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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-30269
 PIXELWORKS, INC.
  Oregon
(State or other jurisdiction of 
incorporation or organization)
    
    91-1761992
(I.R.S. Employer Identification No.)
 8100 SW Nyberg Road, Tualatin, OR
(Address of principal executive offices)
    
    97062
(Zip code)
    
    (503) 454-1750
(Registrants telephone number,
including area code)
 
 
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   Documents Incorporated by Reference




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PIXELWORKS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
  
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    19Item 1B.
    
    Unresolved Staff Comments
    
    
    37Item 2.
    
    Properties
    
    
    37Item 3.
    
    Legal Proceedings
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    38Item 6.
    
    Selected Financial Data
    
    
    40Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operation
    
    
    41Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    55Item 8.
    
    Financial Statements and Supplementary Data
    
    
    56Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    89Item 9A.
    
    Controls and Procedures
    
    
    89Item 9B.
    
    Other Information
    
    
    91PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    91Item 11.
    
    Executive Compensation
    
    
    91Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    91Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    91Item 14.
    
    Principal Accounting Fees and Services
    
    
    91PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    92SIGNATURESEXHIBIT 10.9EXHIBIT 10.10EXHIBIT 10.11EXHIBIT 10.12EXHIBIT 10.13EXHIBIT 10.14EXHIBIT 10.22EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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Forward-looking Statements
 This Report, including the Managements Discussion and Analysis of Financial Condition and
Results of Operation in Part II, Item 7, contains forward-looking statements within the meaning
of the Securities Litigation Reform Act of 1995 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
Report. 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.
 
 PART I
 
 Item 1. Business.
 Overview
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Advanced Display Industry




Advanced Television Market








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6




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Multimedia Projector Market










7




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LCD Panel Market






Our Products and Technologies






Products




ImageProcessor ICs. TM TM


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TM TM




Video
Co-Processor ICs.


TM








Smart TCON ICs.


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MediaProcessor ICs.




Broadband Signal Processor ICs.




Technologies




Core Technologies for Advanced Displays



    
    Advanced Image Scaling and Shaping. Since advanced displays are typically fixed-pixel,
digital display technologies, a constant challenge is to reconfigure incoming content in
video or PC formats that does not match the display resolution. Pixelworks has developed
innovative, industry-leading image scaling technologies that intelligently enlarge or
compress images for display in different resolutions or aspect ratios, which is the ratio
of width to height of display screens. This technology is essential for interfacing fixed
resolution digital displays to the wide range of inputs that are present in todays
marketplace, including HDTV. In addition, our image processing technology incorporates
proprietary programmable image scaling capable of resizing images to fit a wide variety of
aspect ratios.
    
    Adaptive Image Optimization. Our products must translate a broad range of signals in
standard and non-standard formats. We use a proprietary image processing technique to
identify the characteristics of an incoming signal and configure the system to produce the
best possible image.
    
    Color Compensation Technology. Our sophisticated custom color compensation technology
makes it possible to display consistent color images from video and computer graphics,
which use very different color palettes, on different display devices. Our color
processing technology compensates for variations in the color performance of a display.
Using our approach, any color can be addressed independently and adjusted without
impacting other colors.


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
    
    Fully Customizable On-Screen Display.Our technology couples an integrated on-screen
display controller with our industry-first development application. These technologies
allow customers who are designing ImageProcessor semiconductors into their display
products to quickly develop and implement their own unique user interfaces with up to 256
colors that can incorporate graphics and colorful icons in start-up displays and menus.
 Advanced Television Technologies
   
    
    PixelAmp Color Processing.PixelAmp color processing is a proprietary video
processing technique that increases color performance and enhances edges for more
brilliant, crisper images, including high definition content. For lower resolution
images, PixelAmp technology recovers clarity, which improves the consumer viewing
experience on legacy content in advanced television systems. The PixelAmp technology also
includes a demonstration mode that can display an image showing side-by-side screens ofcontent with and without the edge and color enhancements, which is useful for
differentiating products in retail environments.
    
    Dynamic Deblocking.Dynamic Deblocking, or DDb, technology smoothes blocking artifacts
that are common in MPEG encoded content. In order to reduce the amount of data required
to store or transmit in digital format, which is used in digital broadcasting, DVD, and
digital video recording among others, the content is compressed. These digital
compression techniques can introduce visual artifacts that appear as visible blocks in the
video image. Our Dynamic Deblocking technology is able to detect these artifacts and
implements proprietary algorithms to eliminate the edges of the blocks and improve image
quality.
    
