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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,
    2009or[  ]

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

91-1761992(State or other jurisdiction of
    incorporation or organization)

(I.R.S. Employer Identification No.)   16760 SW Upper Boones Ferry Road, Suite 101

97224

503-601-4545(Address of principal executive offices)

(Zip Code)

(Registrants telephone number,
    including area code)    Title of each class

Name of each exchange on which
    registeredCommon Stock

NASDAQ Global Market        X
    X
    X
  Regulation S-T
  
  Regulation S-K Form 10-K Form 10-K.
    Large accelerated filer

Accelerated filer

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

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




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##### 





PIXELWORKS,
    INC.FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2009
   TABLE OF
    CONTENTS
   
 PART IItem 1.


Business.


1Item 1A.


Risk Factors.


9Item 1B.


Unresolved Staff Comments.


22Item 2.


Properties.


22Item 3.


Legal Proceedings.


23Item 4.


(Removed and Reserved).


23PART IIItem 5.


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


24Item 6.


Selected Financial Data.


26Item 7.


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


27Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk.


39Item 8.


Financial Statements and Supplementary
    Data.


40Item 9.


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


69Item 9A.


Controls and Procedures.


69Item 9B.


Other Information.


71PART IIIItem 10.


Director, Executive Officers and Corporate
    Governance.


71Item 11.


Executive Compensation.


71Item 12.


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


71Item 13.


Certain Relationships and Related
    Transactions, and Director Independence.


71Item 14.


Principal Accounting Fees and Services.


71PART IVItem 15.


Exhibits, Financial Statement
    Schedules.


71SIGNATURESEX-3.3EX-10.9EX-10.13EX-10.18EX-10.21EX-21EX-23EX-31.1EX-31.2EX-32.1EX-32.2   i




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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, adverse
    economic conditions, lack of acceptance of new products,
    increased competition, failure to design, develop and
    manufacture new products, lack of success in technological
    advancements, 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
     1




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Digital
    Video Technology Trends
          Large-Screen
    Flat Panel Display Market
     2




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3




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Digital
    Projection Market
          Additional
    Markets
    Our Core
    Technologies and Products
   4




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MEMC (motion
    estimation/motion compensation). non-TV
  Networking.
  Digital keystone
    correction.
      ImageProcessor
    ICs.
  Video
    Co-Processor ICs.
  Networked
    Display ICs.
  Customers,
    Sales and Marketing
   5




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Distributors.
      Direct
    Relationships.
    Integrators.
  Branded
    Manufacturers.
  Branded
    Suppliers.
    Seasonality
   6




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Geographic
    Distribution of Sales
      Backlog
    Competition
      start-up
  Research
    and Development
   7




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Manufacturing
    Form 10-K.
  Intellectual
    Property
      Form 10-K.
  Environmental
    Matters
    Form 10-K.
  Employees
    Availability
    of Securities and Exchange Commission Filings
  Form 10-K, Form 10-Q, Form 8-K
 8




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www.pixelworks.com 1-800-SEC-0330. www.sec.gov
  Item 1A.
    Risk
    Factors.  Investing in our shares of common stock involves a high
    degree of risk, and investors should carefully consider the
    risks described below before making an investment decision. 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. Additional risks that we currently
    believe are immaterial may also impair our business operations.
    In assessing these risks, investors should also refer to the
    other information contained or incorporated by reference in this
    Annual Report on
    Form 10-K
    for the year ended December 31, 2009, including our
    consolidated financial statements and related notes, and our
    other filings made from time to time with the Securities and
    Exchange Commission.
  Macroeconomic
    Risks Related to the Company
  The
    current adverse global economic environment and volatility in
    global credit and financial markets could materially and
    adversely affect our business and results of
    operations.
      Company
    Specific Risks
  Our
    product strategy, which is targeted at markets demanding
    superior video and image quality, may not lead to new design
    wins or significantly increased revenue in a timely manner or at
    all, which could materially adversely affect our results of
    operations and limit our ability to grow.
   9




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system-on-chip
    If we
    are not profitable in the future, we may be unable to continue
    our operations.
    We
    have incurred indebtedness as a result of the sale of
    convertible debentures. We anticipate that we must repay or
    refinance the debentures by May 2011. We may be unable to meet
    this, or other, future capital requirements.
   10




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Because
    of our long product development process and sales cycles, we may
    incur substantial costs before we earn associated revenue and
    ultimately may not sell as many units of our products as we
    originally anticipated.
      We may
    be unable to successfully manage any future expansion efforts,
    including the integration of any future acquisition or equity
    investment, which could disrupt our business and severely harm
    our financial condition.
      
    problems combining the acquired operations, technologies or
    products;
    unanticipated costs;
    diversion of managements attention from existing
    operations;
    adverse effects on existing business relationships with
    customers;
    risks associated with entering markets in which we have no or
    limited prior experience; 11




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
    potential loss of key employees, particularly those of the
    acquired organizations; and
    risks associated with implementing adequate internal control,
    management, financial and operating reporting systems.    
    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; and
    decreases in cash and marketable securities that could otherwise
    serve as working capital.  A
    significant amount of our revenue comes from a limited number of
    customers and distributors, exposing us to increased credit risk
    and subjecting our cash flow to the risk that any of our
    customers or distributors could decrease or cancel its
    orders.
    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.
     12




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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
    revenue.
        International
    sales account for almost all of our revenue, and if we do not
    successfully address the risks associated with international
    sales, 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;
    reduced or limited protection of our IP, particularly in
    software, which is more prone to design piracy;
    difficulties in collecting outstanding accounts receivable
    balances;
    potentially adverse tax consequences;
    difficulties regarding timing and availability of export and
    import licenses;
    political and economic instability, particularly in the PRC,
    Japan, Taiwan, or Korea; 13




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
    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 health epidemics in the PRC or other parts of
    Asia; and
    increased transaction costs related to sales transactions
    conducted outside of the U.S., such as charges to secure letters
    of credit.  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.
    If we
    engage in further restructuring efforts, we may be unable to
    successfully implement new products or enhancements to our
    current products, which will adversely affect our future sales
    and financial condition.
    The
    concentration of our manufacturers and customers in the PRC,
    Japan, Korea and Taiwan increases our risk that a natural
    disaster, work stoppages or economic or political instability in
    the region could disrupt our operations.
     14




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Continued
    compliance with regulatory and accounting requirements will be
    challenging and will require significant
    resources.
    day-to-day
  Our
    effective income tax rate is subject to unanticipated changes
    in, or different interpretations of tax rules and regulations
    and forecasting our effective income tax rate is complex and
    subject to uncertainty.
     15




