGNATURESEXHIBIT 10.42EXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 31.3EXHIBIT 32.1EXHIBIT 32.2EXHIBIT 32.3
  2




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PART I
 
 Item 1. Business.
 Overview
       3




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Advanced Display Industry
  Advanced Television Market
      4




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Multimedia Projector Market
    5




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LCD Panel Market
    Digital Streaming Media Devices Market
   6




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Our Products and Technologies
   Products
  ImageProcessor ICs.
  Video SignalProcessor ICs.
 7




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MediaProcessor ICs.
 Broadband Signal Processor ICs.
 Audio Processing and Video Demodulator ICs.
 Smart TCON ICs.
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Technologies
  Core Technologies for Advanced Displays
 
    
    Advanced Image Scaling and Shaping. Since advanced displays are typically fixed-pixel,
digital display technologies, a constant challenge is to reconfigure incoming content in
video or PC formats that does not match the display resolution. Pixelworks has developed
innovative, industry-leading image scaling technologies that intelligently enlarge or
compress images for display in different resolutions or aspect ratios, which is the ratio
of width to height of display screens. This technology is essential for interfacing fixed
resolution digital displays to the wide range of inputs that are present in todays
marketplace, including HDTV. In addition, our image
processing technology incorporates proprietary programmable image scaling capable of
resizing images to fit a wide variety of aspect ratios.
    
    Adaptive Image Optimization. Our products must translate a broad range of signals in
standard and non-standard formats. We use a proprietary image processing technique to
identify the characteristics of an incoming signal and configure the system to produce the
best possible image.
    
    Color Compensation Technology. Our sophisticated custom color compensation technology
makes it possible to display consistent color images from video and computer graphics,
which use very different color palettes, on different display devices. Our color processing
technology compensates for variations in the color performance of a display. Using our
approach, any color can be addressed independently and adjusted without impacting other
colors.
    
    Fully Customizable On-Screen Display.Our technology couples an integrated on-screen
display controller with our industry-first development application. These technologies
allow customers who are designing ImageProcessor semiconductors into their display products
to quickly develop and implement their own unique user interfaces with up to 256 colors
that can incorporate graphics and colorful icons in start-up displays and menus.
 Advanced Television Technologies
 TM TM
 
    
    DNX Motion-Adaptive De-Interlacing.We have developed a proprietary video processing
technology to convert interlaced content into progressive content that virtually eliminates
image artifacts such as stair-stepping, often referred to as jaggies that can occur with
less sophisticated techniques. Our motion-adaptive de-interlacing is able to analyze the
content and apply the most appropriate methods for both standard television formats and
also high-definition television formats. In addition, DNX Motion-Adaptive De-Interlacing
automatically
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recognizes when incoming signals were originally captured on film so that special methods
are employed to display the content.
    
    DNX PixelBoostTM.A technology that improves pixel response to eliminate
blurring in fast-motion video as seen on some LCD panels. LCD pixels
are not able to turn on and off as rapidly as pixels in CRTs, which results in blurry
images when content contains quick movements. PixelBoost technology can compensate for
this property of LCD panels by manipulating the content in a way that makes it display more
crisply on the screen.
    
    DNX Rich Color Processing. A technology that renders more than one billion colors with
10-bit color processing and also optimizes content appearance for various display
technologies.
    
    DNX Video Enhancement Processing.Most content has been encoded in order to enhance its
appearance on CRT-based televisions which makes it appear unnatural when displayed on LCDs,
DMDs or plasma displays. Our DNX Video Enhancement Processing enables manufacturers to
apply filters that compensate for the signals in order to produce sharp, rich picture
quality.
    
    DNX Noise Reduction.Digital displays often appear to create movement where none exists
because pixels flicker in areas where there is no motion, creating a distracting shimmering
effect. This is referred to as noise. We have developed proprietary technology that
minimizes noise for a stable, accurate video image.
  
    
    Digital Deflection Control.Digital Deflection Control, or DDC, technology is designed
for advanced CRTs by reducing system complexity and cost, providing more control over how
the image appears on-screen and improves system reliability. Current digital CRTs use
discrete analog chips to manipulate the scanning beam in order to achieve accurate images.
DDC digitally pre-processes the video signal in order to achieve the correct screen
geometry and image positioning to compensate for geometric distortion inherent in CRT
technology.
    
    SteadySyncTMWeak Signal Compatibility. In many parts of the world,
television viewers still receive their content via over-the-air broadcast. Our SteadySync
technology is able to compensate for broadcast signals that are weak by being able to
better lock onto a signal and display a picture. This technology helps users in
under-served regions to better receive television broadcasts, which is attractive for
manufacturers serving developing countries.
    
    Intelligent Windowing.Intelligent windowing offers consumers control over how they
view multiple content simultaneously. Our ImageProcessor ICs for advanced televisions are
capable of displaying video and computer content in various, user-controlled formats such
as side-by-side, Picture-In-Picture, or PIP, and Picture-On-Picture, or POP, where as many
as 12 images from various other sources or channels can be monitored while watching a
primary viewing window. Our Intelligent Windowing delivers additional flexibility with
adjustable transparency and user-controlled resizing of windows.
 Multimedia Projector Technologies
 
    
    Digital Keystone Correction.We pioneered digital keystone correction technology and it
is now established as a key feature in multimedia projectors. When projecting an image, if
the
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digital projector is not perpendicular to the surface on which it is projecting the image,
the image will be distorted. Our digital keystone correction modifies the geometry of the
image in our ImageProcessor IC so that it will appear that the image is squared up, which
allows a projector to be placed virtually anywhere in the room. Our ICs have the ability to
adjust the image both vertically and horizontally. With our CornerKlickTM
feature, a user can simply correct the image using our unique user interface.
 LCD Panel Technologies
 
    
    Smart Timing Controllers.Typically, every LCD module requires a specific IC called a
timing controller, or TCON, that is a purpose-built, discrete component with the function
of signaling the LCD module when to turn the pixels on and off. We have led the
development of a new type of TCON that is programmable, or smart, so it is able to work
with most LCD modules. LCD manufacturers benefit by no longer having to design and build a
unique component for each module. Additionally, we implemented new signal processing
techniques that enhance pixel response times and contrast ratios.
 Digital Streaming Media Device Technologies
 
    
    DreamStream Application Reference Software .DreamStream software is a
production-ready platform for manufacturers developing digital media streaming devices for
displaying video content using our Broadband Signal Processor ICs. DreamStream-enabled
devices, including set-top boxes and digital media adapters, support industry-standard
encoding and decoding compression schemes, as well as digital rights management, on-screen
browser and wireless connectivity.
 Future Developments
  Customers, Sales and Marketing
   
    
    Distributors.Distributors are resellers in local markets who provide engineering
support and stock our semiconductors in direct relation to specific manufacturing customer
orders. Our distributors often have valuable and established relationships with our end
customers, and in certain countries it is customary to sell to distributors. While
distributor payment to us is not
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dependent upon the distributors ability to resell the product or to collect from the end
customer, our distributors may provide longer payment terms to end customers than those we
would offer. Sales to distributors accounted for 46%, 69% and 69% of total revenue for the
years ended December 31, 2005, 2004 and 2003, respectively.Our largest distributor, Tokyo Electron Device, or TED, is located in Japan. TED
represented 22%, 31% and 39% of revenue for
the years ended December 31, 2005, 2004 and 2003, respectively, and accounted for 16% and
26% of accounts receivable at December 31, 2005 and 2004, respectively. Revenue through
TED to a single end customer, Seiko Epson Corporation, accounted for 10%, 8% and 7% of revenue for the
years ended December 31, 2005, 2004 and 2003, respectively. No other single end customer
accounted for more than 10% of revenue during the three years ended December 31, 2005.Neoview, located in
Taiwan, was historically our second largest distributor. Neoview represented 13% and 16% of
revenue for the years ended December 31, 2004 and 2003, respectively. Effective February 4, 2005, we
terminated our distributor relationship with Neoview and we now sell products
directly to Taiwanese customers previously served by Neoview, as well as through
our other Taiwanese distributors. Neoview represented 1% of revenue for the
year ended December 31, 2005.We also have distributor relationships in China and Europe.
    
    Direct Relationships.We have established direct relationships with companies that
manufacture advanced display systems. Some of our direct relationships are supported by
manufacturers representatives, which are independent sales agents that represent us in
local markets and provide engineering support but do not carry inventory. Revenue through
direct relationships accounted for 54%, 31% and 31% of total revenue for the years ended
December 31, 2005, 2004 and 2003, respectively. We have identified three classifications
of direct relationships as follows:
 o
    
    Integrators.Integrators are OEM customers who build display devices
based on specifications provided by branded manufacturers.o
    
    Branded Manufacturers. Branded manufacturers are globally recognized
manufacturers who develop display device specifications, manufacture, market and
distribute display devices either directly or through resellers to end-users.o
    
    Branded Suppliers. Branded suppliers are globally recognized suppliers
who develop display device specifications and then source them from integrators,
typically in Asia, and distribute them either directly or through resellers to
end-users.
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Seasonality
  Geographic Concerns
   Backlog
  Research and Development
    Manufacturing
  13




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Intellectual Property
     Competition
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Employees
  Available Information
  15




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Item 1A. Risk Factors.
 Investing in our shares of common stock involves a high degree of risk. If any of the following
risks occur, the market price of our shares of common stock could decline and investors could lose
all or part of their investment.
  RISKS RELATED TO OUR OPERATIONS
 We face considerable business and financial risks related to our acquisition of Equator
Technologies, Inc.
  We may be unable to successfully integrate Equator Technologies, Inc., and any future acquisition
or equity investment we make could disrupt our business and severely harm our financial condition.
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
    
    issuance of stock that dilutes current shareholders percentage ownership;
    
    incurrence of debt;
    
    assumption of liabilities;
    
    amortization expenses related to other intangible assets;
    
    impairment of goodwill;
    
    large and immediate write-offs; or
    
    decrease in cash that could otherwise serve as working capital.
  
    
    problems combining the acquired operations, technologies or products;
    
    unanticipated costs;
    
    diversion of managements attention from our core business;
    
    adverse effects on existing business relationships with customers;
    
    risks associated with entering markets in which we have no or limited prior experience; and
    
    potential loss of key employees, particularly those of the acquired organizations.
 Goodwill represents a significant portion of our total assets.
  The year ended December 31, 2004 was our first year of annual profitability since inception and we
may be unable to achieve profitability in future periods.
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Fluctuations in our quarterly operating results make it difficult to predict our future performance
and may result in volatility in the market price of our common stock.
  