    Digital Horizontal Control.Digital Horizontal Control, or DHC, technology is designed
for advanced CRTs in order to reduce system complexity and cost, provide more control over
how the image appears on-screen and improve system reliability. Current digital CRTs use
analog chips to manipulate the scanning beam in order to achieve accurate images.
DHC digitally pre-processes the video signal in order to achieve the correct screen
geometry and image positioning to compensate for geometric distortion inherent in CRT
technology. DHC is an enabling technology for larger diagonal slim CRT televisions, which
have increased demands for deflection control due to the narrower tube depth.
    
    Chroma Key Window.Chroma Key Window technology enables improved video performance on
hybrid PCTV systems. The Chroma Key Window creates a flexible, resizable
picture-in-picture window that displays an alternative video source such as a set-top box
or DVD player. The advantage is a better image quality, since the content is displayed
using hardware to perform the video processing rather than relying on the PC to handle it
which burdens the PC microprocessor and uses software video processing, generally
resulting in lower image quality.
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
    
    SteadySyncTMWeak Signal Compatibility. In many parts of the world,
television viewers still receive their content via over-the-air broadcast. Our SteadySync
technology is able to compensate for broadcast signals that are weak by being able to
better lock onto a signal and display a picture. This technology helps users in
under-served regions to better receive television broadcasts, which is attractive for
manufacturers serving developing countries.
    
    Intelligent Windowing.Intelligent Windowing technology offers consumers control over
how they view multiple content sources simultaneously. Our ImageProcessor ICs for
advanced televisions are capable of displaying video and computer content in various
user-controlled formats such as side-by-side, Picture-In-Picture (PIP), and
Picture-On-Picture (POP), where as many as 12 images from various other sources or
channels can be monitored while watching a primary viewing window. Our Intelligent
Windowing technology delivers additional flexibility with adjustable transparency and
user-controlled resizing of windows.
 TM TM TM TM
 
    
    DNXTMMotion-Adaptive De-Interlacing.We have developed a proprietary video
processing technology to convert interlaced content into progressive content that
virtually eliminates image artifacts such as stair-stepping, often referred to as
jaggies, that can occur with less sophisticated techniques. Our motion-adaptive
de-interlacing is able to analyze the content and apply the most appropriate methods for
both standard television formats and also HDTV formats. In addition, DNX Motion-Adaptive
De-Interlacing automatically recognizes when incoming signals were originally captured on
film so that special methods are employed to display the content.
    
    DNXTMPixelBoostTM.DNX PixelBoostTM technology
improves pixel response which eliminates blurring in fast-motion video as seen on some LCD
panels. LCD pixels are not able to turn on and off as rapidly as pixels in CRTs, which
results in blurry images when content contains quick movements. DNX
PixelBoostTM technology can compensate for this property of LCD panels by
manipulating the content in a way that makes it display more crisply on the screen.
    
    DNXTMRich Color Processing. DNX Rich Color Processing is a technology that
renders more than one billion colors with 10-bit color processing and also optimizes
content appearance for various display technologies.
    
    DNXTMVideo Enhancement Processing.Most content has been encoded in order
to enhance its appearance on CRT-based televisions which makes it appear unnatural when
displayed on LCDs, DMDs or plasma displays. Our DNX Video Enhancement Processing enables
manufacturers to apply filters that compensate for the signals in order to produce sharp,
rich picture quality.
    
    DNXTMNoise Reduction.Digital displays often appear to create movement
where none exists because pixels flicker in areas where there is no motion, creating a
distracting shimmering effect. This is referred to as noise. We have developed
proprietary technology that minimizes noise for a stable, accurate video image.
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Multimedia Projector Technologies
 
    
    Digital Keystone Correction.We pioneered digital keystone correction technology and
it is now established as a key feature in multimedia projectors. When projecting an
image, if the digital projector is not perpendicular to the surface on which it is
projecting the image, the image will be distorted. Our digital keystone correction
modifies the geometry of the image in our ImageProcessor IC so that it will appear that
the image is squared up, which allows a projector to be placed virtually anywhere in the
room. Our ICs have the ability to adjust the image both vertically and horizontally.
Digital keystone correction technology is used in ImageProcessor ICs for the multimedia
market, as well as in our stand alone keystone correction co-processor IC.
 LCD Panel Technologies
 