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Company
    Risks Related to the Semiconductor Industry and Our
    Markets
  Intense
    competition in our markets may reduce sales of our products,
    reduce our market share, decrease our gross profit and result in
    large losses.
    start-up
    The
    competitiveness and viability of our products could be harmed if
    necessary licenses of third-party technology are not available
    to us or are only available on terms that are not commercially
    viable.
    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.
   16




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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.    If we
    are not able to respond to the rapid technological changes and
    evolving industry standards in the markets in which we compete,
    or seek to compete, our products may become less desirable or
    obsolete.
   17




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We are
    dependent on manufacturers of our semiconductor products not
    only to respond to changes in technology and industry standards
    but also to continue the manufacturing processes on which we
    rely.
      Our
    software development tools may be incompatible with industry
    standards and challenging and costly to implement, which could
    slow product development or cause us to lose customers and
    design wins.
    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.
   18




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We use
    a customer owned tooling process for manufacturing most 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 and other
    key components of our customers products may increase our
    costs, impair our ability to ship our products on time and delay
    our ability to sell our products.
  analog-to-digital
  Our
    products are characterized by average selling prices that
    decline over relatively short periods of time, which will
    negatively affect our financial results unless we are able to
    reduce our product costs or introduce new products with higher
    average selling prices.
    The
    cyclical nature of the semiconductor industry may lead to
    significant variances in the demand for our products and could
    harm our operations.
   19




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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, and may cause us to incur
    significant penalties for noncompliance.
   20




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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;
    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;
    inconsistent trading volume levels of our common stock; and
    changes in market valuations of other technology companies.    We may
    be unable to maintain compliance with NASDAQ Marketplace Rules
    which could cause our common stock to be delisted from the
    NASDAQ Global Market. This could result in the lack of a market
    for our common stock, cause a decrease in the value of an
    investment in us, and adversely affect our business, financial
    condition and results of operations.
  one-for-three
    over-the-counter
 21




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over-the-counter over-the-counter
  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 to effect a change of control, commonly
    referred to as blank check preferred stock;
    members of our board of directors can be removed only 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;
    our 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.  Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.   22




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Total Square

Square Feet

Square Feet

Lease

SubleaseLocation

Function(s)

Feet Leased

Utilized

Subleased

Expiration

ExpirationChina

Engineering; sales;


46,000



46,000






November 2011

customer supportCalifornia

Administration;


37,000



23,000



14,000


June 2013

May 2010engineering; salesTaiwan

Customer support;


22,000



22,000






Various dates

sales; operations













through
    November 2011Oregon

Administration


5,000



5,000






November 2013

Japan

Sales; customer


4,000



4,000






January 2011

supportWashington

None; fully


10,000







10,000


October 2011

Various datessubleased















through
    October 2011   Item 3.
    Legal
    Proceedings.  No. 1-10-CV-164894.
    Item 4.
    (Removed
    and Reserved). 23




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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 2009

High


LowFourth Quarter

$
4.09


$
2.15Third Quarter


4.06



1.25Second Quarter


1.97



0.56First Quarter


0.84



0.37   Fiscal 2008

High


LowFourth Quarter

$
1.45


$
0.55Third Quarter


1.90



1.08Second Quarter


2.95



1.53First Quarter


2.64



1.50       Securities
    Authorized for Issuance Under Equity Compensation
    Plans
  Form 10-K Form 10-K.
 24




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Performance
    Graph
  The Performance Graph is 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 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
  
 25




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Item 6.
    Selected
    Financial Data.      Year Ended December 31,2009


2008


2007


2006


2005(In thousands, except per share data)Revenue, net

$
61,093


$
85,164


$
105,980


$
133,607


$
171,704Cost of revenue


33,798



42,963



59,273



107,506



108,748Gross profit


27,295



42,201



46,707



26,101



62,956Operating expenses:Research and development


20,075



26,512



38,792



57,019



51,814Selling, general and administrative


13,745



17,945



25,437



35,053



30,616Restructuring


235



1,589



13,285



13,316



1,162Amortization of acquired intangible assets






164



359



602



1,084Impairment loss on goodwill














133,739



Impairment loss on acquired intangible assets














1,753



Total operating expenses


34,055



46,210



77,873



241,482



84,676Loss from operations


(6,760
)


(4,009
)


(31,166
)


(215,381
)


(21,720
)Interest and other income, net


12,338



11,979



2,483



10,254



1,532Income (loss) before income taxes


5,578



7,970



(28,683
)


(205,127
)


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


(877
)


(8
)


2,237



(949
)


22,422Net income (loss)

$
6,455


$
7,978


$
(30,920
)

$
(204,178
)

$
(42,610
)Net income (loss) per share:Basic

$
0.48


$
0.55


$
(1.92
)

$
(12.69
)

$
(2.70
)Diluted

$
0.47


$
0.55


$
(1.92
)

$
(12.69
)

$
(2.70
)Weighted average shares outstanding:Basic


13,318



14,399



16,069



16,096



15,779Diluted


13,687



14,410



16,069



16,096



15,779  26




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December 31,2009


2008


2007


2006


2005(In thousands)Cash and cash equivalents

$
17,797


$
53,149


$
74,572


$
63,095


$
68,604Short- and long-term marketable securities


13,062



10,168



44,385



71,489



77,033Working capital


25,359



61,947



112,360



108,169



139,291Total assets


56,078



91,732



161,916



207,771



421,556Long-term liabilities, net of current portion


26,703



73,250



151,871



147,414



163,357Total shareholders equity (deficit)


13,073



4,711



(8,027
)


21,948



215,217   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation.  Overview
    system-on-chip
     27




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Factors
    Affecting Results of Operations and Financial
    Condition
  General
    Market Conditions
    Restructuring
    Plan Initiated in November 2006
    Results
    of Operations
  Year ended December 31, 2009 compared with year ended
    December 31, 2008, and year ended December 31, 2008
    compared with year ended December 31, 2007.
  Revenue, net
    Year ended December 31,

2009 v. 2008

2008 v. 2007%



%2009

2008

2007

$ change

change

$ change

changeRevenue, net

$
61,093


$
85,164


$
105,980


$
(24,071
)


(28
)%

$
(20,816
)


(20
)%   2009 v.
    2008
   28




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2008 v.
    2007
    Cost of
    revenue and gross profit
    Year ended December 31,% of



% of



% of2009

revenue

2008

revenue

2007

revenueDirect product costs and related overhead
    1

$
30,630



50
%

$
39,362



46
%

$
53,807



51
%Amortization of acquired intangible assets


2,336



4



2,820



3



2,820



3Provision for obsolete inventory, net of usage


518



1



488



1



2,376



2Other 2


314



0



293



0



270



0Total cost of revenue

$
33,798



55
%

$
42,963



50
%

$
59,273



56
%Gross profit

$
27,295



45
%

$
42,201



50
%

$
46,707



44
%   1
  2
  2009 v.
    2008
     29




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2008 v.
    2007
    Research
    and development
        Year ended December 31,