    
    our success in integrating the operations of our recently acquired subsidiary, Equator Technologies, Inc.;
 
    
    demand for multimedia projectors, advanced televisions, LCD panels, and digital streaming media devices;
 
    
    demand for our products and the timing of orders for our products;
 
    
    the deferral of customer orders in anticipation of new products or product enhancements from us or our competitors or
due to a reduction in our end customers demand;
 
    
    the loss of one or more of our key distributors or customers or a reduction, delay or cancellation of orders from one
or more of these parties;
 
    
    changes in the available production capacity at the semiconductor fabrication foundries that manufacture our products
and changes in the costs of manufacturing;
 
    
    our ability to provide adequate supplies of our products to customers and avoid excess inventory;
 
    
    the announcement or introduction of products and technologies by our competitors;
 
    
    changes in product mix, product costs or pricing, or distribution channels; and
 
    
    general economic conditions and economic conditions specific to the advanced display and semiconductor markets.
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Our products are characterized by average selling prices that decline over relatively short time
periods, which will negatively affect financial results unless we are able to reduce our product
costs or introduce new products with higher average selling prices.
  Our highly integrated products and high-speed mixed signal products are difficult to manufacture
without defects and the existence of defects could result in an increase in our costs and delays in
the availability of our products.
   If we do not achieve additional design wins in the future, our ability to grow would be seriously
limited.
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Because of the complex nature of our semiconductor designs and of the associated manufacturing
process and the rapid evolution of our customers product designs, we may not be able to develop
new products or product enhancements in a timely manner, which could decrease customer demand for
our products and reduce our revenues.
    
    
    accurate prediction of customer requirements and evolving industry standards, including video decoding, digital
interface and content piracy protection standards;
 
    
    development of advanced display technologies and capabilities;
 
    
    timely completion and introduction of new product designs;
 
    
    use of advanced foundry processes and achievement of high manufacturing yields; and
 
    
    market acceptance of the new products.
  Integration of software in our products adds complexity and cost that may affect our ability to
achieve design wins and may affect our profitability.
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A significant amount of our revenue comes from a few customers and distributors. Any decrease in
revenues from, or loss of, any of these customers or distributors could significantly reduce our
total revenues.
  
    
    a significant reduction, delay or cancellation of orders from one
or more of our key distributors, branded manufacturers or
integrators; or
    
    a decision by one or more significant customers to select products
manufactured by a competitor, or its own internally developed
semiconductor, for inclusion in future product generations.
  The concentration of our accounts receivable with a limited number of customers exposes us to
increased credit risk and could harm our operating results and cash flows.
  International sales account for almost all of our revenue, and if we do not successfully address
the risks associated with our international operations, our revenue could decrease.
  
    
    increased difficulties in managing international distributors and manufacturers of our products and components due to
varying time zones, languages and business customs;
    
    foreign currency exchange fluctuations such as the devaluation in the currencies of Japan, Peoples Republic of China
(PRC), Taiwan and Korea that could result in an increased cost of procuring our semiconductors;
    
    potentially adverse tax consequences;
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
    
    difficulties regarding timing and availability of export and import licenses, which have limited our ability to freely
move demonstration equipment and samples in and out of Asia;
 
    
    political and economic instability, particularly in the PRC, Japan, Taiwan ,Korea and Turkey;
 
    
    reduced or limited protection of our intellectual property, significant amounts of which are contained in software,
which is more prone to design piracy;
 
    
    increased transaction costs related to sales transactions conducted outside of the U.S., such as charges to secure
letters of credit for foreign receivables;
 
    
    difficulties in maintaining sales representatives outside of the U.S. that are knowledgeable about our industry and
products;
 
    
    changes in the regulatory environment in the PRC, Japan, Taiwan, Korea and Turkey that may significantly impact
purchases of our products by our customers;
 
    
    outbreaks of SARS, bird flu or other pandemics in the PRC or other parts of Asia; and
 
    
    difficulties in collecting accounts receivable.
 Our growing presence and investment within the Peoples Republic of China subjects us to risks of
economic and political instability in the area, which could adversely impact our results of
operations.
  Our dependence on selling through distributors and integrators increases the complexity of managing
our supply chain and may result in excess inventory or inventory shortages.
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Dependence on a limited number of sole-source, third-party manufacturers for our products exposes
us to shortages based on capacity allocation or low manufacturing yield, errors in manufacturing,
price increases with little notice, volatile inventory levels and delays in product delivery, which
could result in delays in satisfying customer demand, increased costs and loss of revenues.
   The concentration of our manufacturers and customers in the same geographic region increases our
risk that a natural disaster, labor strike or political unrest could disrupt our operations.
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We use a COT, or customer owned tooling, process for manufacturing some of our products which
exposes us to the possibility of poor yields and unacceptably high product costs.
  We are dependent on our foundries to implement complex semiconductor technologies, which could
adversely affect our operations if those technologies are unavailable, delayed or inefficiently
implemented.
  Manufacturers of our semiconductor products periodically discontinue manufacturing processes, which
could make our products unavailable from our current suppliers.
  If we have to qualify a new contract manufacturer or foundry for any of our products, we may
experience delays that result in lost revenues and damaged customer relationships.
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Our future success depends upon the continued services of key personnel, many of whom would be
difficult to replace and the loss of one or more of these employees could seriously harm our
business by delaying product development.
  Because we do not have long-term commitments from our customers, and plan purchases based on
estimates of customer demand which may be inaccurate, we must contract for the manufacture of our
products based on those potentially inaccurate estimates.
  Development projects may cause us to incur substantial operating expenses without the guarantee of
any associated revenue or far in advance of revenue.
  Because of our long product development process and sales cycle, we may incur substantial expenses
before we earn associated revenues and may not ultimately sell as many units of our products as we
forecasted.
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Shortages of other key components for our customers products could delay our ability to sell our
products.
  Shortages of materials used in the manufacturing of our products may increase our costs or limit
our revenues and impair our ability to ship our products on time.
  Our products could become obsolete if necessary licenses of third-party technology are not
available to us or are only available on terms that are not commercially viable.
  We may not be able to respond to the rapid technological changes in the markets in which we
compete, or we may not be able to comply with industry standards in the future making our products
less desirable or obsolete.
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Our software development tools may be incompatible with industry standards and challenging to
implement, which could slow product development or cause us to lose customers and design wins.
  Our integrated circuits and software could contain defects, which could reduce sales of those
products or result in claims against us.
  Others may bring infringement actions against us that could be time consuming and expensive to
defend.
  
    
    stop selling products using technology that contains the allegedly infringing intellectual property;
    
    attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at
all;
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
    
    attempt to redesign those products that contain the allegedly infringing intellectual property; and
    
    pay damages for past infringement claims that are determined to be valid or which are arrived at in settlement of such
litigation or threatened litigation.
  Our limited ability to protect our intellectual property and proprietary rights could harm our
competitive position by allowing our competitors to access our proprietary technology and to
introduce similar products.
  We have incurred substantial indebtedness as a result of the sale of convertible debentures.
  Failure to manage our expansion effectively could adversely affect our ability to increase our
business and our results of operations.
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Risks Related to Our Industry
 Failure of consumer demand for advanced displays and other digital display technologies to increase
would impede our growth and adversely affect our business.
  If products incorporating our semiconductors are not compatible with computer display protocols,
video standards and other devices, the market for our products will be reduced and our business
prospects could be significantly limited.
  Intense competition in our markets may reduce sales of our products, reduce our market share,
decrease our gross profit and result in large losses.
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The cyclical nature of the semiconductor industry may lead to significant variances in the demand
for our products and could harm our operations.
  Other Risks
 The anti-takeover provisions of Oregon law and in our articles of incorporation could adversely
affect the rights of the holders of our common stock by preventing a sale or takeover of us at a
price or prices favorable to the holders of our common stock.
  
    
    our board of directors is authorized, without prior shareholder approval, to increase the size of the board. Our articles of incorporation provide that if the board is increased to eight or more members, the board will divided into three classes serving staggered terms, which would make it more difficult for a group of shareholders to quickly change the composition of our board;
    
    our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with
voting or other rights or preferences that could impede the success of any attempt to acquire us or change our control,
commonly referred to as blank check preferred stock;
    
    members of our board of directors can only be removed for cause;
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
    
    the board of directors may alter our bylaws without obtaining shareholder approval; and
    
    shareholders are required to provide advance notice for nominations for election to the board of directors or for
proposing matters to be acted upon at a shareholder meeting.
 Our principal shareholders have significant voting power and may take actions that may make it more
difficult to sell our shares at a premium to take over candidates.
  The price of our common stock has and may continue to fluctuate substantially.
  
    
    actual or anticipated fluctuations in our operating results;
 
    
    actual reduction in our operating results due solely to the adoption of Statement of Financial Accounting Standards No.
123R, which requires, among other things, the expensing of stock options beginning in 2006;
 
    
    changes in expectations as to our future financial performance;
 
    
    changes in financial estimates of securities analysts;
 
    
    announcements by us or our competitors of technological innovations, design wins, contracts, standards or acquisitions;
 
    
    the operating and stock price performance of other comparable companies;
 
    
    announcements of future expectations by our customers;
 
    
    changes in market valuations of other technology companies; and
 
    
    inconsistent trading volume levels of our common stock.
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We may be unable to meet our future capital requirements, which would limit our ability to grow.
  We may be unable to meet changing laws, regulations and standards relating to corporate governance
and public disclosure.
  
 Item 1B.
Unresolved Staff Comments.
  