    
    Smart Timing Controllers.Typically, every LCD panel requires a TCON that is a
purpose-built IC with the function of signaling the LCD panel when to
turn the pixels on and off. We have led the development of a new type of TCON that is
programmable, or smart, so it is able to work with most LCD panels. LCD manufacturers
benefit by no longer having to design and build a unique component for each panel.
Additionally, we implemented new signal processing techniques that enhance pixel response
times and contrast ratios.
 Future Developments
   Customers, Sales and Marketing
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
    
    Distributors.Distributors are resellers in local markets who provide engineering
support and stock our semiconductors in direct relation to specific manufacturing customer
orders. Our distributors often have valuable and established relationships with our end
customers, and in certain countries it is customary to sell to distributors. While
distributor payment to us is not dependent upon the distributors ability to resell the
product or to collect from the end customer, our distributors may provide longer payment
terms to end customers than those we would offer. Sales to distributors accounted for
52%, 46% and 69% of total revenue for the years ended December 31, 2006, 2005 and 2004,
respectively.Our largest distributor, Tokyo Electron Device, or TED, is located in Japan. TED
represented 26%, 22% and 31% of revenue for the years ended December 31, 2006, 2005 and,
2004, respectively, and accounted for 23% and 16% of accounts receivable at December 31,
2006 and 2005, respectively. No other distributor accounted for more than 10% of total
revenue during the years ended December 31, 2006, 2005 and 2004.We also have distributor relationships in China and Europe.
    
    Direct Relationships.We have established direct relationships with companies that
manufacture advanced display systems. Some of our direct relationships are supported by
manufacturers representatives, which are independent sales agents that represent us in
local markets and provide engineering support but do not carry inventory. Revenue through
direct relationships accounted for 48%, 54% and 31% of total revenue for the years ended
December 31, 2006, 2005 and 2004, respectively.During 2006, we sold product directly to Seiko Epson Corporation who accounted for 15% of
revenue for the year ended December 31, 2006. Revenue attributable to Seiko Epson
Corporation was 10% and 8% of revenue for the years ended December 31, 2005 and 2004,
respectively. No other customer accounted for more than 10% of total revenue during the
years ended December 31, 2006, 2005 and 2004.We have identified three classifications of direct relationships as follows:
 o
    
    Integrators.Integrators are OEM customers who build display devices
based on specifications provided by branded manufacturers.o
    
    Branded Manufacturers. Branded manufacturers are globally recognized
manufacturers who develop display device specifications, and manufacture, market
and distribute display devices either directly or through resellers to end-users.o
    
    Branded Suppliers. Branded suppliers are globally recognized
suppliers who develop display device specifications and then source them from
integrators, typically in Asia, and distribute them either directly or through
resellers to end-users.
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Seasonality
  Geographic Concerns
    Backlog
  Research and Development
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Manufacturing
  Intellectual Property
     Competition
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Environmental Matters
   Employees
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Available Information
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Item 1A. Risk Factors.
 Investing in our shares of common stock involves a high degree of risk. If any of the following
risks occur, the market price of our shares of common stock could decline and investors could lose
all or part of their investment.
  Risks Related to Our Operations
 We may not be able to gain market acceptance of our co-processor strategy sufficient or timely
enough to grow revenue and margin dollars in support of turning the Company to profitability in a
timely manner.
    We may not be able to implement our 2006 restructuring plans in a timely manner, or at all, and
even if we do, the plan may not result in the anticipated benefits and we may need to initiate
additional restructuring efforts in the future.
   19
    Table of Contents    We have expended a substantial amount of our resources on the acquisition of Equator and we may not
realize a significant return on our investment.
     We have incurred substantial indebtedness as a result of the sale of convertible debentures.
  20
    Table of Contents   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 revenues.
    
    
    accurate prediction of customer requirements and evolving industry standards, including
video decoding, digital interface and content piracy protection standards;
    
    development of advanced display technologies and capabilities;
    
    timely completion and introduction of new product designs;
    
    use of advanced foundry processes and achievement of high manufacturing yields; and
    
    market acceptance of new products.
  If we do not achieve additional design wins in the future, our ability to grow will be seriously
limited.
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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.
     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.
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
    
    demand for multimedia projectors, advanced televisions, and LCD panel products;
    
    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 or due to a reduction in our end customers demand;
    
    the loss of one or more of our key distributors or customers or a reduction, delay or
cancellation of orders from one or more of these parties;
    
    changes in the available production capacity at the semiconductor fabrication foundries
that manufacture our products and changes in the costs of manufacturing;
    
    our ability to provide adequate supplies of our products to customers and avoid excess
inventory;
    
    the announcement or introduction of products and technologies by our competitors;
    
    changes in product mix, product costs or pricing, or distribution channels; and
    
    general economic conditions and economic conditions specific to the advanced display
and semiconductor markets.
  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.
  Changes in stock-based compensation accounting rules have adversely impacted our operating results
and may adversely impact our stock price.
 Shared-Based
Payments
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Failure to manage any expansion efforts effectively could adversely affect our business and results
of operations.
  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.
     