2009 v. 2008

2008 v. 2007%



%2009

2008

2007

$ change

change

$ change

changeResearch and development

$
20,075


$
26,512


$
38,792


$
(6,437
)


(24
)%

$
(12,280
)


(32
)%   2009 v.
    2008
    
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased
    $2.7 million. This decrease resulted from fewer engineering
    software tools due to changes in product development strategy as
    well as decreased amortization from certain licensed technology
    which became fully amortized during the first and second
    quarters of 2009.
    Compensation expense decreased $1.9 million as a result of:  
    a company-wide 10% salary reduction that was in effect during
    the second and third quarters of 2009;
    a reduced senior management bonus for 2009 compared to
    2008; and
    continuous improvement in our engineering practices to lower
    costs and improve efficiency.  
    Stock-based compensation expense decreased $786,000 due to
    personnel reductions and reduced valuation of our stock options.
    Facilities and information technology expense allocations
    decreased $748,000, primarily due to reductions in rent and
    decreased depreciation of equipment and leasehold improvements. 30




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2008 v.
    2007
    
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased
    $6.4 million. This decrease is primarily due to the
    December 31, 2007 write-off of engineering software tools,
    which we are no longer using due to reductions in research and
    development personnel and changes in product development
    strategy.
    Compensation expense decreased $2.6 million. The decrease
    in compensation expense in 2008 is primarily due to headcount
    reductions that occurred in the second half of 2007.
    Facilities and information technology expense allocations
    decreased $1.7 million, primarily due to reductions in
    headcount, outsourced IT support, lower rent and decreased
    equipment depreciation.
    Stock-based compensation expense decreased $1.1 million due
    to personnel reductions and reduced valuation of our stock
    options.
    Travel and related expenses decreased $656,000.  Selling, general and administrative
    Year ended December 31,

2009 v. 2008

2008 v. 2007%



%2009

2008

2007

$ change

change

$ change

changeSelling, general and administrative

$
13,745


$
17,945


$
25,437


$
(4,200
)


(23
)%

$
(7,492
)


(29
)%   2009 v.
    2008
    
    Compensation expense decreased $1.6 million as a result of:  
    a company-wide 10% salary reduction that was in effect during
    the second and third quarters of 2009;
    a reduced senior management bonus for 2009 compared to
    2008; and
    headcount reductions during 2009.  
    Stock-based compensation expense decreased $658,000 due to
    personnel reductions and reduced valuation of our stock options.
    Facilities and information technology allocations decreased
    $525,000, primarily due to reductions in headcount, outsourced
    IT support, lower rent and decreased equipment depreciation.
    Sales commissions decreased $520,000 primarily due to lower
    sales volume. 31




---



##### Table of Contents



2008 v.
    2007
    
    Compensation expense decreased $3.3 million. The decrease
    in compensation expense in 2008 is primarily due to significant
    headcount reductions that occurred in the second half of 2007,
    partially off-set by headcount increases in the second half of
    2008.
    Stock-based compensation expense decreased $2.3 million due
    to personnel reductions and reduced valuation of our stock
    options.
    Facilities and information technology allocations decreased
    $689,000, primarily due to reductions in headcount, outsourced
    IT support, lower rent and decreased equipment depreciation.
    Travel and related expenses decreased $530,000.  Restructuring
  Years
    Ended December 31, 2009 and 2008
    Year ended December 31, 2009


Year ended December 31, 2008Dec. 08


Nov. 06





Dec. 08


Nov. 06Plan


Plan


Total


Plan


Plan


TotalTermination and retention benefits
    1

$
118


$



$
118


$
666


$
506


$
1,172Consolidation of leased space
    2






160



160







508



508Total restructuring expenses

$
118


$
160


$
278


$
666


$
1,014


$
1,680Included in cost of sales

$
43


$



$
43


$
91


$



$
91Included in operating expenses


75



160



235



575



1,014



1,589   1

    
    Includes severance payments for terminated employees in 2009 and
    2008 and retention payments for certain continuing employees in
    2008.2

    
    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.     32




---



##### Table of Contents



Year
    Ended December 31, 2007
    Nov. 06PlanTermination and retention benefits
    1

$
5,420Net write-off of assets and reversal of related liabilities
    2


3,905Contract termination fee
    3


1,693Consolidation of leased space
    4


1,524Payments, non-cancelable contracts
    5


827Other


88Total restructuring expenses

$
13,457Included in cost of sales

$
172Included in operating expenses


13,285   1

    
    Termination and retention benefits included severance and
    retention payments for terminated employees and retention
    payments for certain continuing employees.2

    
    We wrote off assets with a net book value of $6.9 million
    as a result of our November 2006 restructuring plan. 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.3

    
    We paid a contract termination fee of $1.7 million 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 did not realize a benefit due
    to the restructuring plans.    Amortization
    of acquired intangible assets
    Year ended December 31,2009


2008


2007Amortization of acquired intangible assets

$



$
164


$
359    33




---



##### Table of Contents



Interest and other income, net
    Year ended December 31,


$ change2009


2008


2007


2009 v. 2008


2008 v. 2007Gain on repurchase of long-term debt, net
    1

$
12,860


$
19,670


$



$
(6,810
)

$
19,670Other-than-temporary
    impairment of marketable security, net
    2






(7,890
)






7,890



(7,890
)Interest income
    3


242



2,102



5,786



(1,860
)


(3,684
)Interest expense
    4


(640
)


(1,695
)


(2,642
)


1,055



947Amortization of debt issuance costs
    5


(124
)


(426
)


(661
)


302



235Other income
    6






218







(218
)


218Total interest and other income, net

$
12,338


$
11,979


$
2,483


$
359


$
9,496   1

    
    In February 2009, we repurchased and retired $27.1 million
    of our 1.75% convertible subordinated debentures for a net gain
    of $9.0 million. In May 2009, we repurchased and retired
    $17.8 million of the debentures for a net gain of
    $3.8 million. In 2008, we repurchased and retired
    $79.4 million of the debentures for a net gain of
    $19.7 million.2

    
    In the first quarter of 2008, we recognized an
    other-than-temporary
    impairment of $6.5 million on an investment in a
    publicly-traded equity security, due to the duration of time
    that the investment had been below cost, as well as decreased
    target price estimates, analyst downgrades and macroeconomic
    factors. In the fourth quarter of 2008, we recognized a second
    other-than-temporary
    impairment of $1.4 million on the same investment, based on
    the same factors considered in our March 31, 2008 analysis.3

    
    Interest income is earned on cash equivalents and short- and
    long-term marketable securities. The sequential decreases during
    the 2009 and 2008 periods are due to lower balances of
    marketable securities, which resulted from our repurchases of
    long-term debt and decreased yields on our invested funds.4

    
    Interest expense primarily relates to interest payable on our
    long-term debt. The sequential decreases during the 2009 and
    2008 periods are due to the reduced outstanding principal
    balance which resulted from our repurchases of our long-term
    debt.5

    
    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 17 months as of
    December 31, 2009. The sequential decreases during the 2009
    and 2008 periods is due to the write-off of fees associated with
    the portions of long-term debt repurchased in 2009 and 2008.6

    
    In the second quarter of 2008, we recognized a gain of $218,000
    on the sale of a non-marketable equity security.  Provision
    (benefit) for income taxes
    Year ended December 31,2009


2008


2007Provision (benefit) for income taxes

$
(877
)

$
(8
)

$
2,237    34




---



##### Table of Contents



Business
    Outlook
  Form 8-K.
  