 Item 2. Properties.
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Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
  Fiscal 2005
    
    High
    
    LowFourth Quarter
    
    $
    6.74
    
    
    $
    4.97Third Quarter
    
    $
    11.78
    
    
    $
    6.25Second Quarter
    
    $
    9.32
    
    
    $
    6.90First Quarter
    
    $
    12.44
    
    
    $
    7.55
 Fiscal 2004
    
    High
    
    LowFourth Quarter
    
    $
    12.80
    
    
    $
    10.11Third Quarter
    
    $
    15.32
    
    
    $
    7.50Second Quarter
    
    $
    20.74
    
    
    $
    14.61First Quarter
    
    $
    17.93
    
    
    $
    10.95
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Item 6. Selected Financial Data.
  Statement of Operations Data
 Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands, except per share data)Revenue, net
    
    $
    171,704
    
    
    $
    176,211
    
    
    $
    140,921
    
    
    $
    102,641
    
    
    $
    90,808Cost of revenue
    
    
    108,748
    
    
    
    90,991
    
    
    
    78,674
    
    
    
    52,545
    
    
    
    47,167Gross profit
    
    
    62,956
    
    
    
    85,220
    
    
    
    62,247
    
    
    
    50,096
    
    
    
    43,641Operating expenses:Research and development
    
    
    51,814
    
    
    
    32,969
    
    
    
    29,580
    
    
    
    31,182
    
    
    
    24,875Selling, general and administrative
    
    
    30,616
    
    
    
    23,736
    
    
    
    20,797
    
    
    
    16,576
    
    
    
    17,387Restructuring
    
    
    1,162
    
    
    
    
    
    
    
    5,049
    
    
    
    
    
    
    
    Amortization of goodwill and acquired
intangible assets
    
    
    1,084
    
    
    
    486
    
    
    
    486
    
    
    
    242
    
    
    
    15,982Merger-related expenses
    
    
    
    
    
    
    
    
    
    
    8,949
    
    
    
    
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,342
    
    
    
    32,400Total operating expenses
    
    
    84,676
    
    
    
    57,191
    
    
    
    64,861
    
    
    
    72,342
    
    
    
    90,644Income (loss) from operations
    
    
    (21,720
    )
    
    
    28,029
    
    
    
    (2,614
    )
    
    
    (22,246
    )
    
    
    (47,003
    )Interest and other income, net
    
    
    1,532
    
    
    
    1,742
    
    
    
    1,177
    
    
    
    2,275
    
    
    
    4,444Income (loss) before income
taxes
    
    
    (20,188
    )
    
    
    29,771
    
    
    
    (1,437
    )
    
    
    (19,971
    )
    
    
    (42,559
    )Provision for (recovery of) income taxes
    
    
    22,422
    
    
    
    7,990
    
    
    
    (907
    )
    
    
    880
    
    
    
    Net income (loss)
    
    $
    (42,610
    )
    
    $
    21,781
    
    
    $
    (530
    )
    
    $
    (20,851
    )
    
    $
    (42,559
    )Net income (loss) per share:Basic
    
    $
    (0.90
    )
    
    $
    0.47
    
    
    $
    (0.01
    )
    
    $
    (0.48
    )
    
    $
    (1.05
    )Diluted
    
    $
    (0.90
    )
    
    $
    0.45
    
    
    $
    (0.01
    )
    
    $
    (0.48
    )
    
    $
    (1.05
    )Weighted average shares outstanding:Basic
    
    
    47,337
    
    
    
    46,673
    
    
    
    45,337
    
    
    
    43,397
    
    
    
    40,662Diluted
    
    
    47,337
    
    
    
    52,062
    
    
    
    45,337
    
    
    
    43,397
    
    
    
    40,662
 34




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##### Table of Contents



Balance Sheet Data
 December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands)Cash and cash equivalents
    
    $
    68,604
    
    
    $
    32,585
    
    
    $
    16,490
    
    
    $
    17,577
    
    
    $
    43,288Working capital
    
    
    139,291
    
    
    
    209,653
    
    
    
    91,681
    
    
    
    95,776
    
    
    
    98,820Total assets
    
    
    421,556
    
    
    
    423,569
    
    
    
    233,317
    
    
    
    227,212
    
    
    
    202,839Long-term liabilities,
net of current portion
    
    
    163,357
    
    
    
    150,365
    
    
    
    100
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    215,217
    
    
    
    252,023
    
    
    
    220,305
    
    
    
    214,816
    
    
    
    193,633
 
 Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation.
 Forward-looking Statements
   Overview
   35




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##### Table of Contents



Critical Accounting Policies and Estimates
   Revenue Recognition. Revenue Recognition
 Sales Returns and Allowances.
 36




---



##### Table of Contents



Product Warranties.
  Allowance for Doubtful Accounts.
 Inventory Valuation.
 Useful Lives and Recoverability of Equipment and Other Long-Lived Assets. Accounting for the Impairment or
Disposal of Long-Lived Assets
 Goodwill. Goodwill and Other Intangible Assets.
 37




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##### Table of Contents



Business Combinations
 Income Taxes.
  38




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##### Table of Contents



Results of Operations
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Dollars
    
    
    % of sales
    
    
    Dollars
    
    
    % of sales
    
    
    Dollars
    
    
    % of salesRevenue, net
    
    $
    171,704
    
    
    
    100.0
    %
    
    $
    176,211
    
    
    
    100.0
    %
    
    $
    140,921
    
    
    
    100.0
    %Cost of revenue
    
    
    108,748
    
    
    
    63.3
    
    
    
    90,991
    
    
    
    51.6
    
    
    
    78,674
    
    
    
    55.8Gross profit
    
    
    62,956
    
    
    
    36.7
    
    
    
    85,220
    
    
    
    48.4
    
    
    
    62,247
    
    
    
    44.2Operating expenses:Research and development
    
    
    51,814
    
    
    
    30.2
    
    
    
    32,969
    
    
    
    18.7
    
    
    
    29,580
    
    
    
    21.0Selling, general and administrative
    
    
    30,616
    
    
    
    17.8
    
    
    
    23,736
    
    
    
    13.5
    
    
    
    20,797
    
    
    
    14.8Restructuring
    
    
    1,162
    
    
    
    0.7
    
    
    
    
    
    
    
    0.0
    
    
    
    5,049
    
    
    
    3.6Amortization of acquired intangible assets
    
    
    1,084
    
    
    
    0.6
    
    
    
    486
    
    
    
    0.3
    
    
    
    486
    
    
    
    0.3Merger-related expenses
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    8,949
    
    
    
    6.4Total operating expenses
    
    
    84,676
    
    
    
    49.3
    
    
    
    57,191
    
    
    
    32.5
    
    
    
    64,861
    
    
    
    46.0Income (loss) from operations
    
    
    (21,720
    )
    
    
    (12.6
    )
    
    
    28,029
    
    
    
    15.9
    
    
    
    (2,614
    )
    
    
    (1.9
    )Interest income
    
    
    5,658
    
    
    
    3.3
    
    
    
    3,823
    
    
    
    2.2
    
    
    
    1,188
    
    
    
    0.8Interest expense
    
    
    (2,637
    )
    
    
    (1.5
    )
    
    
    (1,609
    )
    
    
    (0.9
    )
    
    
    (11
    )
    
    
    (0.0
    )Realized loss on sale of marketable securities
    
    
    (779
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Amortization of debt issuance costs
    
    
    (710
    )
    
    
    (0.4
    )
    
    
    (472
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    0.0Interest and other income, net
    
    
    1,532
    
    
    
    0.9
    
    
    
    1,742
    
    
    
    1.0
    
    
    
    1,177
    
    
    
    0.8Income (loss) before income taxes
    
    
    (20,188
    )
    
    
    (11.8
    )
    
    
    29,771
    
    
    
    16.9
    
    
    
    (1,437
    )
    
    
    (1.0
    )Provision for (recovery of) income taxes
    
    
    22,422
    
    
    
    13.1
    
    
    
    7,990
    
    
    
    4.5
    
    
    
    (907
    )
    
    
    (0.6
    )Net income (loss)
    
    $
    (42,610
    )
    
    
    (24.8
    )%
    
    $
    21,781
    
    
    
    12.4
    %
    
    $
    (530
    )
    
    
    (0.4
    )%
  Revenue, net
  39




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Advanced television
    
    
    52
    %
    
    
    43
    %
    
    
    27
    %Multimedia projector
    
    
    31
    %
    
    
    45
    %
    
    
    53
    %Digital streaming media devices
    
    
    8
    %
    
    
    0
    %
    
    
    0
    %LCD monitor
    
    
    7
    %
    
    
    10
    %
    
    
    18
    %Other
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
 Advanced Television
  Multimedia Projector
  Digital Streaming Media Devices
  LCD Monitor
  Other
  40




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##### Table of Contents



Cost of sales and gross profit
      Research and development
   
    
    Compensation expense increased $6,850, due to an increase in
headcount in research and development cost centers to 254 at
December 31, 2005 from 164 at December 31, 2004. This increase
includes 49 in our Shanghai design center, and 41 that resulted
from our acquisition of Equator. These increases were partially
offset by a decrease in Tualatin headcount, which was primarily
attributable to the restructuring we initiated in October of 2005.
    
    Development related expenses, including non-recurring engineering
and outside services, increased $4,415.
    
    Depreciation and amortization expense increased $3,875, primarily
due to increased licensed technology and software asset purchases.
 41




---



##### Table of Contents




    
    Facilities and information technology expenses allocated to
research and development increased $3,293. The increase in
facilities and information technology expenses was driven by
increases in headcount in information technology departments,
increases in rent expense, which were in part attributable to the
addition of Equator, increases in depreciation and amortization
expense, increases in expensed equipment and software, and
increases in telephone and other communications charges.
    
    Stock-based compensation increased $536 due to the assumption of
Equator outstanding stock options.
  
    
    Depreciation and amortization expense increased $1,642 due to higher licensed technology and software purchases in 2004.
 
    
    Non-recurring engineering and outside services expenses increased $1,233.
 
    
    Compensation expense increased $409 due to an increase in headcount in research and development cost centers to 164 at
December 31, 2004 from 121 at December 31, 2003.
 
    
    Travel-related expenses increased $387.
 
    
    Facilities and information technology expenses allocated to research and development increased $310. The increase in
facilities and information technology expenses was driven primarily by increases in headcount in information technology
departments and increased telephone and other communications charges.
 
    
    Loss on asset disposals increased $303 due to write offs of licensed technology, software and tooling in 2004.
 
    
    Expensed equipment and software increased $183.
 
    
    Stock-based compensation expense decreased $1,146, which is primarily attributable to our use of the accelerated method
of expense recognition, under which more expense is recognized in earlier periods.
  Selling, general and administrative
   
    
    Compensation expense increased $3,963, due to an increase in headcount in selling, general and administrative cost
centers to 172 at December 31, 2005 from 153 as of December 31, 2004. This increase includes 10 that resulted from our
acquisition of Equator.
 
    
    Facilities and information technology expenses allocated to selling, general and administrative increased $1,562. The
increase in facilities and information technology expenses was driven by increases in headcount in information
technology departments, increases in rent expense, which were in part attributable to the addition of Equator,
increases in depreciation and amortization expense, increases in expensed equipment and software, and increases in
telephone and other communications charges.
 42




---



##### Table of Contents




    
    Sales commission expense increased $908, primarily due to our acquisition of Equator.
 
    
    Travel-related expenses increased $727.
  
    
    Compensation expense increased $1,610 due to an increase in sales and marketing and administrative personnel to 153 as
of December 31, 2004 from 96 as of December 31, 2003.
 
    
    Outside services increased $783 and includes accounting and legal fees related to patent applications, restructuring
corporate subsidiaries in China, and consulting fees related to Sarbanes-Oxley compliance.
 
    
    Travel-related expenses increased $393, primarily due to the increase in headcount and an increase in customer visits.
 
    
    Sales commission expense increased $299 due to higher revenue.
 
    
    Expensed equipment increased $171.
 
    
    Depreciation and amortization expense increased $262, due to increased purchases of property and equipment.
 
    
    Recruiting expenses increased $161, which is related to the increase in headcount.
 
    
    Investor relations expense increased $123.
 