    
    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 that could otherwise serve as working capital.
 24
    Table of Contents   
    
    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.
 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.
  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.
  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.
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Integration of software in our products adds complexity and cost that may affect our ability to
achieve design wins and may affect our profitability.
  Our software development tools may be incompatible with industry standards and challenging to
implement, which could slow product development or cause us to lose customers and design wins.
  Our 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.
  Our limited ability to protect our intellectual property and proprietary rights could harm our
competitive position by allowing our competitors to access our proprietary technology and to
introduce similar products.
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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
intellectual property;
    
    attempt to obtain a license to the relevant intellectual property, which may not be
available on reasonable terms or at all;
    
    attempt to redesign those products that contain the allegedly infringing intellectual
property; 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.
  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.
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Dependence on a limited number of sole-source, third-party manufacturers for our products exposes
us to shortages based on capacity allocation or low manufacturing yield, errors in manufacturing,
price increases with little notice, volatile inventory levels and delays in product delivery, which
could result in delays in satisfying customer demand, increased costs and loss of revenues.
   If we have to qualify a new contract manufacturer or foundry for any of our products, we may
experience delays that result in lost revenues and damaged customer relationships.
  We are dependent on our foundries to implement complex semiconductor technologies, which could
adversely affect our operations if those technologies are unavailable, delayed or inefficiently
implemented.
 28
    Table of Contents    Manufacturers of our semiconductor products periodically discontinue manufacturing processes, which
could make our products unavailable from our current suppliers.
   We use a customer owned tooling, or COT, 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 revenues and impair our ability to ship our products on time.
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Shortages of other key components for our customers products could delay our ability to sell our
products.
  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.
  Decreased effectiveness of share-based payment awards could adversely affect our ability to attract
and retain employees, officers and directors.
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A significant amount of our revenue comes from a limited number of customers and distributors. Any
decrease in revenues from, or loss of, any of these customers or distributors could significantly
reduce our total revenues.
  
    
    a significant reduction, delay or cancellation of orders from one or more of our
distributors, branded manufacturers or integrators; or
    
    a decision by one or more significant end customers to select products manufactured by
a competitor, or its own internally developed semiconductor, for inclusion in future
product generations.
  The concentration of our accounts receivable with a limited number of customers exposes us to
increased credit risk and could harm our operating results and cash flows.
 31
    Table of Contents   International sales account for almost all of our revenue, and if we do not successfully address
the risks associated with our international operations, our revenue could decrease.
  
    
    increased difficulties in managing international distributors and manufacturers of our
products and components due to varying time zones, languages and business customs;
    
    foreign currency exchange fluctuations such as the devaluation in the currencies of
Japan, Peoples Republic of China (PRC), Taiwan 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 intellectual property, significant amounts of
which are contained in software, which is more prone to design piracy;
    
    increased transaction costs related to sales transactions conducted outside of the
U.S., such as charges to secure letters of credit for foreign receivables;
    
    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, Korea or Turkey that
may significantly impact purchases of our products by our customers;
    
    outbreaks of SARS, bird flu or other pandemics in the PRC or other parts of Asia; and
    
    difficulties in collecting accounts receivable.
 Our growing presence and investment within the Peoples Republic of China subjects us to risks of
economic and political instability in the area, which could adversely impact our results of
operations.
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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.
  In recent years, various federal, state, and international governments have enacted laws and
regulations governing the collection, treatment, recycling and disposal of certain materials used
in the manufacturing of electrical and electronic components. We have incurred, and may continue to
incur, significant expenditures to comply with these laws and regulations and we may incur
additional capital expenditures and asset impairments to ensure that our products and our vendors
products are in compliance with these regulations. In addition, we would be subject to significant
penalties for failure to comply with these laws and regulations.
  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.
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If products incorporating our semiconductors are not compatible with computer display protocols,
video standards and other devices, the market for our products will be reduced and our business
prospects could be significantly limited.
  Intense competition in our markets may reduce sales of our products, reduce our market share,
decrease our gross profit and result in large losses.
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The cyclical nature of the semiconductor industry may lead to significant variances in the demand
for our products and could harm our operations.
  Other Risks
 The anti-takeover provisions of Oregon law and in our articles of incorporation could adversely
affect the rights of the holders of our common stock by preventing a sale or takeover of us at a
price or prices favorable to the holders of our common stock.
  