    First quarter revenue of $17.5 million to
    $19.5 million.
    Gross profit margin of approximately 44% to 49%.
    Operating expenses of $9.0 million to $10.0 million.
    A benefit for income tax of approximately $5.0 million to
    $5.5 million.    Liquidity
    and Capital Resources
  Cash and
    short- and long-term marketable securities
    December 31,


$ Change2009


2008


2007


2009 v. 2008


2008 v. 2007Cash and cash equivalents

$
17,797


$
53,149


$
74,572


$
(35,352
)

$
(21,423
)Short-term marketable securities


9,822



8,058



34,581



1,764



(26,523
)Long-term marketable securities


3,240



2,110



9,804



1,130



(7,694
)Total cash and marketable securities

$
30,859


$
63,317


$
118,957


$
(32,458
)

$
(55,640
)        35




---



##### Table of Contents



A-1 / P-1
    other-than-temporary other-than-temporary other-than-temporary.
      Accounts
    receivable, net
    Inventories,
    net
    Capital
    resources
   36




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
      Revenue Recognition.
  Sales Returns and Allowances. case-by-case
      Product Warranties.
 37




---



##### Table of Contents



Allowance for Doubtful Accounts. account-by-account
  Inventory Valuation.
  Useful Lives and Recoverability of Equipment and Other
    Long-Lived Assets.
  Valuation of Investments. other-than-temporarily
  Stock-Based Compensation.
  Income Taxes.
 38




---



##### Table of Contents



Contractual
    Payment Obligations
    Payments Due By PeriodLess than








More than 5Contractual Obligation

Total


1 year


1-3 years


3-5 years


yearsLong-term debt
    1

$
15,779


$



$
15,779


$



$
Interest on long-term debt


414



276



138







Operating leases
    2


5,694



2,182



2,911



601



Payments on accrued balances related to asset purchases


2,620



2,067



553







Estimated Q1 2010 purchase commitments to contract manufacturers


7,195



7,195











Total 3

$
31,702


$
11,720


$
19,381


$
601


$
   1

    
    The earliest date on which the 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 $193,000 and $48,000 for the years ended
    December 31, 2010 and 2011, respectively.3

    
    We are unable to reliably estimate the timing of future payments
    related to uncertain tax positions; therefore, $9.5 million
    of income taxes payable has been excluded from the table above.  Off-Balance
    Sheet Arrangements
    Recent
    Accounting Pronouncements and Accounting Changes
  Form 10-K
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
         39




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data.    Report of Independent Registered Public
    Accounting Firm


41Consolidated Balance Sheets as of
    December 31, 2009 and 2008


42Consolidated Statements of Operations for the
    years ended December 31, 2009, 2008 and 2007


43Consolidated Statements of Cash Flows for the
    years ended December 31, 2009, 2008 and 2007


44Consolidated Statements of Shareholders
    Equity (Deficit) and Comprehensive Income (Loss) for the years
    ended December 31, 2009, 2008 and 2007


45Notes to Consolidated Financial Statements


46   40




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm             Internal Control  Integrated
    Framework
      41




---



##### Table of Contents



PIXELWORKS,
    INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share data)
  December 31,2009


2008ASSETSCurrent assets:Cash and cash equivalents

$
17,797


$
53,149Short-term marketable securities


9,822



8,058Accounts receivable, net


5,619



6,149Inventories, net


6,158



4,981Prepaid expenses and other current assets


2,265



3,381Total current assets


41,661



75,718Long-term marketable security


3,240



2,110Property and equipment, net


5,121



5,187Other assets, net


5,006



5,331Acquired intangible assets, net


1,050



3,386Total assets

$
56,078


$
91,732LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
7,680


$
4,215Accrued liabilities and current portion of long-term liabilities


8,513



9,419Current portion of income taxes payable


109



137Total current liabilities


16,302



13,771Long-term liabilities, net of current portion


1,462



2,035Income taxes payable, net of current portion


9,462



10,581Long-term debt


15,779



60,634Total liabilities


43,005



87,021Commitments and contingencies (Note 8)Shareholders equity:Preferred stock, $0.001 par value, 50,000,000 shares
    authorized, none issued






Common stock, $0.001 par value; 250,000,000 shares
    authorized, 13,403,057 and 13,508,127 shares issued and
    outstanding as of December 31, 2009 and 2008, respectively


334,849



333,974Accumulated other comprehensive income


1,087



55Accumulated deficit


(322,863
)


(329,318
)Total shareholders equity


13,073



4,711Total liabilities and shareholders equity

$
56,078


$
91,732    42




---



##### Table of Contents



PIXELWORKS,
    INC.CONSOLIDATED STATEMENTS OF
    OPERATIONS(In thousands, except per share data)
  Year Ended December 31,2009


2008


2007Revenue, net

$
61,093


$
85,164


$
105,980Cost of revenue (1)


33,798



42,963



59,273Gross profit


27,295



42,201



46,707Operating expenses:Research and development (2)


20,075



26,512



38,792Selling, general and administrative (3)


13,745



17,945



25,437Restructuring


235



1,589



13,285Amortization of acquired intangible assets






164



359Total operating expenses


34,055



46,210



77,873Loss from operations


(6,760
)


(4,009
)


(31,166
)Gain on repurchase of long-term debt, net


12,860



19,670



Interest income


242



2,102



5,786Interest expense


(640
)


(1,695
)


(2,642
)Amortization of debt issuance costs


(124
)


(426
)


(661
)Other-than-temporary
    impairment of marketable security






(7,890
)


Other income






218



Interest and other income, net


12,338



11,979



2,483Income (loss) before income taxes


5,578



7,970



(28,683
)Provision (benefit) for income taxes


(877
)


(8
)


2,237Net income (loss)