    
    Stock-based compensation expense decreased $1,545, which is attributable to our use of the accelerated method of
expense recognition.
  Restructuring
   43




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Amortization of acquired intangible assets
  Merger-related expenses
  Interest and other income, net
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Interest income
    
    $
    5,658
    
    
    $
    3,823
    
    
    $
    1,188Interest expense
    
    
    (2,637
    )
    
    
    (1,609
    )
    
    
    (11
    )Realized loss on sale of marketable securities
    
    
    (779
    )
    
    
    
    
    
    
    Amortization of debt issuance costs
    
    
    (710
    )
    
    
    (472
    )
    
    
    $
    1,532
    
    
    $
    1,742
    
    
    $
    1,177
     44




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##### Table of Contents



Provision for (recovery of) income taxes
     Liquidity and Capital Resources
 Cash and cash equivalents and short- and long-term marketable securities
   45




---



##### Table of Contents



Accounts receivable, net
  Inventories, net
  Capital resources
   46




---



##### Table of Contents



Contractual Payment Obligations
  Payments Due By PeriodLess than 1
    
    
    
    
    
    
    
    
    
    More thanContractual Obligation
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    5 yearsLong-term debt
    
    $
    150,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000Interest on long-term debt
    
    
    14,109
    
    
    
    2,625
    
    
    
    5,250
    
    
    
    5,250
    
    
    
    984Payments on accrued
balances related to
asset purchases
    
    
    24,652
    
    
    
    11,940
    
    
    
    12,712
    
    
    
    
    
    
    
    Estimated Q1 2006
purchase commitments to
contract manufacturers
    
    
    18,860
    
    
    
    18,860
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    15,367
    
    
    
    4,472
    
    
    
    5,972
    
    
    
    2,482
    
    
    
    2,441
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Accounting Changes and Error Corrections-a replacement of
APB Opinion No. 20 and FASB Statement No. 3
 47




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##### Table of Contents



Share Based Payment Accounting for Stock Issued to Employees.
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
    
 Item 8. Financial Statements and Supplementary Data.
  
 48




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
  
 49




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##### Table of Contents



PIXELWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    68,604
    
    
    $
    32,585Short-term marketable securities
    
    
    59,888
    
    
    
    160,213Accounts receivable, net
    
    
    19,927
    
    
    
    14,605Inventories, net
    
    
    26,577
    
    
    
    18,575Prepaid expenses and other current assets
    
    
    7,277
    
    
    
    4,856Total current assets
    
    
    182,273
    
    
    
    230,834Long-term marketable securities
    
    
    17,145
    
    
    
    79,483Property and equipment, net
    
    
    29,029
    
    
    
    12,444Other assets, net
    
    
    18,277
    
    
    
    12,969Debt issuance costs, net
    
    
    3,780
    
    
    
    4,483Acquired intangible assets, net
    
    
    37,321
    
    
    
    2,520Goodwill
    
    
    133,731
    
    
    
    80,836Total assets
    
    $
    421,556
    
    
    $
    423,569LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,206
    
    
    $
    5,946Accrued liabilities and current portion of long-term liabilities
    
    
    26,269
    
    
    
    12,842Income taxes payable
    
    
    9,507
    
    
    
    2,393Total current liabilities
    
    
    42,982
    
    
    
    21,181Long-term liabilities, net of current portion
    
    
    13,357
    
    
    
    365Long-term debt
    
    
    150,000
    
    
    
    150,000Total liabilities
    
    
    206,339
    
    
    
    171,546Commitments and contingenciesShareholders Equity:Preferred stock, $.001 par value; 50,000,000 shares authorized, 1 share
issued and outstanding at December 31, 2005 and 2004
    
    
    
    
    
    
    Common stock, $.001 par value; 250,000,000 shares authorized,
47,168,311 and 46,287,752 shares issued and outstanding at
December 31, 2005 and 2004, respectively
    
    
    316,257
    
    
    
    304,996Shares exchangeable into common stock; 1,731,099 shares issued,
574,467 and 649,453 outstanding at December 31, 2005
and 2004, respectively
    
    
    5,434
    
    
    
    6,144Accumulated other comprehensive income (loss)
    
    
    (3,503
    )
    
    
    531Deferred stock-based compensation
    
    
    (773
    )
    
    
    (60
    )Accumulated deficit
    
    
    (102,198
    )
    
    
    (59,588
    )Total shareholders equity
    
    
    215,217
    
    
    
    252,023Total liabilities and shareholders equity
    
    $
    421,556
    
    
    $
    423,569
  50




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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Revenue, net
    
    $
    171,704
    
    
    $
    176,211
    
    
    $
    140,921Cost of revenue (1)
    
    
    108,748
    
    
    
    90,991
    
    
    
    78,674Gross profit
    
    
    62,956
    
    
    
    85,220
    
    
    
    62,247Operating expenses:Research and development (2)
    
    
    51,814
    
    
    
    32,969
    
    
    
    29,580Selling, general and administrative (3)
    
    
    30,616
    
    
    
    23,736
    
    
    
    20,797Restructuring
    
    
    1,162
    
    
    
    
    
    
    
    5,049Amortization of acquired intangible assets
    
    
    1,084
    
    
    
    486
    
    
    
    486Merger-related expenses
    
    
    
    
    
    
    
    
    
    
    8,949Total operating expenses
    
    
    84,676
    
    
    
    57,191
    
    
    
    64,861Income (loss) from operations
    
    
    (21,720
    )
    
    
    28,029
    
    
    
    (2,614
    )Interest income
    
    
    5,658
    
    
    
    3,823
    
    
    
    1,188Interest expense
    
    
    (2,637
    )
    
    
    (1,609
    )
    
    
    (11
    )Realized loss on sale of marketable securities
    
    
    (779
    )
    
    
    
    
    
    
    Amortization of debt issuance costs
    
    
    (710
    )
    
    
    (472
    )
    
    
    Interest and other income, net
    
    
    1,532
    
    
    
    1,742
    
    
    
    1,177Income (loss) before income taxes
    
    
    (20,188
    )
    
    
    29,771
    
    
    
    (1,437
    )Provision for (recovery of) income taxes
    
    
    22,422
    
    
    
    7,990
    
    
    
    (907
    )Net income (loss)
    
    $
    (42,610
    )
    
    $
    21,781
    
    
    $
    (530
    )Net income (loss) per share:Basic
    
    $
    (0.90
    )
    
    $
    0.47
    
    
    $
    (0.01
    )Diluted
    
    $
    (0.90
    )
    
    $
    0.45
    
    
    $
    (0.01
    )Weighted average shares outstanding:Basic
    
    
    47,337
    
    
    
    46,673
    
    
    
    45,337Diluted
    
    
    47,337
    
    
    
    52,062
    
    
    
    45,337
 
 (1)  Includes amortization of:
 Acquired inventory mark-up
    
    $
    5,217
    
    
    $
    
    
    
    $
    Acquired developed technology
    
    
    4,515
    
    
    
    529
    
    
    
    529Acquired backlog
    
    
    600
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    60
    
    
    
    
    
    
    
    8(2)  Includes stock-based compensation of:
    
    
    758
    
    
    
    222
    
    
    
    1,368(3)  Includes stock-based compensation of:
    
    
    307
    
    
    
    131
    
    
    
    1,676
  51




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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (42,610
    )
    
    $
    21,781
    
    
    $
    (530
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Deferred income tax expense (benefit)
    
    
    13,636
    
    
    
    (1,101
    )
    
    
    (1,168
    )Depreciation and amortization
    
    
    13,469
    
    
    
    8,160
    
    
    
    6,119Amortization of acquired intangible assets
    
    
    6,199
    
    
    
    1,015
    
    
    
    1,015Income tax benefit from stock options
    
    
    1,421
    
    
    
    4,485
    
    
    
    Stock-based compensation
    
    
    1,125
    
    
    
    353
    
    
    
    3,082Realized loss on sale of marketable securities
    
    
    779
    
    
    
    
    
    
    
    Amortization of debt issuance costs
    
    
    710
    
    
    
    472
    
    
    
    Deferred rent
    
    
    250
    
    
    
    95
    
    
    
    Loss on asset disposals
    
    
    180
    
    
    
    381
    
    
    
    3,927Lease incentives
    
    
    95
    
    
    
    124
    
    
    
    Amortization of deferred tax charge
    
    
    55
    
    
    
    55
    
    
    
    55Lease costs related to restructuring
    
    
    
    
    
    
    
    
    
    
    188Changes in operating assets and liabilities, net of effects of acquisition:Accounts receivable, net
    
    
    (858
    )
    
    
    (6,137
    )
    
    
    1,953Inventories, net
    
    
    2,806
    
    
    
    (8,097
    )
    
    
    (3,690
    )Prepaid expenses and other current and long-term assets
    
    
    (2,340
    )
    
    
    (43
    )
    
    
    (548
    )Accounts payable
    
    
    (554
    )
    
    
    1,677
    
    
    
    (754
    )Accrued current and long-term liabilities
    
    
    (943
    )
    
    
    2,072
    
    
    
    1,495Income taxes payable
    
    
    7,114
    
    
    
    2,393
    
    
    
    (115
    )Net cash provided by operating activities
    
    
    534
    
    
    
    27,685
    
    
    
    11,029Cash flows from investing activities:Proceeds from sales and maturities of available-for-sale marketable securities
    
    
    263,375
    
    
    
    
    
    
    
    Proceeds from sales and maturities of held-to-maturity marketable securities
    
    
    54,928
    
    
    
    114,083
    
    
    
    135,628Purchases of available-for-sale marketable securities
    
    
    (124,108
    )
    
    
    
    
    
    
    Purchases of held-to-maturities marketable securities
    
    
    (36,345
    )
    
    
    (259,042
    )
    
    
    (135,844
    )Acquisition of Equator Technologies, Inc., net of cash acquired
    
    
    (104,736
    )
    
    
    
    
    
    
    Payments on equipment and other asset financing
    
    
    (9,825
    )
    
    
    (5,106
    )
    
    
    (199
    )Purchases of property and equipment
    
    
    (7,915
    )
    
    
    (8,471
    )
    
    
    (4,385
    )Purchases of other assets and investments
    
    
    (1,929
    )
    
    
    (3,221
    )
    
    
    (10,253
    )Proceeds from sale of assets
    
    
    61
    
    
    
    12
    
    
    
    Net cash provided by (used in) investing activities
    
    
    33,506
    
    
    
    (161,745
    )
    
    
    (15,053
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    145,500
    
    
    
    Proceeds from issuances of common stock
    
    
    1,986
    
    
    
    5,110
    
    
    
    2,937Debt issuance costs
    
    
    (7
    )
    
    
    (455
    )
    
    
    Net cash provided by financing activities
    
    
    1,979
    
    
    
    150,155
    
    
    
    2,937Net increase (decrease) in cash and cash equivalents
    
    
    36,019
    
    
    
    16,095
    
    
    
    (1,087
    )Cash and cash equivalents, beginning of year
    
    
    32,585
    
    
    
    16,490
    
    
    
    17,577Cash and cash equivalents, end of year
    
    $
    68,604
    
    
    $
    32,585
    
    
    $
    16,490Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    2,638
    
    
    $
    1,293
    
    
    $
    11Income taxes
    
    
    1,691
    
    
    
    530
    
    
    
    920Supplemental disclosure of non-cash investing and financing activities:Acquisitions of property and equipment and other assets under extended payment terms
    
    $
    28,820
    
    
    $
    8,450
    
    
    $
    Value of options assumed in the acquisition of Equator Technologies, Inc.
    