    
    our board of directors is authorized, without prior shareholder approval, to 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;
    
    members of our board of directors can only be removed for cause;
    
    the board of directors may alter our bylaws without obtaining shareholder approval; and
    
    shareholders are required to provide advance notice for nominations for election to the
board of directors or for proposing matters to be acted upon at a shareholder meeting.
 Our principal shareholders have significant voting power and may take actions that may make it more
difficult to sell our shares at a premium to take over candidates.
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The price of our common stock has and may continue to fluctuate substantially.
  
    
    actual or anticipated fluctuations in our operating results;
    
    actual reduction in our operating results due solely to the adoption of SFAS 123R,
which requires, among other things, the expensing of stock options which began January 1,
2006;
    
    changes in expectations as to our future financial performance;
    
    changes in financial estimates of securities analysts;
    
    announcements by us or our competitors of technological innovations, design wins,
contracts, standards or acquisitions;
    
    the operating and stock price performance of other comparable companies;
    
    announcements of future expectations by our customers;
    
    changes in market valuations of other technology companies; and
    
    inconsistent trading volume levels of our common stock.
  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
require significant resources.
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Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
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Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  For
    
    
    23,242,811Against
    
    
    5,628,336Abstain
    
    
    17,853
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
  Fiscal 2006
    
    High
    
    LowFourth Quarter
    
    $
    3.26
    
    
    $
    2.10Third Quarter
    
    
    3.04
    
    
    
    2.00Second Quarter
    
    
    5.05
    
    
    
    2.40First Quarter
    
    
    6.42
    
    
    
    4.36
 Fiscal 2005
    
    High
    
    LowFourth Quarter
    
    $
    6.74
    
    
    $
    4.97Third Quarter
    
    
    11.78
    
    
    
    6.25Second Quarter
    
    
    9.32
    
    
    
    6.90First Quarter
    
    
    12.44
    
    
    
    7.55
  38




---



##### Table of Contents



Performance Graph
 The following Performance Graph does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other Company filing under the Securities Act of
1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically
incorporates this Report by reference therein.
  COMPARISON OF MONTHLY CUMULATIVE TOTAL RETURN
AMONG PIXELWORKS, INC., THE NASDAQ STOCK MARKET (U.S.)
INDEX AND THE NASDAQ ELECTRONICS COMPONENTS INDEX
 
 Equity Compensation Plans
  39




---



##### Table of Contents



Item 6. Selected Financial Data.
  Statement of Operations Data
 Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands, except
per share data)Revenue, net
    
    $
    133,607
    
    
    $
    171,704
    
    
    $
    176,211
    
    
    $
    140,921
    
    
    $
    102,641Cost of revenue
    
    
    84,057
    
    
    
    108,748
    
    
    
    90,991
    
    
    
    78,674
    
    
    
    52,545Impairment loss on acquired developed technology
    
    
    21,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring
    
    
    2,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross profit
    
    
    26,101
    
    
    
    62,956
    
    
    
    85,220
    
    
    
    62,247
    
    
    
    50,096Operating expenses:Research and development
    
    
    57,019
    
    
    
    51,814
    
    
    
    32,969
    
    
    
    29,580
    
    
    
    31,182Selling, general and administrative
    
    
    35,053
    
    
    
    30,616
    
    
    
    23,736
    
    
    
    20,797
    
    
    
    16,576Impairment loss on goodwill
    
    
    133,739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss on acquired intangible assets
    
    
    1,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring
    
    
    13,316
    
    
    
    1,162
    
    
    
    
    
    
    
    5,049
    
    
    
    Amortization of acquired intangible assets
    
    
    602
    
    
    
    1,084
    
    
    
    486
    
    
    
    486
    
    
    
    242Merger-related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,949
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,342Total operating expenses
    
    
    241,482
    
    
    
    84,676
    
    
    
    57,191
    
    
    
    64,861
    
    
    
    72,342Income (loss) from operations
    
    
    (215,381
    )
    
