##### Table of Contents





UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
  FORM 10-K
  [ x ]

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
    SECURITIES
    EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2007or[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
    SECURITIES
    EXCHANGE ACT OF 1934For the transition period from
    to   000-30269
  PIXELWORKS, INC.
   Oregon
    (State or other jurisdiction of
    incorporation or organization)

91-1761992
    (I.R.S. Employer Identification No.)   8100 SW Nyberg Road, Tualatin, OR

97062

(503) 454-1750(Address of principal executive offices)

(Zip code)

(Registrants telephone number,
    including area code)          X
    X
    X
  Regulation S-K Form 10-K Form 10-K.
  Rule 12b-2
  Large accelerated filer

Accelerated filerX

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

Smaller reporting
    Company   Rule 12b-2
  X
      Documents
    Incorporated by Reference
  Form 10-K.




---



##### 





PIXELWORKS,
    INC.FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2007
   TABLE OF
    CONTENTS
   
 PART IItem 1.


Business.


3Item 1A.


Risk Factors.


12Item 1B.


Unresolved Staff Comments.


28Item 2.


Properties.


29Item 3.


Legal Proceedings.


29Item 4.


Submission of Matters to a Vote of Security
    Holders.


29PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities.


30Item 6.


Selected Financial Data.


33Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operation.


34Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk.


46Item 8.


Financial Statements and Supplementary
    Data.


46Item 9.


Changes in and Disagreements With Accountants
    on Accounting and Financial Disclosure.


75Item 9A.


Controls and Procedures.


75Item 9B.


Other Information.


77PART IIIItem 10.


Director, Executive Officers and Corporate
    Governance.


77Item 11.


Executive Compensation.


77Item 12.


Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters.


77Item 13.


Certain Relationships and Related
    Transactions, and Director Independence.


77Item 14.


Principal Accounting Fees and Services.


77PART IVItem 15.


Exhibits, Financial Statement
    Schedules.


77SIGNATURESEXHIBIT 10.19EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   2




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Forward-looking
    Statements
  This Annual Report on
    Form 10-K,
    including the Managements Discussion and Analysis of
    Financial Condition and Results of Operation in Part II,
    Item 7, contains forward-looking statements
    that are based on current expectations, estimates, beliefs,
    assumptions and projections about our business. Words such as
    expects, anticipates,
    intends, plans, believes,
    seeks, estimates and variations of such
    words and similar expressions are intended to identify such
    forward-looking statements. These statements are not guarantees
    of future performance and involve certain risks and
    uncertainties that are difficult to predict. Actual outcomes and
    results may differ materially from what is expressed or
    forecasted in such forward-looking statements due to numerous
    factors. Such factors include, but are not limited to, increased
    competition, adverse economic conditions in the U.S. and
    internationally, including adverse economic conditions in the
    specific markets for our products, adverse business conditions,
    failure to design, develop and manufacture new products, lack of
    success in technological advancements, lack of acceptance of new
    products, unexpected changes in the demand for our products and
    services, the inability to successfully manage inventory pricing
    pressures, failure to reduce costs or improve operating
    efficiencies, changes to and compliance with international laws
    and regulations, currency fluctuations, our ability to attract,
    hire and retain key and qualified employees, and other risks
    identified in the risk factors contained in Part I,
    Item 1A of this Annual Report on
    Form 10-K.
    These forward-looking statements speak only as of the date on
    which they are made, and we do not undertake any obligation to
    update any forward-looking statement to reflect events or
    circumstances after the date of this Annual Report on
    Form 10-K.
    If we do update or correct one or more forward-looking
    statements, you should not conclude that we will make additional
    updates or corrections with respect thereto or with respect to
    other forward-looking statements. Except where the context
    otherwise requires, in this Annual Report on
    Form 10-K,
    the Company, Pixelworks, we,
    us and our refer to Pixelworks, Inc., an
    Oregon corporation, and, where appropriate, its subsidiaries.
 PART I  Item 1.
    Business.  Overview
      system-on-chip
 3




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Digital
    Video Technology Trends
          Large-Screen
    Flat Panel Display TV Market
       4




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Multimedia
    Projector Market
           5




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Additional
    Markets
    Our
    Technologies and Products
      tm tm
  Our
    Products
    ImageProcessor
    ICs. tm tm
    Video
    Co-Processor ICs.
 6




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##### Table of Contents



Broadband Signal
    Processor ICs.
  Core
    Technologies
    Adaptive Image
    Optimization.
  Advanced Image
    Scaling and Shaping.
  Chroma Key
    Window. PC-TV picture-in-picture
  Color
    Compensation Technology.
  Digital Keystone
    Correction. ,
  DNX Motion
    Engine.
  Dynamic
    Deblocking.
  Fully
    Customizable On-Screen Display.
 7




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start-up
  Motion-Adaptive
    De-Interlacing.
  Noise
    Reduction.
  PixelAmptm side-by-side
  Customers,
    Sales and Marketing
        Distributors.
   8




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Direct
    Relationships.
    Integrators.
  Branded
    Manufacturers.
  Branded
    Suppliers.
    Seasonality
    Geographic
    Distribution of Sales
        Backlog
   9




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Competition
      i-Chips start-up
  Research
    and Development
      Manufacturing
     10




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Intellectual
    Property
          Environmental
    Matters
     11




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Employees
    Availability
    of Securities and Exchange Commission Filings
  Form 10-K, Form 10-Q, Form 8-K
  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
  If we
    are delisted from the NASDAQ Global Market, there may not be a
    market for our common stock, causing a decrease in the value of
    an investment in us and adversely affecting our business,
    financial condition and results of operations.
   12




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Our
    new product strategy, which is targeted at markets demanding
    superior video and image quality, may not significantly lead to
    increased revenue or gross profit in a timely manner or at all,
    which could materially adversely affect our results of
    operations.
  system-on-chip
    We may
    not realize the anticipated benefits from the restructuring
    efforts announced in 2006 and implemented throughout 2007 and we
    may need to initiate additional restructuring efforts in the
    future.
      We
    have incurred substantial indebtedness as a result of the sale
    of convertible debentures.
     13




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If we
    do not achieve additional design wins in the future, our ability
    to grow will be seriously limited. Even if we achieve additional
    design wins in the future, we may not realize significant
    revenue from the design wins.
      We may
    not be able to respond to the rapid technological changes in the
    markets in which we compete, or seek to compete, or we may not
    be able to comply with industry standards in the future, making
    our products less desirable or obsolete.
   14




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Because
    of the complex nature of our semiconductor designs and
    associated manufacturing processes 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 revenue.
    