$
6,455


$
7,978


$
(30,920
)Net income (loss) per shareBasic

$
0.48


$
0.55


$
(1.92
)Diluted

$
0.47


$
0.55


$
(1.92
)Weighted average shares outstandingBasic


13,318



14,399



16,069Diluted


13,687



14,410



16,069(1) Includes:Amortization of acquired developed technology

$
2,336


$
2,820


$
2,820Additional amortization of non-cancelable prepaid royalty


251



144



Restructuring


43



91



172Stock-based compensation


20



58



98(2) Includes stock-based compensation


464



1,250



2,320(3) Includes stock-based compensation


540



1,198



3,527    43




---



##### Table of Contents



PIXELWORKS,
    INC.CONSOLIDATED STATEMENTS OF CASH
    FLOWS(In thousands)
  Year Ended December 31,2009


2008


2007Cash flows from operating activities:Net income (loss)

$
6,455


$
7,978


$
(30,920
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:Gain on repurchase of long-term debt, net


(12,860
)


(19,670
)


Other-than-temporary
    impairment of marketable security






7,890



Depreciation and amortization


4,607



6,700



13,999Amortization of acquired intangible assets


2,336



2,984



3,179Stock-based compensation


1,024



2,506



5,945Amortization of debt issuance costs


124



426



661Deferred income tax expense


68



291



512Amortization (accretion) on short- and long-term marketable
    securities


24



(345
)


(583
)Loss on asset disposals


4



180



210Write-off of assets to restructuring






14



3,905Other


55



55



55Changes in operating assets and liabilities:Accounts receivable, net


530



74



3,092Inventories, net


(1,177
)


6,284



2,544Prepaid expenses and other current and long-term assets, net


931



974



3,300Accounts payable


3,389



223



(4,101
)Accrued current and long-term liabilities


(2,377
)


(1,454
)


(2,995
)Income taxes payable


(1,147
)


(149
)


(130
)Net cash provided by (used in) operating activities


1,986



14,961



(1,327
)Cash flows from investing activities:Proceeds from sales and maturities of
    available-for-sale
    marketable securities


13,195



54,532



79,482Purchases of marketable securities


(15,110
)


(22,999
)


(52,885
)Purchases of property and equipment


(1,481
)


(2,158
)


(2,886
)Purchases of licensed technology


(102
)






Proceeds from sales of property and equipment


2



20



26Purchases of other assets










(308
)Net cash provided by (used in) investing activities


(3,496
)


29,395



23,434Cash flows from financing activities:Repurchase of long-term debt


(31,532
)


(58,554
)


Payments on asset financings


(2,161
)


(4,646
)


(6,715
)Repurchase of common stock


(167
)


(2,626
)


(4,269
)Proceeds from issuances of common stock


18



47



354Net cash used in financing activities


(33,842
)


(65,779
)


(10,630
)Net change in cash and cash equivalents


(35,352
)


(21,423
)


11,477Cash and cash equivalents, beginning of period


53,149



74,572



63,095Cash and cash equivalents, end of period

$
17,797


$
53,149


$
74,572    44




---



##### Table of Contents






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








TotalOther








ShareholdersCommon Stock


Exchangeable Shares


Comprehensive


Comprehensive


Accumulated


EquityShares


Amount


Shares


Amount


Income (Loss)


Income (loss)


Deficit


(Deficit)Balance as of December 31, 2006


16,204,514


$
331,567



15,878


$
450


$
(3,693
)





$
(306,376
)

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


149,376



354























354Repurchase of common stock


(1,260,833
)


(4,269
)






















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


11,869



337



(11,869
)


(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


15,104,926



333,934



4,009



113



(4,778
)






(337,296
)


(8,027
)Stock issued under stock option and stock purchase plans


24,929



47























47Repurchase of common stock


(1,625,737
)


(2,626
)






















(2,626
)Conversion of exchangeable shares into common stock


4,009



113



(4,009
)


(113
)














Stock-based compensation expense






2,506























2,506Net income





















$
7,978



7,978



7,978Reclassification adjustment from accumulated other comprehensive
    income for
    other-than-temporary
    loss on marketable security included in net income, net of tax
    of $0


















4,810



4,810







4,810Unrealized gain on
    available-for-sale
    securities, net of tax of $0


















50



50







50Pension adjustment, net of tax of $(7)


















(27
)


(27
)






(27
)Comprehensive income





















$
12,811Balance as of December 31, 2008


13,508,127



333,974











55







(329,318
)


4,711Stock issued under stock option and stock purchase plans


123,530



18























18Repurchase of common stock


(228,600
)


(167
)






















(167
)Stock-based compensation expense






1,024























1,024Net income





















$
6,455



6,455



6,455Unrealized gain on
    available-for-sale
    securities, net of tax of $0


















1,003



1,003







1,003Pension adjustment, net of tax of $11


















29



29







29Comprehensive income





















$
7,487Balance as of December 31, 2009


13,403,057


$
334,849






$



$
1,087






$
(322,863
)

$
13,073     45




---



##### 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
  available-for-sale. Available-for-sale
 46




---



##### Table of Contents



other-than-temporary.
    Accounts
    Receivable
  account-by-account
  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

Lesser of lease term or estimated useful life       Acquired
    Intangible Assets
    Licensed
    Technology
   47




---



##### Table of Contents



Revenue
    Recognition
    case-by-case
      Warranty
    Program
    Stock-Based
    Compensation
     48




---



##### Table of Contents



Research
    and Development
    Income
    Taxes
      Accumulated
    Other Comprehensive Income
    December 31,2009


2008Accumulated net unrealized holding gain on available-for-sale
    and long-term marketable security

$
1,128


$
125Accumulated transition pension obligation


(48
)


(48
)Actuarial gain (loss) on pension obligation


7



(22
)Accumulated other comprehensive income

$
1,087


$
55   Leases
   49




---



##### Table of Contents



Fair
    Value of Financial Instruments
    Risks and
    Uncertainties
  Concentration
    of Suppliers
    Risk of
    Technological Change
    Concentrations
    of Credit Risk
    Recent
    Accounting Pronouncements
  The FASB Accounting Standards
    Codification TM and the Hierarchy of Generally Accepted Accounting
    Principles, a replacement of FASB Statement
    No. 162 , Generally
    Accepted Accounting Principles
  NOTE 3.
    BALANCE
    SHEET COMPONENTS  Marketable
    Securities  See Note 4
  Accounts
    Receivable, Net
    December 31,2009


2008Accounts receivable, gross

$
6,047


$
6,691Allowance for doubtful accounts


(428
)


(542
)Accounts receivable, net

$
5,619


$
6,149  50




---



##### Table of Contents



Year Ended December 31,2009


2008


2007Balance at beginning of year

$
542


$
542


$
200Additions charged (reductions credited)