    
    (21,720
    )
    
    
    28,029
    
    
    
    (2,614
    )
    
    
    (22,246
    )Interest and other income, net
    
    
    10,254
    
    
    
    1,532
    
    
    
    1,742
    
    
    
    1,177
    
    
    
    2,275Income (loss) before income taxes
    
    
    (205,127
    )
    
    
    (20,188
    )
    
    
    29,771
    
    
    
    (1,437
    )
    
    
    (19,971
    )Provision (benefit) for income taxes
    
    
    (949
    )
    
    
    22,422
    
    
    
    7,990
    
    
    
    (907
    )
    
    
    880Net income (loss)
    
    $
    (204,178
    )
    
    $
    (42,610
    )
    
    $
    21,781
    
    
    $
    (530
    )
    
    $
    (20,851
    )Net income (loss) per share:Basic
    
    $
    (4.23
    )
    
    $
    (0.90
    )
    
    $
    0.47
    
    
    $
    (0.01
    )
    
    $
    (0.48
    )Diluted
    
    $
    (4.23
    )
    
    $
    (0.90
    )
    
    $
    0.45
    
    
    $
    (0.01
    )
    
    $
    (0.48
    )Weighted average shares outstanding:Basic
    
    
    48,289
    
    
    
    47,337
    
    
    
    46,673
    
    
    
    45,337
    
    
    
    43,397Diluted
    
    
    48,289
    
    
    
    47,337
    
    
    
    52,062
    
    
    
    45,337
    
    
    
    43,397
 40




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##### Table of Contents



Balance Sheet Data
 December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(In thousands)Cash and cash equivalents
    
    $
    63,095
    
    
    $
    68,604
    
    
    $
    32,585
    
    
    $
    16,490
    
    
    $
    17,577Working capital
    
    
    108,169
    
    
    
    139,291
    
    
    
    209,653
    
    
    
    91,681
    
    
    
    95,776Total assets
    
    
    207,771
    
    
    
    421,556
    
    
    
    423,569
    
    
    
    233,317
    
    
    
    227,212Long-term liabilities, net of current portion
    
    
    147,414
    
    
    
    163,357
    
    
    
    150,365
    
    
    
    100
    
    
    
    Total shareholders equity
    
    
    21,948
    
    
    
    215,217
    
    
    
    252,023
    
    
    
    220,305
    
    
    
    214,816
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation.
  Overview
      41




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##### Table of Contents



Critical Accounting Policies and Estimates
   Revenue Recognition. Revenue Recognition
 Sales Returns and Allowances.
 42




---



##### Table of Contents



Product Warranties.
  Allowance for Doubtful Accounts.
 Inventory Valuation.
 Useful Lives and Recoverability of Equipment and Other Long-Lived Assets. Accounting for the Impairment or
Disposal of Long-Lived Assets
 Goodwill.
 43




---



##### Table of Contents



Goodwill and Other Intangible Assets. Business Combinations
 Stock-Based Compensation Share-Based Payment
 Income Taxes.
  44




---



##### Table of Contents



Results of Operations
  Year Ended December 31,2006
    
    
    2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofDollars
    
    
    Revenue
    
    
    Dollars
    
    
    Revenue
    
    
    Dollars
    
    
    RevenueRevenue, net
    
    $
    133,607
    
    
    
    100.0
    %
    
    $
    171,704
    
    
    
    100.0
    %
    
    $
    176,211
    
    
    
    100.0
    %Cost of revenue
    
    
    84,057
    
    
    
    62.9
    
    
    
    108,748
    
    
    
    63.3
    
    
    
    90,991
    
    
    
    51.6Impairment loss on acquired developed technology
    
    
    21,330
    
    
    
    16.0
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Restructuring
    
    
    2,119
    
    
    
    1.6
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Gross profit
    
    
    26,101
    
    
    
    19.5
    
    
    
    62,956
    
    
    
    36.7
    
    
    
    85,220
    
    
    
    48.4Operating expenses:Research and development
    
    
    57,019
    
    
    
    42.7
    
    
    
    51,814
    
    
    
    30.2
    
    
    
    32,969
    
    
    
    18.7Selling, general and administrative
    
    
    35,053
    
    
    
    26.2
    
    
    
    30,616
    
    
    
    17.8
    
    
    
    23,736
    
    
    
    13.5Impairment loss on goodwill
    
    
    133,739
    
    
    
    100.1
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Impairment loss on acquired intangible assets
    