    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 new products.    Because
    of our long product development process and sales cycles, we may
    incur substantial costs before we earn associated revenues and
    may not ultimately sell as many units of our products as we
    originally anticipated.
       15




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The
    year ended December 31, 2004 was our only year of
    profitability since inception and we may be unable to achieve
    profitability in future periods.
    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.
    
    demand for multimedia projectors and advanced televisions;
    demand and timing of orders for our products;
    the deferral of customer orders in anticipation of new products
    or product enhancements from us or our competitors;
    the deferral of or reduction in customer orders due to a
    reduction in our end customers demand;
    the loss of one or more of our key distributors or customers;
    changes in the available production capacity at the
    semiconductor fabrication foundries that manufacture our
    products;
    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 pricing or distribution
    channels; and
    general economic conditions and economic conditions specific to
    the advanced display and semiconductor markets.    Our
    products are characterized by average selling prices that
    decline over relatively short periods of time, which will
    negatively affect financial results unless we are able to reduce
    our product costs or introduce new products with higher average
    selling prices.
   16




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Failure
    to manage any future expansion efforts effectively could
    adversely affect our business and results of
    operations.
    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.
   17




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Our
    dependence on selling to distributors and integrators increases
    the complexity of managing our supply chain and may result in
    excess inventory or inventory shortages.
    A
    significant amount of our revenue comes from a limited number of
    customers and distributors. Any decrease in revenue from, or
    loss of, any of these customers or distributors could
    significantly reduce our revenue.
    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.
    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.
  product-by-by-product
 18




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Our
    limited ability to protect our IP and proprietary rights could
    harm our competitive position by allowing our competitors to
    access our proprietary technology and to introduce similar
    products.
      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 IP;
    attempt to obtain a license to the relevant IP, which may not be
    available on reasonable terms or at all;
    attempt to redesign those products that contain the allegedly
    infringing IP; or
    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.    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.
   19




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If we
    have to qualify a new foundry or packaging, assembly and testing
    supplier for any of our products, we may experience delays that
    result in lost revenue and damaged customer
    relationships.
    Manufacturers
    of our semiconductor products periodically discontinue
    manufacturing processes, which could make our products
    unavailable from our current suppliers.
    We are
    dependent on our foundries to implement complex semiconductor
    technologies and our operations could be adversely affected if
    those technologies are unavailable, delayed or inefficiently
    implemented.
   20




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Our
    highly integrated products and high-speed mixed signal products
    are difficult to manufacture without defects and the existence
    of defects could result in increased costs, delays in the
    availability of our products, reduced sales of products or
    claims against us.
          We use
    a customer owned tooling process for manufacturing many of our
    products which exposes us to the possibility of poor yields and
    unacceptably high product costs.
    Shortages
    of materials used in the manufacturing of our products may
    increase our costs or limit our revenue and impair our ability
    to ship our products on time.
    Shortages
    of other key components for our customers products could
    delay our ability to sell our products.
    Integration
    of software with our products adds complexity and cost that may
    affect our ability to achieve design wins and may affect our
    profitability.
   21




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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.
    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 due to varying time zones, languages and
    business customs;
    foreign currency exchange fluctuations in the currencies of
    Japan, the Peoples Republic of China (PRC),
    Taiwan or Korea that could result in an increase in our
    operating expenses and cost of procuring our semiconductors;
    potentially adverse tax consequences;
    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, or Korea;
    reduced or limited protection of our IP, 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;
    increased risk of internal control weaknesses for key processes
    transferred to our Asian operations;
    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
    and Korea 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 outstanding accounts receivable
    balances. 22




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Our
    presence and investment within the Peoples Republic of
    China subjects us to risks of economic and political instability
    in the area, which could adversely impact our results of
    operations.
    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.
  and/or
  Decreased
    effectiveness of share-based payment awards could adversely
    affect our ability to attract and retain employees, officers and
    directors.
  Share-Based Payment
  We may
    be unable to successfully integrate any future acquisition or
    equity investment we make, which could disrupt our business and
    severely harm our financial condition.
   23




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
    issuance of stock that dilutes current shareholders
    percentage ownership;
    incurrence of debt;
    assumption of liabilities;
    amortization expenses related to acquired intangible assets;
    impairment of goodwill;
    large and immediate write-offs; or
    decreases in cash and marketable securities 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.   24




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Environmental
    laws and regulations have caused us to incur, and may cause us
    to continue to incur, significant expenditures to comply with
    applicable laws and regulations, or to incur significant
    penalties for noncompliance.
    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.
    Intense
    competition in our markets may reduce sales of our products,
    reduce our market share, decrease our gross profit and result in
    large losses.
   25




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i-Chips start-up
    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.
    The
    cyclical nature of the semiconductor industry may lead to
    significant variances in the demand for our products and could
    harm our operations.
   26




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Other
    Risks
  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 to the adoption of
    SFAS 123R on January 1, 2006, which requires the
    expensing of stock options;
    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;
    inconsistent trading volume levels of our common stock; and
    additional future communications from NASDAQ concerning
    delisting or potential delisting.    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 change the size of the board. Our articles of
    incorporation provide that if the board is increased to eight or
    more members, the board will be 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; 27




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
    members of our board of directors can only be removed for cause
    and at a meeting of shareholders called expressly for that
    purpose, by the vote of 75 percent of the votes then
    entitled to be cast for the election of directors;
    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.  We may
    be unable to meet our future capital requirements, which would
    limit our ability to grow.
        Continued
    compliance with new regulatory and accounting requirements will
    be challenging and will require significant
    resources.
    Item 1B.
    Unresolved
    Staff Comments.   28




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Item 2.
    Properties.    Total Square

Square Feet

Square Feet

Lease

SubleaseLocation

Function(s)

Feet Leased

Utilized

Subleased

Expiration

ExpirationOregon

Administration


55,000



14,000



3,000


February 2009

February 2009California

Administration;


37,000



23,000



14,000


May 2013

May 2010engineeringWashington

None; fully


10,000







10,000


October 2011

Various datessubleased















through
    October 2011Canada

Engineering


12,000



7,000



5,000


August 2008

August 2008China

Engineering; sales;


46,000



46,000






November 2009

customer supportTaiwan

Customer support;


28,000



28,000






Various dates

sales; operations













through August 2009Japan

Sales; customer


4,000



4,000






January 2009

support   Item 3.
    Legal
    Proceedings.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   29




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    for Registrants Common Equity and Related Stockholder
    Matters
    Fiscal 2007

High


LowFourth Quarter

$
1.33


$
0.75Third Quarter


1.89



0.81Second Quarter


1.76



1.32First Quarter


2.48



1.56   Fiscal 2006

High


LowFourth Quarter

$
3.26


$
2.10Third Quarter


3.04



2.00Second Quarter


5.05



2.40First Quarter


6.42



4.36       Securities
    Authorized for Issuance Under Equity Compensation
    Plans
  Form 10-K Form 10-K.
 30




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Issuer
    Purchases of Equity Securities
    Total number


Approximateof shares


dollar value ofpurchased as


shares thatpart of


may yet bepublicly


purchasedTotal number





announced


under theof shares


Average price


plans or


plans orPeriod

purchased(1)


paid per share


programs


programsOctober 1, 2007  October 31, 2007


2,587,800


$
1.20



2,587,800


$
6,898November 1, 2007  November 30, 2007


771,700



1.01



771,700



6,116December 1, 2007  December 31, 2007


423,000



0.91



423,000



5,731Total


3,782,500


$
1.13



3,782,500   (1)
 31




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Performance
    Graph
  The Performance Graph is being furnish and shall not be
    deemed to be filed for purposes of Section 18
    of the Securities Exchange Act of 1934, as amended (the
    Exchange Act), or otherwise subject to the liability
    of that section, nor shall the Performance Graph be deemed to be
    incorporated by reference in any registration statement or other
    document filed under the Securities Act of 1933, as amended, or
    the Exchange Act, except as otherwise stated in such filing.
    COMPARISON
    OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
    PIXELWORKS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND
    THE
    NASDAQ ELECTRONICS COMPONENTS INDEX
  
 32




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Item 6.
    Selected
    Financial Data.      Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except per share data)Revenue, net

$
105,980


$
133,607


$
171,704


$
176,211


$
140,921Cost of revenue


59,273



107,506



108,748



90,991



78,674Gross profit


46,707



26,101



62,956



85,220



62,247Operating expenses:Research and development


38,792



57,019



51,814



32,969



29,580Selling, general and administrative


25,437



35,053



30,616



23,736



20,797Restructuring


13,285



13,316



1,162







5,049Amortization of acquired intangible assets


359



602



1,084



486



486Impairment loss on goodwill






133,739











Impairment loss on acquired intangible assets






1,753











Merger-related expenses


















8,949Total operating expenses


77,873



241,482



84,676



57,191



64,861Income (loss) from operations


(31,166
)