(75
)






483Accounts written-off, net of recoveries


(39
)






(141
)Balance at end of year

$
428


$
542


$
542   Inventories,
    Net
    December 31,2009


2008Finished goods

$
2,888


$
4,617Work-in-process


5,410



5,3588,298



9,975Reserve for slow-moving and obsolete items


(2,140
)


(4,994
)Inventories, net

$
6,158


$
4,981     Year Ended December 31,2009


2008


2007Balance at beginning of period

$
4,994


$
5,950


$
5,950New provision


1,225



1,496



4,365Sales of previously reserved inventory


(707
)


(1,008
)


(1,989
)Net provision for obsolete inventory


518



488



2,376Final scrap of previously reserved inventory


(3,372
)


(1,444
)


(2,376
)Balance at end of period

$
2,140


$
4,994


$
5,950   end-of-life.
  Prepaid
    Expenses and Other Current Assets
   51




---



##### Table of Contents



Property
    and Equipment, Net
    December 31,2009


2008Software

$
6,712


$
9,141Equipment, furniture and fixtures


7,289



6,668Tooling


1,837



1,244Leasehold improvements


2,634



3,17418,472



20,227Accumulated depreciation and amortization


(13,351
)


(15,040
)Property and equipment, net

$
5,121


$
5,187     Other
    Assets, Net
    Acquired
    Intangible Assets, Net
    December 31,2009


2008Gross carrying amount

$
19,170


$
19,170Less: accumulated amortization


(18,120
)


(15,784
)Acquired intangible assets, net

$
1,050


$
3,386    52




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##### Table of Contents



Accrued
    Liabilities and Current Portion of Long-Term
    Liabilities
    December 31,2009


2008Accrued payroll and related liabilities

$
2,279


$
3,749Current portion of accrued liabilities for asset financings


2,068



1,116Accrued commissions and royalties


853



728Reserve for warranty returns


304



593Accrued interest payable


257



236Accrued costs related to restructuring


190



940Reserve for sales returns and allowances


55



100Other


2,507



1,957$
8,513


$
9,419     Year Ended December 31,2009


2008


2007Reserve for warranty returns:Balance at beginning of year

$
593


$
932


$
662Provision (benefit)


269



(203
)


1,418Charge-offs


(558
)


(136
)


(1,148
)Balance at end of year

$
304


$
593


$
932Reserve for sales returns and allowances:Balance at beginning of year

$
100


$
175


$
479Provision


9



25



123Charge-offs


(54
)


(100
)


(427
)Balance at end of year

$
55


$
100


$
175   Long-Term
    Liabilities, Net of Current Portion
    December 31,2009


2008Accrued liabilities for asset financings

$
553


$
699Deferred rent


494



617Accrued costs related to restructuring


218



262Payroll and related liabilities


136



182Other


61



275$
1,462


$
2,035   Long-Term
    Debt and Debt Issuance Costs
   53




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##### Table of Contents



54




---



##### Table of Contents



NOTE 4.
    MARKETABLE
    SECURTIES AND FAIR VALUE MEASUREMENTS  available-for-sale
  Unrealized


FairCost


Gain (Loss)


ValueShort-term marketable securities:As of December 31, 2009:US government agencies debt securities

$
6,286


$
(3
)

$
6,283Commercial paper


2,996







2,996Corporate debt security


542



1



543$
9,824


$
(2
)

$
9,822As of December 31, 2008:US government agencies debt securities

$
3,487


$
105


$
3,592Commercial paper


3,486



2



3,488Corporate debt securities


960



18



978$
7,933


$
125


$
8,058Long-term marketable security:As of December 31, 2009:Equity security

$
2,110


$
1,130


$
3,240As of December 31, 2008:Equity security

$
2,110


$



$
2,110   available-for-sale
  other-than-temporary other-than-temporary
  Fair
    Value Measurements
      Level 2:
    Valuations based on inputs other than quoted prices included
    within Level 1 that are observable for the asset or
    liability, either directly or indirectly.Level 3:
    Valuations based on unobservable inputs in which there is little
    or no market data available, which require the reporting entity
    to develop its own assumptions. 55




---



##### Table of Contents



Level 1


Level 2


Level 3


TotalAs of December 31, 2009Cash equivalents

$
17,073


$



$



$
17,073Short-term marketable securities






9,822







9,822Long-term marketable security


3,240











3,240Total

$
20,313


$
9,822


$



$
30,135As of December 31, 2008Cash equivalents

$
34,213


$



$



$
34,213Short-term marketable securities






8,058







8,058Long-term marketable security


2,110











2,110Total

$
36,323


$
8,058


$



$
44,381       NOTE 5.
    EARNINGS
    PER SHARE     56




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##### Table of Contents



Year Ended December 31,2009


2008


2007Net income (loss)

$
6,455


$
7,978


$
(30,920
)Basic weighted average shares outstanding


13,318



14,399



16,069Common share equivalents:Dilutive effect of stock options and awards


369



11



Diluted weighted average shares outstanding


13,687



14,410



16,069Net income (loss) per common share  basic

$
0.48


$
0.55


$
(1.92
)Net income (loss) per common share  diluted

$
0.47


$
0.55


$
(1.92
)     Year Ended December 31,2009

2008

2007Stock options


1,500,767



1,793,187



1,962,893Conversion of debentures


356,309



1,191,026



1,916,259   NOTE 6.
    RESTRUCTURINGS        Year Ended December 31,2009


2008


2007Cost of revenue  restructuring:Termination and retention benefits

$
43


$
91


$
172Operating expenses  restructuring:Consolidation of leased space


160



508



1,524Termination and retention benefits


75



1,081



5,248Net write-off of assets and reversal of related liabilities










3,905Contract termination fee










1,693Payments, non-cancelable contracts










827Other










88235



1,589



13,285Total restructuring expense

$
278


$
1,680


$
13,457  57




---



##### Table of Contents



Balance as of








Balance as ofDecember 31,








December 31,2008


Expensed


Payments


2009Termination and retention benefits

$
737


$
118


$
(855
)

$
Lease termination costs


465



160



(217
)


408Total

$
1,202


$
278


$
(1,072
)

$
408   Balance as of








Balance as ofDecember 31,








December 31,2007


Expensed


Payments


2008Termination and retention benefits

$
1,758


$
1,172


$
(2,193
)

$
737Lease termination costs


999



508



(1,042
)


465Contract termination and other costs


514







(514
)


Total

$
3,271


$
1,680


$
(3,749
)

$
1,202   NOTE 7.
    INCOME
    TAXES  Current
    and Deferred Income Tax Expense (Benefit)
    Year Ended December 31,2009