    
    8,336
    
    
    
    
    
    
    
    Transfer of cost-based investment to available-for-sale marketable security
    
    
    
    
    
    
    10,000
    
    
    
    Debt issuance costs withheld from proceeds
    
    
    
    
    
    
    4,500
    
    
    
    Release and cancellation of shares held in escrow
    
    
    
    
    
    
    541
    
    
    
    
  52




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##### Table of Contents



PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
 AccumulatedOther
    
    
    
    
    
    
    Deferred
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Exchangeable Shares
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    Stock-based
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Income (Loss)
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Deficit
    
    
    EquityBalance at December 31, 2002
    
    
    43,967,585
    
    
    $
    287,566
    
    
    
    1,108,969
    
    
    $
    10,491
    
    
    $
    
    
    
    
    
    
    
    $
    (2,402
    )
    
    $
    (80,839
    )
    
    $
    214,816Stock issued under stock option and stock purchase plans
    
    
    870,969
    
    
    
    2,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,937Stock-based compensation expense due to option
modifications and grant to non-employee
    
    
    
    
    
    
    1,903
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,903Reversal of deferred stock-based compensation due
to terminations
    
    
    
    
    
    
    (774
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    774
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,179
    
    
    
    
    
    
    
    1,179Conversion of exchangeable shares to common stock
    
    
    275,108
    
    
    
    2,603
    
    
    
    (275,108
    )
    
    
    (2,603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (530
    )
    
    
    (530
    )Balance at December 31, 2003
    
    
    45,113,662
    
    
    
    294,235
    
    
    
    833,861
    
    
    
    7,888
    
    
    
    
    
    
    
    
    
    
    
    (449
    )
    
    
    (81,369
    )
    
    
    220,305Stock issued under stock option and stock purchase
plans and tax benefits associated therewith
    
    
    1,021,761
    
    
    
    9,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,595Stock-based compensation expense due to option
modification
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Reversal of deferred stock-based compensation due
to terminations
    
    
    
    
    
    
    (101
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    288Conversion of exchangeable shares to common stock
    
    
    184,205
    
    
    
    1,743
    
    
    
    (184,205
    )
    
    
    (1,743
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reversal of exchangeable shares due to termination
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Release and cancellation of shares held in escrow
    
    
    (31,876
    )
    
    
    (541
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (541
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,781
    
    
    
    
    
    
    
    21,781
    
    
    
    21,781Unrealized gain on available-for-sale securities, net of tax of $239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    531Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,312Balance at December 31, 2004
    
    
    46,287,752
    
    
    
    304,996
    
    
    
    649,453
    
    
    
    6,144
    
    
    
    531
    
    
    
    
    
    
    
    (60
    )
    
    
    (59,588
    )
    
    
    252,023Stock issued under stock option and stock purchase
plans and tax benefits associated therewith
    
    
    805,573
    
    
    
    2,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,595Fair value of options assumed in Equator Technologies, Inc.
acquisition and deferred stock-based compensation
associated therewith
    
    
    
    
    
    
    8,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,218
    )
    
    
    
    
    
    
    6,118Reversal of deferred stock-based compensation due
to terminations
    
    
    
    
    
    
    (380
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125
    
    
    
    
    
    
    
    1,125Conversion of exchangeable shares to common stock
    
    
    74,986
    
    
    
    710
    
    
    
    (74,986
    )
    
    
    (710
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (42,610
    )
    
    
    
    
    
    
    (42,610
    )
    
    
    (42,610
    )Unrealized loss on available-for-sale securities, net of tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,034
    )
    
    
    (4,034
    )
    
    
    
    
    
    
    
    
    
    
    (4,034
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (46,644
    )Balance at December 31, 2005
    
    
    47,168,311
    
    
    $
    316,257
    
    
    
    574,467
    
    
    $
    5,434
    
    
    $
    (3,503
    )
    
    
    
    
    
    $
    (773
    )
    
    $
    (102,198
    )
    
    $
    215,217
  53




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##### Table of Contents



PIXELWORKS, INC.   Notes to Consolidated Financial Statements
 (In thousands, except share and per share data)
 NOTE 1. BASIS OF PRESENTATION
 Nature of Business
  Consolidated Financial Statements
  Use of Estimates
  Reclassifications
  NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Cash and Cash Equivalents
  54




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##### Table of Contents



Marketable Securities
 Accounting for Certain Investments in Debt and Equity Securities
   Accounts Receivable
   Inventories
  Property and Equipment
  Software
    
    Lesser of 3 years or contractual license termEquipment, furniture and fixtures
    
    2 yearsTooling
    
    2 yearsLeasehold improvements
    
    Lessor of lease term or estimated useful life
 Accounting for the Impairment or Disposal of Long-lived Assets ,
 55




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##### Table of Contents



Acquired Intangible Assets
  Developed technology
    
    5-7 yearsCustomer relationships
    
    3 yearsTrademark
    
    1 yearAssembled workforce
    
    3 years
  Licensed Technology
  Goodwill
 Goodwill and Other Intangible Assets. Business Combinations
 56




---



##### Table of Contents



Revenue Recognition
 Revenue Recognition
 
    
    an authorized purchase order has been received;
 
    
    title and risk of loss have transferred;
 
    
    the sales price is fixed or determinable; and
 
    
    collectibility of the receivable is reasonably assured.
    Warranty Program
  Stock-Based Compensation
  Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure, an Amendment of FASB Statement
No. 123 Accounting for Stock Issued to Employees .
 57




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##### Table of Contents



Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans
   Year Ended December 31,2005
    
    
    2004
    
    
    2003Net income (loss) as reported
    
    $
    (42,610
    )
    
    $
    21,781
    
    
    $
    (530
    )Add: Stock-based compensation included in reported
net income (loss), net of related tax effects
    
    
    1,125
    
    
    
    258
    
    
    
    1,862Deduct: Stock-based compensation determined under
the fair value based method, net of related tax effects
    
    
    (14,913
    )
    
    
    (11,750
    )
    
    
    (10,659
    )Pro-forma net income (loss)
    
    $
    (56,398
    )
    
    $
    10,289
    
    
    $
    (9,327
    )Reported net income (loss) per share:Basic
    
    $
    (0.90
    )
    
    $
    0.47
    
    
    $
    (0.01
    )Diluted
    
    $
    (0.90
    )
    
    $
    0.45
    
    
    $
    (0.01
    )Pro-forma net income (loss) per share:Basic
    
    $
    (1.19
    )
    
    $
    0.22
    
    
    $
    (0.21
    )Diluted
    
    $
    (1.19
    )
    
    $
    0.21
    
    
    $
    (0.21
    )
 58




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##### Table of Contents



Year Ended December 31,2005
    
    2004
    
    2003Stock Option Plans:Risk free interest rate
    
    
    3.95
    %
    
    
    3.88
    %
    
    
    2.90
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life (in years)
    
    
    4.7
    
    
    
    6.1
    
    
    
    5.5Volatility
    
    
    90
    %
    
    
    100
    %
    
    
    109
    %Employee Stock Purchase Plan:Risk free interest rate
    
    
    3.13
    %
    
    
    1.87
    %
    
    
    1.83
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life (in years)
    
    
    0.5
    
    
    
    1.3
    
    
    
    1.2Volatility
    
    
    68
    %
    
    
    103
    %
    
    
    104
    %
  Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services
 Share Based Payment .
 Research and Development
  59




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##### Table of Contents



Income Taxes
 Accounting for Income Taxes ,
  Accumulated Other Comprehensive Income
 Reporting Comprehensive Income
 Leases
 Accounting for Leases
 Fair Value of Financial Instruments
  Risks and Uncertainties
 Concentration of Suppliers
  60




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##### Table of Contents



Risk of Technological Change
  Concentrations of Credit Risk
  NOTE 3. BALANCE SHEET COMPONENTS
 Marketable Securities
   Amortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueDecember 31, 2005Available-for-sale:Auction rate securities
    
    $
    27,800
    
    
    $
    
    
    
    $
    27,800US government agencies
    
    
    14,814
    
    
    
    (103
    )
    
    
    14,711Corporate debentures
    
    
    4,171
    
    
    
    (9
    )
    
    
    4,162Municipal bonds
    
    
    4,301
    
    
    
    (5
    )
    
    
    4,296Commercial paper
    
    
    5,761
    
    
    
    (7
    )
    
    
    5,754Foreign government bonds
    
    
    3,188
    
    
    
    (23
    )
    
    
    3,165$
    60,035
    
    
    $
    (147
    )
    
    $
    59,888
 61




---



##### Table of Contents



Amortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Loss
    
    
    ValueDecember 31, 2004Available-for-sale:Auction rate securities
    
    $
    77,150
    
    
    $
    
    
    
    $
    77,150Held-to-maturity:US government agencies
    
    
    68,068
    
    
    
    (15
    )
    
    
    68,053Municipal bonds
    
    
    8,265
    
    
    
    (21
    )
    
    
    8,244Commercial paper
    
    
    5,493
    
    
    
    (2
    )
    
    
    5,491Foreign government bonds
    
    
    1,237
    
    
    
    (10
    )
    
    
    1,227$
    83,063
    
    
    $
    (48
    )
    
    $
    83,015
  Amortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain (Loss)
    
    
    ValueDecember 31, 2005Available-for-sale:Investment in SMIC
    
    $
    10,000
    
    
    $
    (3,240
    )
    
    $
    6,760US government agencies
    
    
    7,872
    
    
    
    (69
    )
    
    
    7,803Municipal bonds
    
    
    1,030
    
    
    
    (4
    )
    
    
    1,026Foreign government bonds
    
    
    990
    
    
    
    (30
    )
    
    
    960Corporate debentures
    
    
    609
    
    
    
    (13
    )
    
    
    596$
    20,501
    
    
    $
    (3,356
    )
    
    $
    17,145December 31, 2004Available-for-sale:Investment in SMIC
    
    $
    10,000
    
    
    $
    531
    
    
    $
    10,531Held-to-maturity:US government agencies
    
    
    52,117
    
    
    