(215,381
)


(21,720
)


28,029



(2,614
)Interest and other income, net


2,483



10,254



1,532



1,742



1,177Income (loss) before income taxes


(28,683
)


(205,127
)


(20,188
)


29,771



(1,437
)Provision (benefit) for income taxes


2,237



(949
)


22,422



7,990



(907
)Net income (loss)

$
(30,920
)

$
(204,178
)

$
(42,610
)

$
21,781


$
(530
)Net income (loss) per share:Basic

$
(0.64
)

$
(4.23
)

$
(0.90
)

$
0.47


$
(0.01
)Diluted

$
(0.64
)

$
(4.23
)

$
(0.90
)

$
0.45


$
(0.01
)Weighted average shares outstanding:Basic


48,208



48,289



47,337



46,673



45,337Diluted


48,208



48,289



47,337



52,062



45,337  33




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##### Table of Contents



December 31,2007


2006


2005


2004


2003(In thousands)Cash and cash equivalents

$
74,572


$
63,095


$
68,604


$
32,585


$
16,490Working capital


112,360



108,169



139,291



209,653



91,681Total assets


161,916



207,771



421,556



423,569



233,317Long-term liabilities, net of current portion


151,871



147,414



163,357



150,365



100Total shareholders equity (deficit)


(8,027
)


21,948



215,217



252,023



220,305   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation.  Overview
      system-on-chip
     34




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Factors
    Affecting Results of Operations and Financial
    Condition
  Restructuring
    Plans
      reduction-in-force
  Goodwill
    and Intangible Asset Impairments
   35




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Results
    of Operations
  Year ended December 31, 2007 compared with year ended
    December 31, 2006, and year ended December 31, 2006
    compared with year ended December 31, 2005.
  Revenue,
    net
    2007 v. 2006


2006 v. 2005Year ended December 31,





%





%2007


2006


2005


$ change


change


$ change


changeMultimedia projector

$
58,674


$
59,236


$
53,247


$
(562
)


(1
)%

$
5,989



11
%Advanced television


19,827



43,221



88,696



(23,394
)


(54
)


(45,475
)


(51
)Advanced media processor


16,098



18,135



13,254



(2,037
)


(11
)


4,881



37LCD monitor, panel and other


11,381



13,015



16,507



(1,634
)


(13
)


(3,492
)


(21
)Total revenue

$
105,980


$
133,607


$
171,704


$
(27,627
)


(21
)%

$
(38,097
)


(22
)%     Multimedia
    Projector
    Advanced
    Television
      Advanced
    Media Processor
   36




---



##### Table of Contents



LCD
    Monitor, Panel and Other
    Cost of revenue and gross profit
    Year ended December 31,% of





% of





% of2007


revenue


2006


revenue


2005


revenueDirect product costs and related overhead
    1

$
56,183



53
%

$
75,182



56
%

$
98,549



57
%Provision for obsolete inventory, net of usage










4,554



3



(193
)


0Amortization of acquired intangible assets


2,820



3



4,087



3



5,115



3Restructuring


172



0



2,119



2







Stock-based compensation


98



0



208



0



60



0Impairment loss on acquired developed technology










21,330



16







Amortization of acquired inventory markup










26



0



5,217



3Total cost of revenue

$
59,273



56
%

$
107,506



80
%

$
108,748



63
%Gross profit

$
46,707



44
%

$
26,101



20
%

$
62,956



37
%   1 Includes purchased materials, assembly, test, labor, employee
    benefits, warranty expense and royalties.
      Research
    and development
    2007 v. 2006


2006 v. 2005Year ended December 31,





%





%2007


2006


2005


$ change


change


$ change


changeResearch and development
    1

$
38,792


$
57,019


$
51,814


$
(18,227
)


(32
)%

$
5,205



10
%1
    Includes stock-based compensation expense of:


2,320



3,884



758    37




---



##### Table of Contents




    Compensation expense decreased $6.4 million. At
    December 31, 2007, we had 146 research and development
    employees compared to 254 at December 31, 2006.
    Development-related expenses, including non-recurring
    engineering and outside services, decreased $4.7 million.
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased
    $2.5 million.
    Facilities and information technology expense allocations
    decreased $1.9 million, primarily due to lower rent expense.
    Stock-based compensation expense decreased $1.6 million.
    Travel and related expenses decreased $730,000.    
    Depreciation and amortization expense increased
    $3.2 million due to increased licensed technology and
    software asset purchases made at the end of 2005.
    Stock-based compensation expense increased $3.1 million as
    a result of our adoption of Statement of Financial Accounting
    Standards No. (SFAS) 123R, Share-Based Payment(SFAS 123R) on January 1, 2006.
    Facilities and information technology allocations increased
    $692,000. This increase was driven by increases in depreciation
    and amortization expense, outside services, and telephone and
    other communications charges.
    Compensation expense decreased $2.3 million. While the
    number of research and development employees was consistent at
    254 at December 31, 2006 and 2005, the restructuring plans
    that we initiated in April and November 2006 shifted research
    and development personnel to lower-cost locations in Asia from
    higher-cost locations in North America.
    Development-related expenses, including non-recurring
    engineering and outside services, decreased $456,000 due to the
    timing of projects in process.  Selling,
    general and administrative
    2007 v. 2006


2006 v. 2005Year ended December 31,





%





%2007


2006


2005


$ change


change


$ change


changeSelling, general and administrative
    1

$
25,437


$
35,053


$
30,616


$
(9,616
)


(27
)%

$
4,437



14
%1
    Includes stock-based compensation expense of:


3,527



5,464



307    38




---



##### Table of Contents




    Compensation expense decreased $3.6 million. As of
    December 31, 2007, we had 69 employees in selling,
    general and administrative functions, compared to 150 as of
    December 31, 2006.
    Stock-based compensation expense decreased $1.9 million.
    Facilities and information technology allocations decreased
    $727,000.
    Travel and related expenses decreased $592,000.
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased $442,000.
    Professional service fees, including accounting and legal,
    decreased $376,000.    
    Stock-based compensation expense increased $5.2 million as
    a result of our adoption of SFAS 123R on January 1,
    2006.
    Compensation expense increased $342,000. While selling, general
    and administrative headcount decreased from 172 at
    December 31, 2005 to 150 at December 31, 2006, average
    headcount was relatively consistent at 159 in 2006 and 164 in
    2005.
    Sales commission expense decreased $1.3 million due to
    lower revenue in 2006 compared to 2005.  Restructuring
    Year ended December 31,2007


2006


2005Termination and retention benefits
    1

$
5,420


$
2,781


$
1,162Net write off of assets and reversal of related liabilities
    2


3,905



11,618



Contract termination fee
    3


1,693







Consolidation of leased space
    4


1,524



1,036



Payments, non-cancelable contracts
    5


827







Other


88







Total restructuring expenses

$
13,457


$
15,435


$
1,162Included in cost of sales

$
172


$
2,119


$
Included in operating expenses


13,285



13,316



1,162   1
    
    Termination and retention benefits related to our restructuring
    plans during the years ended December 31, 2007 and 2006
    included severance payments and retention payments for
    terminated employees and retention payments for certain
    continuing employees. Benefits recorded during the year ended
    December 31, 2005 consisted of severance payments for
    terminated employees.2
    