2008


2007Domestic

$
4,376


$
6,141


$
(31,614
)Foreign


1,202



1,829



2,931$
5,578


$
7,970


$
(28,683
)  58




---



##### Table of Contents



Year Ended December 31,2009


2008


2007Current:Federal

$
55


$
55


$
55State


20



142



6Foreign


(1,020
)


(496
)


1,664Total current


(945
)


(299
)


1,725Deferred:Federal










State










Foreign


68



291



512Total deferred


68



291



512Income tax expense (benefit)

$
(877
)

$
(8
)

$
2,237     Year Ended December 31,2009

2008

2007Expected income tax rate


34%



35%



35%Decrease resulting from:Change in valuation allowance


(30)



(67)



(40)Tax contingencies, net of reversals


(20)







Impact of foreign earnings


(4)



26



State income taxes, net of federal tax benefit


4



2



Stock compensation


1



3



Research and experimentation credit










1Decrease in deferred tax rates










(1)Other


(1)



1



(3)Actual tax expense (benefit)


(16)%



%



(8)%  59




---



##### Table of Contents



Deferred
    Tax Assets, Liabilities and Valuation Allowance
    December 31,2009


2008Deferred tax assets:Net operating loss carryforwards

$
65,666


$
73,861Research and experimentation credit carryforwards


12,471



12,951Foreign tax credit carryforwards


8,717



9,073Other-than-temporary
    impairment of marketable security


2,873



2,983Deferred stock compensation


2,705



3,372Depreciation


2,304



2,613Reserves and accrued expenses


1,103



2,651Accrued vacation


213



338Other


2,208



2,256Total gross deferred tax assets


98,260



110,098Deferred tax liabilities:Amortization


(382
)


(1,225
)Foreign earnings


(129
)


(3,983
)Other


(275
)


(230
)(786
)


(5,438
)Less valuation allowance


(96,767
)


(104,090
)Net deferred tax assets

$
707


$
570        60




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##### Table of Contents



Uncertain
    Tax Positions
      2009


2008Uncertain tax positions:Balance at beginning of year

$
8,257


$
8,539Accrual for positions taken in a prior year


150



(49
)Accrual for positions taken in current year


159



91Reversals due to lapse of statute of limitations


(1,380
)


(324
)Balance at end of year

$
7,186


$
8,257Interest and penalties:Balance at beginning of year

$
2,324


$
2,096Accrual for positions taken in prior year


391



463Reversals due to lapse of statute of limitations


(439
)


(235
)Balance at end of year

$
2,276


$
2,324        61




---



##### Table of Contents



NOTE 8.
    COMMITMENTS
    AND CONTINGENCIES  Royalties
    form 10-K
  401(k)
    Plan
    Leases
    Year Ending December 31:2010

$
2,1822011


1,8392012


1,0722013


6012014


$
5,694     Contract
    Manufacturers
   62




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##### Table of Contents



Indemnifications
    Legal
    Proceedings
    NOTE 9.
    SUPPLEMENTAL
    DISCLOSURE OF CASH FLOW INFORMATION    Year Ended December 31,2009


2008


2007Cash paid during the year for:Interest

$
620


$
1,882


$
2,618Income taxes, net of refunds received


196



218



101Non-cash investing and financing activities:Acquisitions of property and equipment and other assets under
    extended payment terms

$
2,966


$
1,815


$
1,818Unrealized gain (loss) on
    available-for-sale
    securities


1,003



50



(1,090
)Increase in leasehold improvements and deferred rent related to
    tenant improvement allowances received






140



   NOTE 10.
    SHAREHOLDERS
    EQUITY  Preferred
    Stock
    Common
    Stock
    Exchangeable
    Shares
  one-for-one
 63




---



##### Table of Contents



Reverse
    Stock Split
  one-for-three
  Stock
    Incentive Plans
    Stock
    Options
      WeightedaverageNumber


exerciseof shares


priceOptions outstanding as of December 31, 2008


1,954,696


$
14.66Granted


1,139,959



1.40Exercised


(6,198
)


1.48Forfeited


(112,656
)


6.27Expired


(487,965
)


25.92Options outstanding as of December 31, 2009


2,487,836


$
6.79  64




---



##### 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

2009


life


price


2009


price$ 0.21 - $ 0.80


798,042



9.14


$
0.62



161,113


$
0.590.81 -     4.00


869,624



6.94



2.49



276,551



2.124.01 -     7.00


201,014



7.14



5.25



152,442



5.357.01 -    10.00


168,777



5.62



7.46



167,855



7.4610.01 -    16.00


92,734



5.91



14.69



87,264



14.7016.01 -    57.00


357,645



3.89



29.51



357,624



29.51$ 0.21 - $57.00


2,487,836



7.10


$
6.79



1,202,849


$
12.13       WeightedaverageWeighted


remainingNumber of


average


contractual


Aggregateshares


exercise price


term


intrinsic valueVested


1,202,849


$
12.13



6.12


$
653,830Expected to vest


1,029,387



1.77



8.07



1,500,286Total


2,232,236


$
7.35



7.02


$
2,154,116     Restricted
    Stock Awards
    Employee
    Stock Purchase Plan
   65




---



##### Table of Contents



Stock-Based
    Compensation Expense
    Year Ended December 31,2009

2008

2007Stock Option Plans:Risk free interest rate


2.24
%


2.71
%


4.65
%Expected dividend yield


0
%


0
%


0
%Expected life (in years)


5.0



4.8



5.2Volatility


84
%


68
%


70
%Employee Stock Purchase Plan:Risk free interest rate


0.33
%


2.05
%


5.09
%Expected dividend yield


0
%


0
%


0
%Expected life (in years)


0.5



0.5



0.5Volatility


137
%


85
%


55
%       Share
    Repurchase
   66




---



##### Table of Contents



NOTE 11.
    SEGMENT
    INFORMATION    Geographic
    Information
    Year Ended December 31,2009


2008


2007Japan

$
34,030


$
50,408


$
60,135Taiwan


13,399



10,582



12,053Korea


3,182



5,583



8,338Europe


3,012



6,639



6,734China


2,809



1,734



6,253U.S.