    
    1,753
    
    
    
    1.3
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Restructuring
    
    
    13,316
    
    
    
    10.0
    
    
    
    1,162
    
    
    
    0.7
    
    
    
    
    
    
    
    0.0Amortization of acquired intangible assets
    
    
    602
    
    
    
    0.5
    
    
    
    1,084
    
    
    
    0.6
    
    
    
    486
    
    
    
    0.3Total operating expenses
    
    
    241,482
    
    
    
    180.7
    
    
    
    84,676
    
    
    
    49.3
    
    
    
    57,191
    
    
    
    32.5Income (loss) from operations
    
    
    (215,381
    )
    
    
    (161.2
    )
    
    
    (21,720
    )
    
    
    (12.6
    )
    
    
    28,029
    
    
    
    15.9Interest income
    
    
    5,833
    
    
    
    4.4
    
    
    
    5,658
    
    
    
    3.3
    
    
    
    3,823
    
    
    
    2.2Interest expense
    
    
    (2,721
    )
    
    
    (2.0
    )
    
    
    (2,637
    )
    
    
    (1.5
    )
    
    
    (1,609
    )
    
    
    (0.9
    )Settlement proceeds, net
    
    
    4,800
    
    
    
    3.6
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Gain on repurchase of long-term debt, net
    
    
    3,009
    
    
    
    2.3
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Realized loss on sale of marketable securities
    
    
    
    
    
    
    0.0
    
    
    
    (779
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    0.0Amortization of debt issuance costs
    
    
    (667
    )
    
    
    (0.5
    )
    
    
    (710
    )
    
    
    (0.4
    )
    
    
    (472
    )
    
    
    (0.3
    )Interest and other income, net
    
    
    10,254
    
    
    
    7.7
    
    
    
    1,532
    
    
    
    0.9
    
    
    
    1,742
    
    
    
    1.0Income (loss) before income taxes
    
    
    (205,127
    )
    
    
    (153.5
    )
    
    
    (20,188
    )
    
    
    (11.8
    )
    
    
    29,771
    
    
    
    16.9Provision (benefit) for income taxes
    
    
    (949
    )
    
    
    (0.7
    )
    
    
    22,422
    
    
    
    13.1
    
    
    
    7,990
    
    
    
    4.5Net income (loss)
    
    $
    (204,178
    )
    
    
    (152.8
    )%
    
    $
    (42,610
    )
    
    
    (24.8
    )%
    
    $
    21,781
    
    
    
    12.4
    %
  Revenue, Net
  45




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004Multimedia projector
    
    
    44
    %
    
    
    31
    %
    
    
    45
    %Advanced television
    
    
    32
    %
    
    
    52
    %
    
    
    43
    %Digital streaming media devices
    
    
    14
    %
    
    
    8
    %
    
    
    0
    %LCD monitor
    
    
    6
    %
    
    
    7
    %
    
    
    10
    %Other
    
    
    4
    %
    
    
    2
    %
    
    
    2
    %
 Multimedia Projector
    Advanced Television
    Digital Streaming Media Devices
  46




---



##### Table of Contents



LCD Monitor
   Other
  Cost of Revenue and Gross Profit
      47




---



##### Table of Contents



Research and Development
   
    
    Depreciation and amortization expense increased $3,155 primarily
due to increased licensed technology and software asset purchases
made at the end of 2005.
    
    Stock-based compensation expense increased $3,126 as a result of
our adoption of SFAS 123R on January 1, 2006. Under SFAS 123R, we
estimate the fair value of options granted using the Black-Scholes
option-pricing model and recognize stock-based compensation
expense over the requisite service period, which is generally the
vesting period. Previously, stock-based compensation expense was
recognized only in the event options were granted at an exercise
price less than the market price of our common stock on the date
of grant.
    
    Facilities and information technology expenses allocated to
research and development increased $692. The increase in
facilities and information technology expenses was driven by
increases in depreciation and amortization expense, outside
services, and telephone and other communications charges.
    
    Compensation expense decreased $2,306. While headcount in our
research and development cost centers was consistent at 254 at
December 31, 2006 and 2005, the restructuring plans we initiated
in April 2006 and November 2006 have shifted research and
development to locations in Asia from locations in North America.
    
    Development-related expenses, including non-recurring engineering
and outside services, decreased $456 due to the timing of projects
in process.
  