    During the year ended December 31, 2007 we wrote off assets
    with a net book value of $6.9 million as a result of our
    restructuring plans. These assets consisted primarily of
    engineering software tools which we are no longer using due to
    the reductions in research and development personnel and changes
    in product development strategy. We also reversed accrued
    liabilities in the amount of $3.0 million related to the
    write off of the engineering software tools. 39




---



##### Table of Contents



During the year ended December 31, 2006 we wrote off assets
    with a net book value of $11.6 million as a result of our
    restructuring plans. These assets consisted primarily of
    licensed technology and tooling.3
    
    We paid a contract termination fee of $1.7 million during
    the year ended December 31, 2007 to cancel a software
    license agreement prior to its expiration.4
    
    Expenses related to the consolidation of leased space included
    future non-cancelable rent payments due for vacated space (net
    of estimated sublease income) and moving expenses.5
    
    Non-cancelable contract payments consist of amounts that we were
    obligated to pay, but for which we will not realize a benefit
    due to the restructuring plans.  Amortization
    of acquired intangible assets
    Year ended December 31,2007


2006


2005Amortization of acquired intangible assets

$
359


$
602


$
1,084     Interest
    and other income, net
    Year ended December 31,


$ change2007


2006


2005


2007 v. 2006


2006 v. 2005Interest income
    1

$
5,786


$
5,833


$
5,658


$
(47
)

$
175Interest expense
    2


(2,642
)


(2,721
)


(2,637
)


79



(84
)Amortization of debt issuance costs
    3


(661
)


(667
)


(710
)


6



43Settlement proceeds, net
    4






4,800







(4,800
)


4,800Gain on repurchase of long-term debt, net
    5






3,009







(3,009
)


3,009Realized loss on sale of marketable securities, net
    6










(779
)






779Total interest and other income, net

$
2,483


$
10,254


$
1,532


$
(7,771
)

$
8,722   1
    
    Interest income is earned on cash equivalents and short- and
    long-term marketable securities.2
    
    Interest expense primarily relates to interest payable on our
    long-term debt.3
    
    The fees associated with the issuance of our long-term debt have
    been capitalized and are being amortized over a period of seven
    years. The remaining amortization period is approximately three
    years as of December 31, 2007.4
    
    During the fourth quarter of 2006, our claim against funds
    placed in escrow in connection with the Equator acquisition was
    settled. In the settlement, we received proceeds of
    $4.8 million net of legal fees.5
    
    In February 2006, we repurchased and retired $10.0 million
    of our outstanding debt for $6.8 million cash. We
    recognized a gain on this repurchase of $3.0 million net of
    a write off of debt issuance costs of $191,000.6
    
    During the second quarter of 2005, we realized a loss on the
    sale of marketable securities of $779,000. The proceeds from the
    sale of these securities were used to fund the acquisition of
    Equator. 40




---



##### Table of Contents



Provision
    (benefit) for income taxes
    Year ended December 31,2007

2006

2005Provision (benefit) for income taxes

$
2,237


$
(949
)

$
22,422             Business Outlook
  Form 8-K.
    
    First quarter revenue of $22.0 million to
    $24.0 million.
    Gross profit margin of approximately 46.5% to 49.5%.
    Operating expenses of $12.4 million to $13.4 million.
    Interest and other income, net of approximately $450,000.
    Tax provision of approximately $0. 41




---



##### Table of Contents



Liquidity
    and Capital Resources
  Cash and
    short- and long-term marketable securities
    2007 v. 2006


2006 v. 2005December 31,





%





%2007


2006


2005


$ change


change


$ change


changeCash and cash equivalents

$
74,572


$
63,095


$
68,604


$
11,477



18
%

$
(5,509
)


(8
)%Short-term marketable securities


34,581



53,985



59,888



(19,404
)


(36
)


(5,903
)


(10
)Long-term marketable securities


9,804



17,504



17,145



(7,700
)


(44
)


359



2Total cash and marketable securities

$
118,957


$
134,584


$
145,637


$
(15,627
)


(12
)%

$
(11,053
)


(8
)%           Accounts
    receivable, net
    Inventories,
    net
    Capital
    resources
   42




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
      Revenue Recognition. Revenue Recognition
  Sales Returns and Allowances. case-by-case
     43




---



##### 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
  Stock-Based Compensation.
  Income Taxes. Accounting for
    Uncertainty in Income Taxes an Interpretation
    of FASB Statement 109
 44




---



##### Table of Contents



Contractual
    Payment Obligations
    Payments Due By PeriodLess than 1








More than 5Contractual Obligation

Total


year


1-3 years


3-5 years


yearsLong-term debt
    1

$
140,000


$



$



$
140,000


$
Interest on long-term debt


8,575



2,450



4,900



1,225



Operating leases
    2


8,171



3,230



2,499



2,050



392Payments on accrued balances related to asset purchases


4,150



4,150











Estimated Q1 2008 purchase commitments to contract manufacturers


9,591



9,591











   1
    
    The earliest date on which the remaining holders of our 1.75%
    convertible subordinated debentures due 2024 have the right to
    require us to purchase all or a portion of the outstanding
    debentures is May 15, 2011. We expect holders of the
    debentures to require us to purchase all of the outstanding
    debentures on that date.2
    
    The operating lease payments above are net of sublease rental
    income of $644,000, $424,000, $194,000 and $49,000 for the years
    ending December 31, 2008, 2009, 2010 and 2011 respectively.  Off-Balance
    Sheet Arrangements
    Recent
    Accounting Pronouncements
  Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
    Services Received for Use in Future Research and Development
    Activities (EITF 07-3), EITF 07-3 EITF 07-3
  Business Combinations Business Combinations
 45




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
      Foreign
    Currency Exchange Rate Risk
    Item 8.
    Financial
    Statements and Supplementary Data.    Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2007 and 2006Consolidated Statements of Operations for the years ended
    December 31, 2007, 2006 and 2005Consolidated Statements of Cash Flows for the years ended
    December 31, 2007, 2006 and 2005Consolidated Statements of Shareholders Equity (Deficit)
    and Comprehensive Loss for the years ended December 31,
    2007, 2006 and 2005Notes to Consolidated Financial Statements  46




---



##### 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)
        47




---



##### Table of Contents



PIXELWORKS,
    INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands, except share data)
  December 31,2007


2006ASSETSCurrent assets:Cash and cash equivalents

$
74,572


$
63,095Short-term marketable securities


34,581



53,985Accounts receivable, net


6,223



9,315Inventories, net


11,265



13,809Prepaid expenses and other current assets


3,791



6,374Total current assets


130,432



146,578Long-term marketable securities


9,804



17,504Property and equipment, net


6,148



21,931Other assets, net


6,902



9,287Debt issuance costs, net


2,260



2,922Acquired intangible assets, net


6,370



9,549Total assets

$
161,916


$
207,771LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
3,992


$
8,093Accrued liabilities and current portion of long-term liabilities


13,848



19,319Current portion of income taxes payable


232



10,997Total current liabilities


18,072



38,409Long-term liabilities, net of current portion


1,236



7,414Income taxes payable, net of current portion


10,635



Long-term debt


140,000



140,000Total liabilities


169,943



185,823Commitments and contingenciesShareholders equity (deficit):Preferred stock, $0.001 par value; 50,000,000 shares
    authorized, 1 share issued and issued and outstanding as of
    December 31, 2007 and 2006






Common stock, $0.001 par value; 250,000,000 shares
    authorized, 45,315,061 and 48,613,826 shares issued and
    outstanding as of December 31, 2007 and 2006, respectively