2,047



3,872



4,627Other


2,614



6,346



7,840$
61,093


$
85,164


$
105,980   Significant
    Customers
    Year Ended December 31,2009

2008

2007Distributors:All distributors


51
%


53
%


57
%Distributor A


35
%


32
%


33
%End
    Customers:(1)Top five end customers


56
%


55
%


47
%End customer A


21
%


24
%


21
%End customer B


11
%


9
%


6
%     (1)
    
    End customers include customers who purchase directly from us,
    as well as customers who purchase our products indirectly
    through distributors.    December 31,2009

2008Account A


34
%


20
%Account B


22
%


32
%Account C


11
%


4
%Account D


0
%


15
%  67




---



##### Table of Contents



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


June 30


September 30


December 312009Revenue, net

$
10,780


$
14,213


$
16,732


$
19,368Gross profit


4,156



6,773



7,341



9,025Loss from operations


(4,530
)


(1,163
)


(644
)


(423
)Income (loss) before income taxes


4,280



2,577



(734
)


(545
)Net income (loss)


5,897



2,219



(890
)


(771
)Net income (loss) per share:Basic


0.44



0.17



(0.07
)


(0.06
)Diluted


0.44



0.16



(0.07
)


(0.06
)2008Revenue, net

$
23,976


$
20,793


$
21,479


$
18,916Gross profit


11,671



10,498



11,451



8,581Income (loss) from operations


(835
)


(1,102
)


441



(2,513
)Income (loss) before income taxes


4,496



(875
)


8,533



(4,184
)Net income (loss)


6,133



(1,250
)


8,219



(5,124
)Net income (loss) per share:Basic


0.41



(0.09
)


0.57



(0.37
)Diluted


0.41



(0.09
)


0.56



(0.37
)  68




---



##### 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) Rule 15d-15(f)
    Managements
    Report on Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  Internal Control  Integrated Framework,
    Changes
    in Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 69




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
     Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework
    KPMG
    LLP
    70




---



##### 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, 2009 and 2008Consolidated Statements of Operations for the years ended
    December 31, 2009, 2008 and 2007Consolidated Statements of Cash Flows for the years ended
    December 31, 2009, 2008 and 2007Consolidated Statements of Shareholders Equity (Deficit)
    and Comprehensive Income (Loss) for the years ended
    December 31, 2009, 2008 and 2007Notes to Consolidated Financial Statements   (a) 2.    Financial
    Statement Schedules.
   71




---



##### 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

Third Amendment to Sixth Amended and Restated Articles of
    Incorporation of Pixelworks, Inc. (incorporated by reference to
    Exhibit 3.1 to the Companys Quarterly Report on
    Form 10-Q
    filed on August 11, 2008).3
.3

Second Amended and Restated Bylaws of Pixelworks, Inc.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. Amended and Restated 2006 Stock Incentive Plan
    (incorporated by reference to Exhibit 10.1 to the
    Companys Quarterly Report on
    Form 10-Q
    filed on August 6, 2009).+10
.7

Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan,
    Terms and Conditions of Restricted Stock Awards (incorporated by
    reference to Exhibit 10.3 to the Companys Quarterly
    Report on
    Form 10-Q
    filed on May 7, 2009).+10
.8

Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan,
    Terms and Conditions of Option Grants (incorporated by reference
    to Exhibit 10.4 to the Companys Quarterly Report on
    Form 10-Q
    filed on May 7, 2009).+10
.9

Summary of Pixelworks Non-Employee Director Compensation.+10
.10

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).+ 72




---



##### Table of Contents



ExhibitNumber

Description10
.11

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
.12

Executive Employment Agreement dated and effective
    March 31, 2008, by and between Bruce Walicek and
    Pixelworks, Inc (incorporated by reference to Exhibit 10.1
    to the Companys Quarterly Report on
    Form 10-Q
    filed on May 8, 2008).+10
.13

2009 Executive Employment Agreement dated May 11, 2009 and
    effective April 1, 2009, by and between Bruce Walicek and
    Pixelworks, Inc.+10
.14

Pixelworks, Inc. 2008 Senior Management Bonus Plan (incorporated
    by reference to Exhibit 10.1 to the Companys
    Quarterly Report on
    Form 10-Q
    filed on August 11, 2008).+10
.15

Form of Pixelworks, Inc. Senior Management Bonus Plan
    (incorporated by reference to Exhibit 10.1 to the
    Companys
    Form 8-K
    filed December 31, 2009).+10
.16

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
.17

Change of Control Severance Agreement dated November 20,
    2008, by and between Pixelworks, Inc. and Steven L. Moore
    (incorporated by reference to Exhibit 10.1 to the
    Companys
    Form 8-K
    filed November 20, 2008).+10
.18

Change of Control Severance Agreement dated May 11, 2009
    and effective April 1, 2009, by and between Pixelworks,
    Inc. and Steven L. Moore.+10
.19

Change of Control Severance Agreement dated November 20,
    2008, by and between Pixelworks, Inc. and Hongmin (Bob) Zhang
    (incorporated by reference to Exhibit 10.2 to the
    Companys
    Form 8-K
    filed November 20, 2008).+10
.20

Separation Agreement dated and effective February 11, 2009,
    by and between Anthony Simon and Pixelworks, Inc. (incorporated
    by reference to Exhibit 10.1 to the Companys
    Quarterly Report on
    Form 10-Q
    filed on May 7, 2009).+10
.21

Change of Control Severance Agreement dated November 22,
    2008, by and between Pixelworks, Inc. and Tzoyao (T) Chan.+10
.22

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
.23

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
.24

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
.25

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
    (incorporated by reference to Exhibit 10.19 to the
    Companys Annual Report on
    Form 10-K
    filed March 12, 2008).10
.26

Amendment to 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 IV (incorporated by reference to Exhibit 10.2 to
    the Companys Quarterly Report on
    Form 10-Q
    filed on November 7, 2008).10
.27

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). 73




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##### Table of Contents



ExhibitNumber

Description10
.28

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
.29

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
.30

Office Lease Agreement dated September 10, 2008 and
    commencing December 1, 2008 by and between Pixelworks, Inc.
    and Durham Plaza, LLC (incorporated by reference to
    Exhibit 10.3 to the Companys Quarterly Report on
    Form 10-Q
    filed on November 7, 2008).21


Subsidiaries of Pixelworks, Inc.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. 74




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##### Table of Contents



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

Title

Date/s/  Bruce
    A. WalicekBruce
    A. Walicek

President and 
    Chief Executive Officer

March 10, 2010/s/  Steven
    L. MooreSteven
    L. Moore

Vice President, Chief Financial 
    Officer, Secretary and Treasurer

March 10, 2010/s/  Allen
    H. AlleyAllen
    H. Alley

Chairman of the Board

March 10, 2010/s/  Mark
    A. ChristensenMark
    A. Christensen

Director

March 10, 2010/s/  James
    R. FiebigerJames
    R. Fiebiger

Director

March 10, 2010/s/  C.
    Scott GibsonC.
    Scott Gibson

Director

March 10, 2010/s/  Daniel
    J. HeneghanDaniel
    J. Heneghan

Director

March 10, 2010/s/  Richard
    L. SanquiniRichard
    L. Sanquini

Director

March 10, 2010/s/  Bruce
    A. WalicekBruce
    A. Walicek

Director

March 10, 2010