    (61
    )
    
    
    52,056US treasury bonds
    
    
    12,390
    
    
    
    29
    
    
    
    12,419Foreign government bonds
    
    
    2,484
    
    
    
    (34
    )
    
    
    2,450Municipal bonds
    
    
    1,340
    
    
    
    (4
    )
    
    
    1,336Corporate debentures
    
    
    621
    
    
    
    2
    
    
    
    623$
    68,952
    
    
    $
    (68
    )
    
    $
    68,884
   62




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##### Table of Contents



Accounts Receivable, Net
  December 31,2005
    
    
    2004Accounts receivable, gross
    
    $
    20,139
    
    
    $
    14,817Allowance for doubtful accounts
    
    
    (212
    )
    
    
    (212
    )Accounts receivable, net
    
    $
    19,927
    
    
    $
    14,605
  Inventories, Net
  December 31,2005
    
    
    2004Finished goods
    
    $
    20,623
    
    
    $
    11,648Work-in-process
    
    
    7,350
    
    
    
    8,51627,973
    
    
    
    20,164Reserve for slow moving and obsolete items
    
    
    (1,396
    )
    
    
    (1,589
    )Inventories, net
    
    $
    26,577
    
    
    $
    18,575
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    1,589
    
    
    $
    1,942
    
    
    $
    1,377Usage:Inventory scrapped
    
    
    (730
    )
    
    
    (521
    )
    
    
    (318
    )Inventory utilized
    
    
    (795
    )
    
    
    (735
    )
    
    
    Subtotal usage
    
    
    (1,525
    )
    
    
    (1,256
    )
    
    
    (318
    )Provision
    
    
    1,332
    
    
    
    903
    
    
    
    883Balance at end of year
    
    $
    1,396
    
    
    $
    1,589
    
    
    $
    1,942
 63




---



##### Table of Contents



Property and Equipment, Net
  December 31,2005
    
    
    2004Software
    
    $
    36,948
    
    
    $
    16,385Equipment, furniture and fixtures
    
    
    15,924
    
    
    
    11,681Tooling
    
    
    5,000
    
    
    
    4,349Leasehold improvements
    
    
    2,674
    
    
    
    1,77860,546
    
    
    
    34,193Accumulated depreciation and amortization
    
    
    (31,517
    )
    
    
    (21,749
    )Property and equipment, net
    
    $
    29,029
    
    
    $
    12,444
  Other Assets, Net
  Acquired Intangible Assets, Net
  December 31,2005
    
    
    2004Gross carrying amount:Developed technology
    
    $
    40,500
    
    
    $
    3,700Customer relationships
    
    
    3,400
    
    
    
    Assembled workforce
    
    
    1,577
    
    
    
    1,577Backlog and trademark
    
    
    800
    
    
    
    46,277
    
    
    
    5,277Accumulated amortization:Developed technology
    
    
    (6,057
    )
    
    
    (1,543
    )Customer relationships
    
    
    (614
    )
    
    
    Assembled workforce
    
    
    (1,577
    )
    
    
    (1,214
    )Backlog and trademark
    
    
    (708
    )
    
    
    (8,956
    )
    
    
    (2,757
    )Acquired intangible assets, net
    
    $
    37,321
    
    
    $
    2,520
 64




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##### Table of Contents



2006
    
    $
    9,1142007
    
    
    9,0222008
    
    
    8,4082009
    
    
    7,4042010
    
    
    3,373$
    37,321
 Goodwill
  Accrued Liabilities and Current Portion of Long-Term Liabilities
  December 31,2005
    
    
    2004Current portion of accrued liabilities for asset purchases
    
    $
    11,940
    
    
    $
    3,185Accrued payroll and related liabilities
    
    
    5,294
    
    
    
    4,586Accrued manufacturing liabilities
    
    
    3,612
    
    
    
    477Accrued commissions and royalties
    
    
    1,232
    
    
    
    719Reserve for warranty returns
    
    
    577
    
    
    
    419Accrued interest payable
    
    
    335
    
    
    
    335Reserve for sales returns and allowances
    
    
    237
    
    
    
    524Other
    
    
    3,042
    
    
    
    2,597$
    26,269
    
    
    $
    12,842
 65




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##### Table of Contents



Year ending December 31:2006
    
    $
    11,9402007
    
    
    7,3372008
    
    
    5,375$
    24,652
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    524
    
    
    $
    202
    
    
    $
    588Provision
    
    
    52
    
    
    
    977
    
    
    
    1,654Charge offs
    
    
    (339
    )
    
    
    (655
    )
    
    
    (2,040
    )Balance at end of year
    
    $
    237
    
    
    $
    524
    
    
    $
    202
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    419
    
    
    $
    569
    
    
    $
    769Provision
    
    
    813
    
    
    
    241
    
    
    
    18Charge offs
    
    
    (655
    )
    
    
    (391
    )
    
    
    (218
    )Balance at end of year
    
    $
    577
    
    
    $
    419
    
    
    $
    569
 Long-Term Debt and Debt Issuance Costs
   66




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##### Table of Contents



Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys
Own Stock Accounting for Derivative Instruments and Hedging Activities
  NOTE 4. EARNINGS PER SHARE
 Earnings per Share
 The Effect of
Contingently Convertible Debt on Diluted Earnings per Share.
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Basic weighted average shares outstanding
    
    
    47,337,122
    
    
    
    46,672,766
    
    
    
    45,336,670Incremental shares related to:Conversion of debentures
    
    
    
    
    
    
    3,772,495
    
    
    
    Stock options
    
    
    
    
    
    
    1,604,200
    
    
    
    Restricted stock subject to vesting
    
    
    
    
    
    
    12,397
    
    
    
    Diluted weighted average shares outstanding
    
    
    47,337,122
    
    
    
    52,061,858
    
    
    
    45,336,670
 67




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##### Table of Contents



Year Ended December 31,2005
    
    
    2003Weighted average shares related to:Stock options
    
    
    8,990,140
    
    
    
    6,393,851Conversion of debentures
    
    
    6,159,405
    
    
    
    Restricted stock subject to vesting
    
    
    
    
    
    
    99,00115,149,545
    
    
    
    6,492,852
   Net income used in calculating basic net income per share
    
    $
    21,781Add: Interest expense and amortization of debt issuance costs, net of tax
    
    
    1,522Net income used in calculating diluted net income per share
    
    $
    23,303
 NOTE 5. INCOME TAXES
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Domestic
    
    $
    (21,482
    )
    
    $
    28,891
    
    
    $
    (2,166
    )Foreign
    
    
    1,294
    
    
    
    880
    
    
    
    729$
    (20,188
    )
    
    $
    29,771
    
    
    $
    (1,437
    )
 68




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    73
    
    
    $
    8,391
    
    
    $
    12State
    
    
    260
    
    
    
    457
    
    
    
    8Foreign
    
    
    8,453
    
    
    
    243
    
    
    
    241Total current
    
    
    8,786
    
    
    
    9,091
    
    
    
    261Deferred:Federal
    
    
    11,754
    
    
    
    (161
    )
    
    
    (627
    )State
    
    
    1,882
    
    
    
    (940
    )
    
    
    (541
    )Total deferred
    
    
    13,636
    
    
    
    (1,101
    )
    
    
    (1,168
    )Income tax expense (benefit)
    
    $
    22,422
    
    
    $
    7,990
    
    
    $
    (907
    )
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Net change in gross deferred tax assets and liabilities
    
    $
    (57,359
    )
    
    $
    3,362
    
    
    $
    (3,461
    )Deferred tax assets reducing (increasing):Goodwill
    
    
    7,445
    
    
    
    
    
    
    
    Deferred charge and other liabilities
    
    
    
    
    
    
    
    
    
    
    601Increase (decrease) in the beginning-of-year balance
of the valuation allowance for deferred tax assets
    
    
    63,550
    
    
    
    (4,463
    )
    
    
    1,692$
    13,636
    
    
    $
    (1,101
    )
    
    $
    (1,168
    )
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Goodwill
    
    $
    (8,257
    )
    
    $
    (1,110
    )
    
    $
    Shareholders equity
    
    
    (609
    )
    
    
    (4,485
    )
    
    
    
  69




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Expected income tax rate
    
    
    35
    %
    
    
    35
    %
    
    
    34
    %Increase (decrease) resulting from:Change in valuation allowance
    
    
    (192
    )
    
    
    (1
    )
    
    
    (81
    )Research and experimentation credit
    
    
    21
    
    
    
    (7
    )
    
    
    65Increase in deferred tax rates
    
    
    13
    
    
    
    
    
    
    
    Increase in beginning balance of acquired deferred
tax assets
    
    
    11
    
    
    
    
    
    
    
    Foreign tax refund
    
    
    3
    
    
    
    
    
    
    
    Difference between financial and tax reporting for
stock option exercises
    
    
    (2
    )
    
    
    
    
    
    
    12State income taxes, net of federal tax benefit
    
    
    2
    
    
    
    1
    
    
    
    8Amortization of acquired intellectual property,
assembled workforce and deferred tax charge
    
    
    1
    
    
    
    (1
    )
    
    
    19Other
    
    
    (3
    )
    
    
    
    
    
    
    6Actual tax (expense) benefit
    
    
    (111
    )%
    
    
    27
    %
    
    
    63
    %
  December 31,2005
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    60,439
    
    
    $
    7,867Research and experimentation credit carryforwards
    
    
    14,270
    
    
    
    7,020Foreign tax credit carryforwards
    
    
    7,598
    
    
    
    Accrued vacation
    
    
    599
    
    
    
    446Reserves and accrued expenses
    
    
    1,456
    
    
    
    1,283Deferred compensation
    
    
    29
    
    
    
    35Depreciation
    
    
    1,135
    
    
    
    Other
    
    
    1,151
    
    
    
    419Total gross deferred tax assets
    
    
    86,677
    
    
    
    17,070Deferred tax liabilities:Amortization
    
    
    (13,731
    )
    
    
    (919
    )Depreciation
    
    
    
    
    
    
    (563
    )Total gross deferred tax liabilities
    
    
    (13,731
    )
    
    
    (1,482
    )Less valuation allowance
    
    
    (72,540
    )
    
    
    (8,990
    )Net deferred tax assets
    
    $
    406
    
    
    $
    6,598
  70




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##### Table of Contents



NOTE 6. COMMITMENTS AND CONTINGENCIES
 Royalties
  401(k) Plan
  71




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##### Table of Contents



Leases
  Year Ending December 31:2006
    
    $
    4,4722007
    
    
    3,1662008
    
    
    2,8062009
    
    
    1,3402010
    
    
    1,142Thereafter
    
    
    2,441$
    15,367
  Contract Manufacturers
  Indemnifications
 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others-an interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No.34
 Legal Proceedings
  72