333,934



331,567Exchangeable shares; 1,731,099 shares issued, 12,028 and
    47,635 shares outstanding as of December 31, 2007 and
    2006, respectively


113



450Accumulated other comprehensive loss


(4,778
)


(3,693
)Accumulated deficit


(337,296
)


(306,376
)Total shareholders equity (deficit)


(8,027
)


21,948Total liabilities and shareholders equity

$
161,916


$
207,771    48




---



##### Table of Contents



PIXELWORKS,
    INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands, except per share data)
  Year Ended December 31,2007


2006


2005Revenue, net

$
105,980


$
133,607


$
171,704Cost of revenue(1)


59,273



107,506



108,748Gross profit


46,707



26,101



62,956Operating expenses:Research and development(2)


38,792



57,019



51,814Selling, general and administrative(3)


25,437



35,053



30,616Restructuring


13,285



13,316



1,162Amortization of acquired intangible assets


359



602



1,084Impairment loss on goodwill






133,739



Impairment loss on acquired intangible assets






1,753



Total operating expenses


77,873



241,482



84,676Loss from operations


(31,166
)


(215,381
)


(21,720
)Interest income


5,786



5,833



5,658Interest expense


(2,642
)


(2,721
)


(2,637
)Amortization of debt issuance costs


(661
)


(667
)


(710
)Settlement proceeds, net






4,800



Gain on repurchase of long-term debt, net






3,009



Realized loss on sale of marketable securities










(779
)Interest and other income, net


2,483



10,254



1,532Loss before income taxes


(28,683
)


(205,127
)


(20,188
)Provision (benefit) for income taxes


2,237



(949
)


22,422Net loss

$
(30,920
)

$
(204,178
)

$
(42,610
)Net loss per share  basic and diluted

$
(0.64
)

$
(4.23
)

$
(0.90
)Weighted average shares outstanding  basic and diluted


48,208



48,289



47,337(1) Includes:Amortization of acquired developed technology

$
2,820


$
4,087


$
4,515Restructuring


172



2,119



Stock-based compensation


98



208



60Impairment loss on acquired developed technology






21,330



Amortization of acquired inventory
    mark-up






26



5,217Amortization of acquired backlog










600(2) Includes stock-based compensation


2,320



3,884



758(3) Includes stock-based compensation


3,527



5,464



307    49




---



##### Table of Contents



PIXELWORKS,
    INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (In thousands)
  Year Ended December 31,2007


2006


2005Cash flows from operating activities:Net loss

$
(30,920
)

$
(204,178
)

$
(42,610
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Depreciation and amortization


13,999



17,667



13,469Stock-based compensation


5,945



9,556



1,125Amortization of acquired intangible assets


3,179



4,689



6,199Net write off of assets and reversal of related liabilities due
    to restructuring


3,905



11,618



Amortization of debt issuance costs


661



667



710Deferred income tax expense (benefit)


512



(967
)


13,636Accretion on short- and long-term marketable securities


(583
)


(246
)


(186
)Loss on asset disposals


210



90



180Other


55



100



150Impairment losses on goodwill and acquired intangible assets






156,822



Gain on repurchase of long-term debt, net






(3,009
)


Income tax benefit from stock options










1,421Realized loss on sale of marketable securities










779Changes in operating assets and liabilities, net of effects of
    acquisition:Accounts receivable, net


3,092



10,612



(858
)Inventories, net


2,544



12,768



2,806Prepaid expenses and other current and long-term assets


3,300



842



(2,340
)Accounts payable


(4,101
)


(2,742
)


2,581Accrued current and long-term liabilities


(2,995
)


1,041



(3,828
)Income taxes payable


(130
)


1,490



7,114Net cash provided by (used in) operating activities


(1,327
)


16,820



348Cash flows from investing activities:Proceeds from sales and maturities of available-for-sale
    marketable securities


79,482



47,647



263,375Proceeds from sales and maturities of held-to-maturity
    marketable securities










54,928Purchases of available-for-sale marketable securities


(52,885
)


(42,044
)


(123,922
)Purchases of held-to-maturities marketable securities










(36,345
)Acquisition of Equator Technologies, Inc., net of cash acquired










(104,736
)Payments on equipment and other asset financing


(6,715
)


(17,178
)


(9,825
)Purchases of property and equipment


(2,886
)


(5,255
)


(7,915
)Purchases of other assets


(303
)


(278
)


(1,929
)Proceeds from sales of property and equipment


26



36



61Net cash provided by (used in) investing activities


16,719



(17,072
)


33,692Cash flows from financing activities:Repurchase of common stock


(4,269
)






Proceeds from issuances of common stock


354



1,543



1,986Repurchase of long-term debt






(6,800
)


Debt issuance costs










(7
)Net cash provided by (used in) financing activities


(3,915
)


(5,257
)


1,979Net change in cash and cash equivalents


11,477



(5,509
)


36,019Cash and cash equivalents, beginning of year


63,095



68,604



32,585Cash and cash equivalents, end of year

$
74,572


$
63,095


$
68,604    50




---



##### Table of Contents






PIXELWORKS,
    INC.
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
    AND COMPREHENSIVE LOSS
    (In thousands, except share data)
  Accumulated











TotalOther





Deferred





ShareholdersCommon Stock


Exchangeable Shares


Comprehensive


Comprehensive


Stock-based


Accumulated


EquityShares


Amount


Shares


Amount


Loss


Loss


Compensation


Deficit


(Deficit)Balance as of 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
    associated tax benefits


805,573



2,595



























2,595Fair value of options assumed in Equator Technologies, Inc.
    acquisition and associated deferred stock-based compensation






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 into 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 as of December 31, 2005


47,168,311



316,257



574,467



5,434



(3,503
)






(773
)


(102,198
)


215,217Stock issued under stock option and stock purchase plans


918,683



1,543



























1,543Conversion of exchangeable shares into common stock


526,832



4,984



(526,832
)


(4,984
)


















Initial adjustment to adopt SFAS 123R






(773
)


















773







Stock-based compensation expense






9,556



























9,556Net loss





















$
(204,178
)






(204,178
)


(204,178
)Unrealized loss on available-for-sale securities, net of tax of
    $0


















(142
)


(142
)










(142
)Initial adjustment to adopt SFAS 158, net of tax of $16


















(48
)


(48
)










(48
)Comprehensive loss





















$
(204,368
)Balance as of December 31, 2006


48,613,826



331,567



47,635



450



(3,693
)










(306,376
)


21,948Stock issued under stock option and stock purchase plans


448,128



354



























354Repurchase of common stock


(3,782,500
)


(4,269
)


























(4,269
)Conversion of exchangeable shares into common stock


35,607



337



(35,607
)


(337
)


















Stock-based compensation expense






5,945



























5,945Net loss





















$
(30,920
)






(30,920
)


(30,920
)Unrealized loss on available-for-sale securities, net of tax of
    $0


















(1,090
)


(1,090
)










(1,090
)Pension adjustment, net of tax of $2


















5



5











5Comprehensive loss





















$
(32,005
)Balance as of December 31, 2007


45,315,061


$
333,934



12,028


$
113


$
(4,778
)





$



$
(337,296
)

$
(8,027
)    51




---



##### 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
    Marketable
    Securities
  Accounting
    for Certain Investments in Debt and Equity Securities
 52




---



##### Table of Contents



Accounts
    Receivable
      Inventories
  work-in-process, first-in,
  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 ,
    Acquired
    Intangible Assets
     53




---



##### Table of Contents



Licensed
    Technology
    Goodwill
  Goodwill and Other Intangible Assets.
  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.  case-by-case
      Warranty
    Program
   54




---



##### Table of Contents



Stock-Based
    Compensation
  Share-Based Payment
    Accounting for Stock Issued to
    Employees Accounting for Stock-Based Compensation Accounting for
    Stock Appreciation Rights and Other Variable Stock Option or
    Award Plans
    Year EndedDecember 31,2005Net loss as reported

$
(42,610
)Add: Stock-based compensation included in reported 
    net loss, net of related tax effects


1,125Deduct: Stock-based compensation determined under 
    the fair value based method, net of related tax effects


(14,913
)Pro-forma net loss

$
(56,398
)Reported net loss per share  basic and diluted

$
(0.90
)Pro-forma net loss per share  basic and diluted

$
(1.19
)   Research
    and Development
    Income
    Taxes
   55




---



##### Table of Contents



Accounting for
    Income Taxes ,
  Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement 109
  Accumulated
    Other Comprehensive Loss
  Reporting Comprehensive Income
  December 31,2007


2006Accumulated net unrealized holding loss on 
    available-for-sale marketable securities

$
(4,735
)

$
(3,645
)Accumulated transition pension obligation under SFAS 158


(48
)


(48
)Actuarial gain on pension obligation


5



Accumulated other comprehensive loss

$
(4,778
)

$
(3,693
)   Leases
  Accounting for
    Leases
  Fair
    Value of Financial Instruments
    Risks and
    Uncertainties
  Concentration
    of Suppliers
   56




---



##### Table of Contents



Risk of
    Technological Change
    Concentrations
    of Credit Risk
    NOTE 3.    BALANCE SHEET
    COMPONENTS
  Short-
    and Long-Term Marketable Securities
    Unrealized


FairCost


Gain (Loss)


ValueShort-term marketable securities:As of December 31, 2007:Commercial paper

$
19,573


$
(12
)

$
19,561Foreign government debt securities


7,005



(5
)


7,000Corporate debt securities


5,581



(5
)


5,576US government agencies debt securities


2,444







2,444$
34,603


$
(22
)

$
34,581As of December 31, 2006:Auction rate securities

$
29,000


$



$
29,000US government agencies debt securities


14,630



(14
)


14,616Commercial paper


6,195



(4
)


6,191Corporate debt securities


1,984



1



1,985Foreign government debt securities


1,208



(17
)


1,191Municipal debt securities


1,002







1,002$
54,019


$
(34
)

$
53,985Long-term marketable securities:As of December 31, 2007:Equity security

$
10,000


$
(4,810
)

$
5,190US government agencies debt securities


3,541



81



3,622Corporate debt securities


976



16



992$
14,517


$
(4,713
)

$
9,804As of December 31, 2006:Equity security

$
10,000


$
(3,560
)

$
6,440US government agencies debt securities


6,026



(25
)


6,001Corporate debt securities


3,535



(18
)


3,517Foreign government debt securities


1,554



(8
)


1,546$
21,115


$
(3,611
)

$
17,504  57




---



##### Table of Contents



Accounts
    Receivable, Net
    December 31,2007


2006Accounts receivable, gross

$
6,765


$
9,515Allowance for doubtful accounts


(542
)


(200
)Accounts receivable, net

$
6,223


$
9,315     Year Ended December 31,2007


2006


2005Balance at beginning of year

$
200


$
212


$
212Provision


483







Recoveries


(141
)


(12
)


Balance at end of year

$
542


$
200


$
212   Inventories,
    Net
    December 31,2007


2006Finished goods

$
12,733


$
15,409Work-in-process


4,482



4,35017,215



19,759Reserve for slow moving and obsolete items


(5,950
)


(5,950
)Inventories, net

$
11,265


$
13,809  58




---



##### Table of Contents



Year Ended December 31,2007


2006


2005Balance at beginning of year

$
5,950


$
1,396


$
1,589Provision


4,365



6,215



1,332Usage:Scrap


(2,376
)


(1,282
)


(730
)Sales


(1,989
)


(379
)


(795
)Total usage


(4,365
)


(1,661
)


(1,525
)Balance at end of year

$
5,950


$
5,950


$
1,396     Property
    and Equipment, Net
    December 31,2007


2006Software

$
6,909


$
39,042Equipment, furniture and fixtures


6,401



18,515Tooling


1,035



5,003Leasehold improvements


2,764



3,36517,109



65,925Accumulated depreciation and amortization


(10,961
)


(43,994
)Property and equipment, net

$
6,148


$
21,931       Other
    Assets, Net
     59




---



##### Table of Contents



Acquired
    Intangible Assets, Net
    December 31,2007


2006Gross carrying amount:Developed technology

$
19,170


$
19,170Customer relationships


1,689



1,68920,859



20,859Accumulated amortization:Developed technology


(12,964
)


(10,144
)Customer relationships


(1,525
)


(1,166
)(14,489
)


(11,310
)Acquired intangible assets, net

$
6,370


$
9,549       Year ending December 31:2008

$
2,9842009


2,3362010


1,050$
6,370   Goodwill
   60




---



##### Table of Contents



Accrued
    Liabilities and Current Portion of Long-Term
    Liabilities
    December 31,2007


2006Current portion of accrued liabilities for asset financings

$
4,150


$
7,733Accrued payroll and related liabilities


3,366



4,937Accrued costs related to restructuring


2,918



1,955Reserve for warranty returns


932



662Accrued interest payable


405



399Accrued commissions and royalties


381



693Reserve for sales returns and allowances


175



479Other


1,521



2,461$
13,848


$
19,319       Year Ended December 31,2007


2006


2005Reserve for warranty returns:Balance at beginning of year

$
662


$
577


$
419Provision


1,418



990



813Charge offs


(1,148
)


(905
)


(655
)Balance at end of year

$
932


$
662


$
577Reserve for sales returns and allowances:Balance at beginning of year

$
479


$
237


$
524Provision


123



665



52Charge offs


(427
)


(423
)


(339
)Balance at end of year

$
175


$
479


$
237   Long-Term
    Liabilities, Net of Current Portion
    December 31,2007


2006Deferred rent

$
619


$
622Accrued costs related to restructuring


353



762Payroll and related liabilities


181



467Other


83



Accrued liabilities for asset financings






5,563$
1,236


$
7,414  61




---



##### Table of Contents



Long-Term
    Debt and Debt Issuance Costs
            No. 00-19, 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
 62




---



##### Table of Contents



Year Ended December 31,2007

2006

2005Stock options


5,888,680



8,612,964



8,990,140Conversion of debentures


5,748,778



5,797,716



6,159,405   NOTE 5.
    RESTRUCTURINGS      reduction-in-force
    Year Ended December 31,2007


2006


2005Cost of revenue  restructuring:Termination and retention benefits

$
172


$
47


$
Licensed technology and tooling write offs






2,072



172



2,119



Operating expenses  restructuring:Termination and retention benefits


5,248



2,734



1,162Net write off of assets and reversal of related liabilities


3,905



9,546



Contract termination fee


1,693







Consolidation of leased space


1,524



1,036



Payments, non-cancelable contracts


827







Other


88







13,285



13,316



1,162Total restructuring expense

$
13,457


$
15,435


$
1,162  63




---



##### Table of Contents



Balance as of








Balance as ofDecember 31,








December 31,2006


Expensed


Payments


2007Lease termination costs

$
1,524


$
1,524


$
(2,049
)

$
999Termination and retention benefits


1,193



5,420



(4,855
)


1,758Contract termination and other costs






2,520



(2,006
)


514Total

$
2,717


$
9,464


$
(8,910
)

$
3,271   Balance as of








Balance as ofDecember 31,








December 31,2005


Expensed


Payments


2006Lease termination costs

$



$
1,905


$
(381
)