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##### Table of Contents



NOTE 7. SHAREHOLDERS EQUITY
 Preferred Stock
    Common Stock
  Exchangeable Shares
  Stock Option Plans
   73




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##### Table of Contents



WeightedaverageNumber
    
    
    exerciseof shares
    
    
    priceOptions outstanding as of December 31, 2002
    
    
    5,814,694
    
    
    $
    9.74Granted at market
    
    
    1,592,099
    
    
    
    7.52Exercised
    
    
    (650,766
    )
    
    
    2.76Canceled
    
    
    (484,288
    )
    
    
    10.20Options outstanding as of December 31, 2003
    
    
    6,271,739
    
    
    
    9.86Granted at market
    
    
    2,595,005
    
    
    
    14.03Exercised
    
    
    (809,966
    )
    
    
    4.91Canceled
    
    
    (531,643
    )
    
    
    12.82Options outstanding as of December 31, 2004
    
    
    7,525,135
    
    
    
    11.63Granted at market
    
    
    2,560,030
    
    
    
    8.48Exchanged in acquisition
    
    
    1,263,417
    
    
    
    1.26Exercised
    
    
    (608,754
    )
    
    
    1.05Canceled
    
    
    (1,576,346
    )
    
    
    11.21Options outstanding as of December 31, 2005
    
    
    9,163,482
    
    
    $
    10.09
  Options Outstanding
    
    Options ExercisableWeightedNumber
    
    average
    
    Weighted
    
    Number
    
    Weightedoutstanding at
    
    remaining
    
    average
    
    exercisable at
    
    averageRange of
    
    December 31,
    
    contractual
    
    exercise
    
    December 31,
    
    exerciseExercise prices
    
    2005
    
    life
    
    price
    
    2005
    
    price$ 0.07  $  2.43
    
    
    1,036,237
    
    
    
    6.36
    
    
    $
    0.61
    
    
    
    932,616
    
    
    $
    0.613.98      6.58
    
    
    969,173
    
    
    
    7.90
    
    
    
    6.09
    
    
    
    366,785
    
    
    
    5.856.59      7.96
    
    
    1,270,435
    
    
    
    8.53
    
    
    
    7.54
    
    
    
    394,069
    
    
    
    7.408.00      9.15
    
    
    1,018,099
    
    
    
    7.70
    
    
    
    8.47
    
    
    
    459,627
    
    
    
    8.489.22      9.48
    
    
    1,114,228
    
    
    
    8.88
    
    
    
    9.33
    
    
    
    146,997
    
    
    
    9.299.52    11.29
    
    
    975,097
    
    
    
    7.14
    
    
    
    10.37
    
    
    
    701,738
    
    
    
    10.2911.34    14.84
    
    
    1,034,560
    
    
    
    8.07
    
    
    
    13.72
    
    
    
    390,513
    
    
    
    13.3314.90    16.90
    
    
    1,108,436
    
    
    
    7.21
    
    
    
    16.19
    
    
    
    703,107
    
    
    
    16.3417.05    39.00
    
    
    637,217
    
    
    
    5.74
    
    
    
    23.70
    
    
    
    553,043
    
    
    
    24.53$ 0.07  $39.00
    
    
    9,163,482
    
    
    
    7.62
    
    
    $
    10.09
    
    
    
    4,648,495
    
    
    $
    10.41
   Employee Stock Purchase Plan
  74




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NOTE 8. SEGMENT INFORMATION
 Disclosures about Segments of an Enterprise and Related Information
 Geographic Information
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Japan
    
    $
    56,770
    
    
    $
    70,749
    
    
    $
    58,597Taiwan
    
    
    29,752
    
    
    
    36,766
    
    
    
    33,843China
    
    
    23,884
    
    
    
    30,587
    
    
    
    17,930Europe
    
    
    25,861
    
    
    
    14,342
    
    
    
    8,302Korea
    
    
    15,396
    
    
    
    14,032
    
    
    
    14,428U.S.
    
    
    6,324
    
    
    
    2,265
    
    
    
    1,928Other
    
    
    13,717
    
    
    
    7,470
    
    
    
    5,893$
    171,704
    
    
    $
    176,211
    
    
    $
    140,921
 Significant Customers
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Distributor A
    
    
    22
    %
    
    
    31
    %
    
    
    39
    %Distributor B
    
    
    1
    %
    
    
    13
    %
    
    
    16
    %
  75




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##### Table of Contents



December 31,2005
    
    
    2004Account A
    
    
    16
    %
    
    
    26
    %Account B
    
    
    14
    %
    
    
    9
    %Account C
    
    
    11
    %
    
    
    6
    %Account D
    
    
    4
    %
    
    
    11
    %
 NOTE 9. RESTRUCTURING
   NOTE 10. ACQUISITION
   76




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##### Table of Contents



Purchase price
    
    
    
    
    
    $
    118,116Less net assets acquired:Assets acquired:Cash
    
    $
    5,044Accounts receivable
    
    
    4,464Inventory
    
    
    10,808Other current assets
    
    
    296Non-current assets
    
    
    6,295Developed technology
    
    
    36,800Other acquired intangible assets
    
    
    4,200Deferred stock compensation
    
    
    2,218Less:Liabilities assumed
    
    
    (9,530
    )
    
    
    (60,595
    )Goodwill
    
    
    
    
    
    $
    57,521
     77




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004Net revenue
    
    $
    186,670
    
    
    $
    192,041Net income (loss)
    
    $
    (49,561
    )
    
    $
    5,419Net income (loss) per share:Basic
    
    $
    (1.05
    )
    
    $
    0.12Diluted
    
    $
    (1.05
    )
    
    $
    0.11Weighted average shares outstanding:Basic
    
    
    47,337,122
    
    
    
    46,672,766Diluted
    
    
    47,337,122
    
    
    
    49,409,885
  NOTE 11. GENESIS MICROCHIP TRANSACTION
  78




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##### Table of Contents



NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
 March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2005
    
    
    2005Revenue
    
    $
    40,261
    
    
    $
    41,315
    
    
    $
    46,794
    
    
    $
    43,334Gross profit
    
    
    16,918
    
    
    
    16,202
    
    
    
    14,647
    
    
    
    15,189Income (loss) from operations
    
    
    271
    
    
    
    (2,654
    )
    
    
    (10,170
    )
    
    
    (9,167
    )Income (loss) before taxes
    
    
    1,152
    
    
    
    (2,578
    )
    
    
    (9,973
    )
    
    
    (8,789
    )Net income (loss)
    
    
    836
    
    
    
    (2,275
    )
    
    
    (5,257
    )
    
    
    (35,914
    )Net income (loss) per share:Basic and diluted
    
    
    0.02
    
    
    
    (0.05
    )
    
    
    (0.11
    )
    
    
    (0.75
    )
 March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004
    
    
    2004
    
    
    2004
    
    
    2004Revenue
    
    $
    45,270
    
    
    $
    48,509
    
    
    $
    43,970
    
    
    $
    38,462Gross profit
    
    
    23,387
    
    
    
    23,032
    
    
    
    21,710
    
    
    
    17,091Income from operations
    
    
    9,924
    
    
    
    8,810
    
    
    
    7,184
    
    
    
    2,111Income before taxes
    
    
    10,159
    
    
    
    8,929
    
    
    
    7,822
    
    
    
    2,861Net income
    
    
    6,553
    
    
    
    5,759
    
    
    
    5,449
    
    
    
    4,020Net income per share:Basic
    
    
    0.14
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.09Diluted
    
    
    0.14
    
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.08
 NOTE 13: SUBSEQUENT EVENT
  79




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
  
 Item 9A. Controls and Procedures.
  Managements Report on Internal Control over Financial Reporting
  Internal Control  Integrated Framework,
  Changes to Internal Controls
  Report of Independent Registered Public Accounting Firm
 
 Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
 80




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##### Table of Contents



Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission(COSO)
    
 81




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##### Table of Contents



Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
      
 
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
   
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accounting Fees and Services.
  82




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 (a) 1. Financial Statements
  
 (a) 2. Financial Statement Schedules
  (a) 3. Exhibits
  ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger dated as of December 13, 2000 among Pixelworks, Inc.,
Panther Acquisition, Inc., Panstera, Inc. and those certain shareholders of Panstera, Inc.
signatories thereto (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on February 13, 2001).2.2
    
    Amendment to Agreement and Plan of Merger dated as of January 26, 2001 among Pixelworks
Inc., Panther Acquisition, Inc. and Panstera, Inc. (incorporated by reference to Exhibit
2.2 to the Companys Current Report on Form 8-K filed on February 13, 2001).2.3
    
    Agreement and Plan of Merger and Reorganization dated as of December 6, 2001 among
Pixelworks, Inc., Nighthawk Acquisition Corp. and those certain shareholders of nDSP
Delaware, Inc. who are signatories thereto (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed on January 29, 2002).2.4
    
    Reorganization Agreement among Pixelworks, Inc., Pixelworks Nova Scotia Company,
Certain Shareholders of Jaldi Semiconductor Corp. and Jaldi Semiconductor Corp. dated
August 2, 2002 (incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-3 filed on October 15, 2002).2.5
    
    Jaldi Semiconductor, Inc. Exchangeable Share Provisions (incorporated by reference to
Exhibit 99.2 to the Companys Registration Statement on Form S-3 filed on October 15,
2002).
 83




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##### Table of Contents



ExhibitNumber
    
    Description2.6
    
    Exchangeable Share Support Agreement among Jaldi Semiconductor Corp., Pixelworks, Inc.,
Pixelworks Nova Scotia and Jaldi Semiconductor Corp. dated September 6, 2002 (incorporated
by reference to Exhibit 99.3 to the Companys Registration Statement on Form S-3 filed on
October 15, 2002).2.7
    
    Voting and Exchange Trust Agreement among Jaldi Semiconductor Corp., Pixelworks, Inc.,
Pixelworks Nova Scotia Company and CIBC Mellon Trust Company, dated September 6, 2002
(incorporated by reference to Exhibit 99.4 to the Companys Registration Statement on Form
S-3 filed on October 15, 2002).2.8
    
    Agreement and Plan of Merger, dated as of March 17, 2003 among Pixelworks, Inc.,
Display Acquisition Corp. and Genesis Microchip Inc. (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed on March 20, 2003).2.9
    
    Agreement and Plan of Merger dated April 28, 2005 among Pixelworks, Inc., Equator
Technologies, Inc., Twain Sub, Inc., and Robert C. Fox, Jr., as Shareholders Agent
(incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed
on May 3, 2005).3.1
    
    Sixth Amended and Restated Articles of Incorporation of Pixelworks, Inc., As Amended
(incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q
filed on August 9, 2004).3.2
    