$
1,524Termination and retention benefits






2,781



(1,588
)


1,193Total

$



$
4,686


$
(1,969
)

$
2,717   NOTE 6.
    INCOME
    TAXES  Current
    and Deferred Income Tax Expense (Benefit)
    Year Ended December 31,2007


2006


2005Domestic

$
(31,614
)

$
(206,239
)

$
(21,482
)Foreign


2,931



1,112



1,294$
(28,683
)

$
(205,127
)

$
(20,188
)  64




---



##### Table of Contents



Year Ended December 31,2007


2006


2005Current:Federal

$
55


$
(1,535
)

$
73State


6



4



260Foreign


1,664



1,549



8,453Total current


1,725



18



8,786Deferred:Federal










11,754State










1,882Foreign


512



(967
)


Total deferred


512



(967
)


13,636Income tax expense (benefit)

$
2,237


$
(949
)

$
22,422     Year Ended December 31,2007


2006


2005Change in gross deferred tax assets and liabilities

$
(6,915
)

$
(49,304
)

$
(57,359
)Deferred tax assets reducing goodwill










7,445Increase in valuation allowance for deferred tax assets


7,427



48,337



63,550Deferred income tax expense (benefit)

$
512


$
(967
)

$
13,636       Year Ended December 31,2007


2006


2005Expected income tax rate


35
%


35
%


35
%Increase (decrease) resulting from:Change in valuation allowance


(40
)


(13
)


(192
)Impairment loss on goodwill






(23
)


Research and experimentation credit


1



1



21Increase (decrease) in deferred tax rates


(1
)






13Increase in beginning balance of acquired deferred tax assets










11Foreign tax refund










3Difference between financial and tax reporting for stock option
    exercises










(2
)State income taxes, net of federal tax benefit






1



2Amortization of acquired intellectual property, assembled
    workforce and deferred tax charge










1Other


(3
)


(1
)


(3
)Actual tax expense


(8
)%



%


(111
)%  65




---



##### Table of Contents



Deferred
    Tax Assets, Liabilities and Valuation Allowance
    December 31,2007


2006Deferred tax assets:Net operating loss carryforwards

$
89,836


$
80,074Research and experimentation credit carryforwards


21,152



25,709Foreign tax credit carryforwards


9,486



8,048Deferred compensation


2,975



3,315Reserves and accrued expenses


3,734



3,124Depreciation


1,797



2,680Accrued vacation


253



570Other


2,282



2,252Total gross deferred tax assets


131,515



125,772Deferred tax liability  amortization


(2,350
)


(3,522
)Less valuation allowance


(128,304
)


(120,877
)Net deferred tax assets

$
861


$
1,373              66




---



##### Table of Contents



Uncertain
    Tax Positions
      Uncertain tax positions:Balance as of December 31, 2006

$
8,743Accrual for positions taken in a prior year


334Accrual for positions taken in current year


200Settlements


(738
)Balance as of December 31, 2007

$
8,539Interest and penalties:Balance as of December 31, 2006

$
1,747Accrual for positions taken in a prior year


451Settlements


(102
)Balance as of December 31, 2007

$
2,096        67




---



##### Table of Contents



NOTE 7.
    COMMITMENTS
    AND CONTINGENCIES  Royalties
    401(k)
    Plan
    Leases
    Year Ending December 31:2008

$
3,2302009


1,4862010


1,0132011


1,1182012


932Thereafter


392$
8,171     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
 68




---



##### Table of Contents



Legal
    Proceedings
      NOTE 8.
    SUPPLEMENTAL
    DISCLOSURE OF CASH FLOW INFORMATION    Year Ended December 31,2007


2006


2005Cash paid during the year for:Interest

$
2,618


$
2,657


$
2,638Income taxes, net of refunds received


101



123



1,691Non-cash investing and financing activities:Acquisitions of property and equipment and other assets under
    extended payment terms

$
1,818


$
5,822


$
28,820Increase in leasehold improvements and deferred rent related to
    a tenant improvement allowance received






1,002



Value of options assumed in the acquisition of Equator










8,336   NOTE 9.
    SHAREHOLDERS
    EQUITY  Preferred
    Stock
        Common
    Stock
   69




---



##### Table of Contents



Exchangeable
    Shares
    Stock
    Incentive Plans
    Stock
    Options
    WeightedaverageNumber


exerciseof shares


priceOptions outstanding as of December 31, 2004


7,525,135


$
11.63Granted


2,560,030



8.48Exchanged in acquisition


1,263,417



1.26Exercised


(608,754
)


1.05Forfeited


(1,115,023
)


10.58Expired


(461,323
)


12.73Options outstanding as of December 31, 2005


9,163,482



10.09Granted


3,130,955



3.46Exercised


(558,192
)


0.81Forfeited


(2,287,616
)


9.25Expired


(2,604,344
)


12.14Options outstanding as of December 31, 2006


6,844,285



7.32Granted


1,252,755



1.63Exercised


(72,584
)


0.51Forfeited


(1,799,096
)


4.74Expired


(1,411,572
)


9.16Options outstanding as of December 31, 2007


4,813,788


$
6.36  70




---



##### Table of Contents



Options Outstanding


Options ExercisableWeightedNumber


average


Weighted


Number


Weightedoutstanding as of


remaining


average


exercisable as of


averageRange of

December 31,


contractual


exercise


December 31,


exerciseExercise prices

2007


life


price


2007


price$ 0.07 - $ 2.00


937,448



8.44


$
1.40



204,750


$
1.052.01 -  4.00


1,203,620



7.35



2.44



586,091



2.454.01 -  6.00


487,134



7.73



4.89



184,620



4.926.01 -  8.00


778,308



5.53



7.15



675,460



7.128.01 - 10.00


700,240



6.25



9.14



528,567



9.1110.01 - 12.00


25,162



6.09



10.92



20,326



11.0012.01 - 14.00


6,533



4.54



13.40



6,533



13.4014.01 - 16.00


261,343



6.08



15.37



241,784



15.3816.01 - 23.00


414,000



3.82



18.42



411,240



18.42$ 0.07 - $23.00


4,813,788



6.76


$
6.36



2,859,371


$
8.32       WeightedaverageWeighted


remainingNumber of


average


contractual


Aggregateshares


exercise price


term


intrinsic valueVested


2,859,371


$
8.32



5.55


$
37Expected to vest


1,163,704



3.31



8.55



3Total


4,023,075


$
6.87



6.42


$
40   Restricted
    Stock Awards
   71




---



##### Table of Contents



Employee
    Stock Purchase Plan
    Stock-Based
    Compensation Expense
    Year Ended December 31,2007


2006


2005Stock Option Plans:Risk free interest rate


4.65
%


4.00
%


3.95
%Expected dividend yield


0
%


0
%


0
%Expected life (in years)


5.2



3.6



4.7Volatility


70
%


61
%


90
%Employee Stock Purchase Plan:Risk free interest rate


5.09
%


4.91
%


3.13
%Expected dividend yield


0
%


0
%


0
%Expected life (in years)


0.5



0.5



0.5Volatility


55
%


57
%


68
%         Stock
    Repurchase
   72




---



##### Table of Contents



NOTE 10.
    SEGMENT
    INFORMATION  Disclosures about Segments
    of an Enterprise and Related Information
  Geographic
    Information
    Year Ended December 31,2007


2006


2005Japan

$
60,135


$
58,958


$
56,770Taiwan


12,053



17,798



29,752Korea


8,338



12,055



15,396Europe


6,734



9,035



25,861China


6,253



18,098



23,884U.S.


4,627



5,571



6,324Canada






6,821



4,826Other


7,840



5,271



8,891$
105,980


$
133,607


$
171,704   Significant
    Customers
        December 31,2007


2006Account A


27
%


23
%Account B


21
%


10
%Account C


3
%


13
%Account D


0
%


10
%  73




---



##### Table of Contents



NOTE 11.    ACQUISITION
      NOTE 12.
    QUARTERLY
    FINANCIAL DATA (UNAUDITED)  Quarterly Period EndedMarch 31


June 30


September 30


December 312007Revenue, net

$
23,981


$
26,896


$
28,133


$
26,970Gross profit


9,853



11,602



12,108



13,144Loss from operations


(12,505
)


(7,811
)


(4,285
)


(6,565
)Loss before income taxes


(11,800
)


(7,221
)


(3,654
)


(6,008
)Net loss


(12,422
)


(7,620
)


(4,429
)


(6,449
)Net loss per share  basic and diluted


(0.25
)


(0.16
)


(0.09
)


(0.14
)2006Revenue, net

$
36,559


$
30,910


$
36,309


$
29,829Gross profit (loss)


(8,484
)


11,588



13,615



9,382Loss from operations


(36,267
)


(145,923
)


(10,705
)


(22,486
)Loss before income taxes


(32,803
)


(145,368
)


(10,017
)


(16,939
)Net loss


(33,055
)


(145,569
)


(10,104
)


(15,450
)Net loss per share  basic and diluted


(0.69
)


(3.02
)


(0.21
)


(0.32
)  74




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rule 13a-15(e)
    Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f).
  Internal Control 
    Integrated Framework,
    Changes
    in Internal Control Over Financial Reporting
  Rules 13a-15 15d-15
 75




---



##### 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).
        Internal Control  Integrated Framework issued by
    the Committee of Sponsoring Organizations of the Treadway
    Commission
    KPMG
    LLP
    76




---



##### Table of Contents



Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance.    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, and Director
    Independence.    Item 14.
    Principal
    Accounting Fees and Services.   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules.  (a) 1.    Financial
    Statements.
    Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2007 and 2006Consolidated Statements of Operations for the years ended
    December 31, 2007, 2006 and 2005Consolidated Statements of Cash Flows for the years ended
    December 31, 2007, 2006 and 2005Consolidated Statements of Shareholders Equity (Deficit)
    and Comprehensive Loss for the years ended December 31,
    2007, 2006 and 2005Notes to Consolidated Financial Statements   (a) 2.    Financial
    Statement Schedules.
   77




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##### Table of Contents



(a)
    3.    Exhibits.    ExhibitNumber

Description3
.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 on 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 on 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 on 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).+10
.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 on 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 on 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

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 on June 17, 2005).+10
.6

Pixelworks, Inc. 2006 Stock Incentive Plan (incorporated by
    reference to Exhibit 4.1 to the Companys Registration
    Statement on
    Form S-8
    filed on August 11, 2006).+10
.7

Chair and Board Service Agreement dated and effective
    December 12, 2006, by and between Allen Alley and
    Pixelworks, Inc. (incorporated by reference to Exhibit 10.9
    to the Companys Annual Report on
    Form 10-K
    filed on March 12, 2007).+10
.8

CEO Transition Agreement dated and effective December 12,
    2006, by and between Allen Alley and Pixelworks, Inc.
    (incorporated by reference to Exhibit 10.10 to the
    Companys Annual Report on
    Form 10-K
    filed on March 12, 2007).+10
.9

Transition Employment Agreement dated and effective
    December 12, 2006, by and between Hans Olsen and
    Pixelworks, Inc. (incorporated by reference to
    Exhibit 10.11 to the Companys Annual Report on
    Form 10-K
    filed on March 12, 2007).+10
.10

Severance Agreement dated and effective December 12, 2006,
    by and between Hans Olsen and Pixelworks, Inc. (incorporated by
    reference to Exhibit 10.12 to the Companys Annual
    Report on
    Form 10-K
    filed on March 12, 2007).+ 78




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##### Table of Contents



ExhibitNumber

Description10
.11

Pixelworks, Inc. 2007 Senior Management Bonus Plan (incorporated
    by reference to Exhibit 10.1 to the Companys
    Quarterly Report on
    Form 10-Q
    filed on May 10, 2007).+10
.12

Restricted Stock Award Agreement dated May 3, 2007 between
    Pixelworks, Inc. and Hans H. Olsen (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q
    filed August 9, 2007).+10
.13

Offer letter dated June 22, 2007 between Pixelworks, Inc.
    and Steven L. Moore (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q
    filed August 9, 2007).+10
.14

Severance Agreement dated June 22, 2007 between Pixelworks,
    Inc. and Steven L. Moore (incorporated by reference to
    Exhibit 10.3 to the Companys Quarterly Report on
    Form 10-Q
    filed August 9, 2007).+10
.16

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
.17

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
.18

Office Lease dated June 20, 2005 and commencing
    March 1, 2006, by and between Pixelworks, Inc. and Union
    Bank of California as Trustee for Quest Group Trust VI
    (incorporated by reference to Exhibit 10.22 to the
    Companys Annual Report on
    Form 10-K
    filed March 12, 2007).10
.19

Office Lease dated October 2, 2007 and commencing
    November 1, 2007 by and between Pixelworks, Inc. and Union
    Bank of California as Trustee for Quest Group Trust VI.10
.20

Office Lease Agreement dated December 2005, by and between
    CA-The Concourse Limited Partnership and Pixelworks, Inc.
    (incorporated by reference to Exhibit 10.42 to the
    Companys Annual Report on
    Form 10-K
    filed March 13, 2006).10
.21

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
.22

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).21


Subsidiaries of Pixelworks, Inc. (incorporated by reference to
    Exhibit 21 to the Companys Annual Report on
    Form 10-K
    filed March 13, 2006).23


Consent of KPMG LLP.31
.1

Certification of Chief Executive Officer.31
.2

Certification of Chief Financial Officer.32
.1*

Certification of Chief Executive Officer.32
.2*

Certification of Chief Financial Officer.     +
    
    Indicates a management contract or compensation arrangement.*
    
    Exhibits 32.1 and 32.2 are being furnished and shall not be
    deemed to be filed for purposes of Section 18
    of the Securities Exchange Act of 1934, as amended (the
    Exchange Act), or otherwise subject to the liability
    of that section, nor shall such exhibits be deemed to be
    incorporated by reference in any registration statement or other
    document filed under the Securities Act of 1933, as amended, or
    the Exchange Act, except as otherwise stated in such filing. 79




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##### Table of Contents



SIGNATURES      By:
    /s/  Bruce
    A. Walicek   Interim President and
 Chief Executive Officer
      Signature

Title

Date/s/  Bruce
    A. WalicekBruce
    A. Walicek

Interim President and
    Chief Executive Officer

March 12, 2008/s/  Steven
    L. MooreSteven
    L. Moore

Vice President, Chief Financial
    Officer and Secretary

March 12, 2008/s/  Allen
    H. AlleyAllen
    H. Alley

Chairman of the Board

March 12, 2008/s/  Mark
    A. ChristensenMark
    A. Christensen

Director

March 12, 2008/s/  James
    R. FiebigerJames
    R. Fiebiger

Director

March 12, 2008/s/  C.
    Scott GibsonC.
    Scott Gibson

Director

March 12, 2008/s/  Daniel
    J. HeneghanDaniel
    J. Heneghan

Director

March 12, 2008/s/  Bruce
    A. WalicekBruce
    A. Walicek

Director

March 12, 2008