    First Restated Bylaws of Pixelworks, Inc. (incorporated by reference to Exhibit 3.3 to
the Companys Registration Statement on Form S-1 declared effective May 19, 2000).4.1
    
    Reference is made to Exhibit 3.1 above (incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on Form S-1 declared effective May 19, 2000).4.2
    
    Third Amended Registration Rights Agreement dated February 22, 2000 (incorporated by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-1 declared
effective May 19, 2000).4.3
    
    Indenture dated May 18, 2004 between Pixelworks, Inc. and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on
Form 10-Q filed on August 9, 2004).4.4
    
    Form of 1.75% Convertible Subordinated Debentures due 2024 dated May 18, 2004
(incorporated by reference to Exhibit 4.2 to the Companys Quarterly Report on Form 10-Q
filed August 9, 2004).4.5
    
    Registration Rights Agreement, dated May 18, 2004 among Pixelworks, Inc., Citigroup
Global Markets Inc. and D.A. Davidson & Co. (incorporated by reference to Exhibit 4.3 to
the Companys Quarterly Report on Form 10-Q filed August 9, 2004).4.6
    
    Purchase Agreement, dated May 12, 2004 among Pixelworks, Inc. and Citigroup Global
Markets Inc. (incorporated by reference to Exhibit 4.4 to the Companys Quarterly Report on
Form 10-Q filed August 9, 2004).10.1
    
    Form of Indemnity Agreement between Pixelworks, Inc. and each of its Officers and
Directors (incorporated by reference to Exhibit 10.1 to the Companys Registration
Statement on Form S-1 declared effective May 19, 2000). +
 84




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##### Table of Contents



ExhibitNumber
    
    Description10.2
    
    Pixelworks, Inc. 1997 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed June 21, 2005). +10.3
    
    Pixelworks, Inc. 2000 Employee Stock Purchase Plan, As Amended (incorporated by
reference to Exhibit 99.2 to the Companys Registration Statement on Form S-8 filed March
23, 2005). +10.4
    
    Pixelworks, Inc. 2001 Nonqualified Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed on May 31, 2001). +10.5
    
    Registration Rights Agreement dated as of December 6, 2001 among Pixelworks, Inc., nDSP
Delaware, Inc. and those certain shareholders of nDSP Delaware, Inc. who are signatories
thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on January 29, 2002).10.6
    
    Sublease Agreement Dated September 7, 2001 between Epicor Software Corporation and
Pixelworks Inc. (incorporated by reference to Exhibit 10.4 to the Companys Annual Report
on Form 10-K filed on March 25, 2002).10.7
    
    Lease Agreement Dated April 14, 1999 between Southcenter III and IV Investors LLC and
Pixelworks, Inc. (incorporated by reference to Exhibit 10.7 to the Companys Registration
Statement on Form S-1 declared effective May 19, 2000).10.8
    
    VAutomation Incorporated Synthesizable Soft Core Agreement dated November 4, 1997
between VAutomation Incorporated and Pixelworks, Inc. (incorporated by reference to Exhibit
10.8 to the Companys Registration Statement on Form S-1 declared effective May 19, 2000).10.9
    
    Intellectual Property Sublicense Agreement dated March 30, 1999 between VAutomation
Incorporated and Pixelworks, Inc. (incorporated by reference to Exhibit 10.9 to the
Companys Registration Statement on Form S-1 declared effective May 19, 2000).10.10
    
    License Agreement dated February 22, 2000 between Pixelworks, Inc. and InFocus
Systems, Inc. (incorporated by reference to Exhibit 10.10 to the Companys Registration
Statement on Form S-1 declared effective May 19, 2000).10.11
    
    Employment Agreement between Jeffrey B. Bouchard and Pixelworks, Inc. (incorporated by
reference to Exhibit 10.11 to the Companys Registration Statement on Form S-1 declared
effective May 19, 2000). +10.12
    
    Shareholders Agreement dated as of January 15, 2001 among Pixelworks, Inc., Panstera,
Inc., and those certain shareholders of Panstera, Inc. (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February 13, 2001).10.13
    
    Third Amendment to Lease dated March 1, 2002 between Copper Mountain Trust Corporation
and Pixelworks, Inc. (incorporated by reference to Exhibit 10.13 to the Companys Annual
Report on Form 10-K filed on March 25, 2002).10.14
    
    Form of Pixelworks, Inc. Change of Control Severance Agreement dated March 14, 2003
(incorporated by reference to Exhibit 10.4 to the Companys Registration Statement on Form
S-4 filed on April 18, 2003). +10.15
    
    Change of Control Severance Agreement dated March 14, 2003 between Jeffrey Bouchard
and Pixelworks, Inc. (incorporated by reference to Exhibit 10.5 to the Companys
Registration Statement on Form S-4 filed on April 18, 2003). +
 85




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##### Table of Contents



ExhibitNumber
    
    Description10.16
    
    Change of Control Severance Agreement dated March 14, 2003 between Hans Olsen and
Pixelworks, Inc. (incorporated by reference to Exhibit 10.6 to the Companys Registration
Statement on Form S-4 filed on April 18, 2003). +10.17
    
    Fourth Amendment to lease dated June 23, 2003 between Pixelworks, Inc. and Quest Group
Trust VI (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q filed on August 14, 2003).10.18
    
    Fifth Amendment to lease dated February 18, 2004 between Pixelworks, Inc. and Quest
Group Trust VI (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q filed on May 7, 2004).10.19
    
    First Amendment to lease dated February 2004 between Pixelworks, Inc. and Epicor
Software Corporation (incorporated by reference to Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q filed on May 7, 2004).10.20
    
    First Amendment of Lease between Pixelworks, Inc. and Southcenter III & IV Investors
LLC (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
10-Q filed on August 9, 2004).10.21
    
    Pixelworks, Inc. 2004 Senior Management Bonus Plan (incorporated by reference to
Exhibit 10.22 to the Companys Annual Report on Form 10-K filed on March 15, 2005). +10.22
    
    Pixelworks, Inc. 2005 Senior Management Bonus Plan (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 10, 2005). +10.23
    
    Equator Technologies, Inc. 1996 Stock Option Plan, as amended (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed June
17, 2005). +10.24
    
    Stock Option Agreement, dated April 18, 2002, between Equator Technologies, Inc. and
Christopher H. Basoglu (incorporated by reference to Exhibit 99.2 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.25
    
    Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and
Christopher H. Basoglu (incorporated by reference to Exhibit 99.3 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.26
    
    Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc.
and Christopher H. Basoglu (incorporated by reference to Exhibit 99.4 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.27
    
    Stock Option Agreement, dated April 18, 2002, between Equator Technologies, Inc. and
Richard E. Christopher (incorporated by reference to Exhibit 99.5 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.28
    
    Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and
Richard E. Christopher (incorporated by reference to Exhibit 99.6 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.29
    
    Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc.
and Richard E. Christopher (incorporated by reference to Exhibit 99.7 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +
 86




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##### Table of Contents



ExhibitNumber
    
    Description10.30
    
    Stock Option Agreement, dated September 15, 2004, between Equator Technologies, Inc.
and Richard E. Christopher (incorporated by reference to Exhibit 99.8 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.31
    
    Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc.
and Michael Myhre (incorporated by reference to Exhibit 99.9 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.32
    
    Stock Option Agreement, dated July 18, 2002, between Equator Technologies, Inc. and
Tedford Niday (incorporated by reference to Exhibit 99.10 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.33
    
    Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and
Tedford Niday (incorporated by reference to Exhibit 99.11 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.34
    
    Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc.
and Tedford Niday (incorporated by reference to Exhibit 99.12 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.35
    
    Stock Option Agreement, dated March 29, 2001, between Equator Technologies, Inc. and
John ODonnell (incorporated by reference to Exhibit 99.13 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.36
    
    Stock Option Agreement, dated July 18, 2002, between Equator Technologies, Inc. and
John ODonnell (incorporated by reference to Exhibit 99.14 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.37
    
    Stock Option Agreement, dated April 8, 2003, between Equator Technologies, Inc. and
John ODonnell (incorporated by reference to Exhibit 99.15 to the Companys Registration
Statement on Form S-8 filed June 17, 2005). +10.38
    
    Stock Option Agreement, dated November 11, 2003, between Equator Technologies, Inc.
and John ODonnell (incorporated by reference to Exhibit 99.16 to the Companys
Registration Statement on Form S-8 filed June 17, 2005). +10.39
    
    Office Lease dated April 12, 2001, by and between Equator Technologies, Inc. and Pike
Street Delaware, Inc. (incorporated by reference to Exhibit 10.18 to the Companys
Quarterly Report on Form 10-Q filed August 9, 2005).10.40
    
    Real Property Lease dated March 21, 2001, by and between Equator Technologies, Inc.
and Limar Realty Corp. #30 (incorporated by reference to Exhibit 10.19 to the Companys
Quarterly Report on Form 10-Q filed August 9, 2005).10.41
    
    Amendment No. 1 to Office Lease dated July 7, 2005, by and between Equator
Technologies, Inc. and 520 Pike Street, Inc. (incorporated by reference to Exhibit 10.20 to
the Companys Quarterly Report on Form 10-Q filed November 7, 2005).10.42
    
    Office Lease Agreement by and between CA-The Concourse Limited Partnership and
Pixelworks, Inc.
 87




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##### Table of Contents



ExhibitNumber
    
    Description21
    
    Subsidiaries of Pixelworks, Inc.23
    
    Consent of KPMG LLP.31.1
    
    Certification of Chief Executive Officer.31.2
    
    Certification of Chief Financial Officer.31.3
    
    Certification of Chief Operating Officer.32.1
    
    Certification of Chief Executive Officer.32.2
    
    Certification of Chief Financial Officer.32.3
    
    Certification of Chief Operating Officer.
 
 +
    
    Indicates a management contract or compensation arrangement. 88




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##### Table of Contents



SIGNATURES
  PIXELWORKS, INC.Dated: March 13, 2006
    
    By:
    
    /s/ Allen H. Alley

Allen H. AlleyChairman of the Board, President andChief Executive Officer
  Signature
    
    Title
    
    Date/s/ Allen H. Alley
    
    Chairman of the Board,
    
    March 13, 2006Allen H. Alley
    
    President andChief Executive Officer/s/ Michael D. Yonker

Michael D. Yonker
    
    Vice President, Chief
Financial Officer, Treasurer
    
    March 13, 2006and Secretary/s/ Mark Christensen
Mark Christensen
    
    Director
    
    March 13, 2006/s/ C. Scott Gibson

C. Scott Gibson
    
    Director
    
    March 13, 2006/s/ Frank Gill
Frank Gill
    
    Director
    
    March 13, 2006/s/ Bruce Walicek
Bruce Walicek
    
    Director
    
    March 13, 2006
 89