    
    Compensation expense increased $6,850, due to an increase in
headcount in research and development cost centers to 254 at
December 31, 2005 from 164 at December 31, 2004. This increase
includes 49 in our Shanghai design center, and 41 that resulted
from our acquisition of Equator. These increases were partially
offset by a decrease in Tualatin headcount, which was primarily
attributable to the restructuring we initiated in October of 2005.
 
    
    Development related expenses, including non-recurring engineering
and outside services, increased $4,415.
 
    
    Depreciation and amortization expense increased $3,875, primarily
due to increased licensed technology and software asset purchases.
 
    
    Facilities and information technology expenses allocated to
research and development increased $3,293. The increase in
facilities and information technology expenses was driven by
increased headcount in information technology departments and rent
expense, which were in part attributable
 48




---



##### Table of Contents



to the addition of
Equator, and increased depreciation and amortization expense,
expensed equipment and software, and telephone and other
communications charges.
 
    
    Stock-based compensation increased $536 due to the assumption of
outstanding Equator stock options.
  Selling, General and Administrative
   
    
    Stock-based compensation expense increased $5,157 as a result of our adoption of SFAS 123R on January 1, 2006. Under
SFAS 123R, we estimate the fair value of options granted using the Black-Scholes option-pricing model and recognize
stock-based compensation expense over the requisite service period, which is generally the vesting period. Previously,
stock-based compensation expense was recognized only in the event options were granted at an exercise price less than
the market price of our common stock on the date of grant.
 
    
    Compensation expense increased $342. Selling, general and administrative headcount decreased from 172 at December 31,
2005 to 150 at December 31, 2006 however, average headcount was relatively consistent at 159 in 2006 and 164 in 2005.
 
    
    Sales commission expense decreased $1,250 due to the decrease in revenue in 2006.
  
    
    Compensation expense increased $3,963, due to an increase in headcount in selling, general and administrative cost
centers to 172 at December 31, 2005 from 137 as of December 31, 2004. This increase includes 10 employees that
resulted from our acquisition of Equator.
 
    
    Facilities and information technology expenses allocated to selling, general and administrative increased $1,562. The
increase in facilities and information technology expenses was driven by increased headcount in information technology
departments and increased rent expense, which were in part attributable to the addition of Equator, and increased
depreciation and amortization expense, expensed equipment and software, and telephone and other communications charges.
 
    
    Sales commission expense increased $908, primarily due to our acquisition of Equator.
 
    
    Travel-related expenses increased $727.
  49




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##### Table of Contents



Impairment Loss on Goodwill
  Impairment Loss on Acquired Intangible Assets
  Restructuring
      50




---



##### Table of Contents



Amortization of Acquired Intangible Assets
  Interest and Other Income, Net
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Interest income
    
    $
    5,833
    
    
    $
    5,658
    
    
    $
    3,823Interest expense
    
    
    (2,721
    )
    
    
    (2,637
    )
    
    
    (1,609
    )Settlement proceeds, net
    
    
    4,800
    
    
    
    
    
    
    
    Gain on repurchase of long-term debt, net
    
    
    3,009
    
    
    
    
    
    
    
    Realized loss on sale of marketable securities
    
    
    
    
    
    
    (779
    )
    
    
    Amortization of debt issuance costs
    
    
    (667
    )
    
    
    (710
    )
    
    
    (472
    )Interest and other income, net
    
    $
    10,254
    
    
    $
    1,532
    
    
    $
    1,742
      51




---



##### Table of Contents



Provision for Income Taxes
     Liquidity and Capital Resources
   52




---



##### Table of Contents



Accounts Receivable, Net
  Inventories, Net
  Capital Resources
  53




---



##### Table of Contents



th th
 Contractual Payment Obligations
  Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual Obligation
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsLong-term debt
    
    $
    140,000
    
    
    $
    
    
    
    $
    
    
    
    $
    140,000
    
    
    $
    Interest on long-term debt
    
    
    10,719
    
    
    
    2,450
    
    
    
    4,900
    
    
    
    3,369
    
    
    
    Operating leases
    
    
    11,383
    
    
    
    3,641
    
    
    
    4,044
    
    
    
    2,374
    
    
    
    1,324Payments on accrued balances related to
asset purchases
    
    
    13,296
    
    
    
    7,733
    
    
    
    5,563
    
    
    
    
    
    
    
    Estimated Q1 2007 purchase commitments
to contract manufacturers
    
    
    11,022
    
    
    
    11,022
    
    
    
    
    
    
    
    
    
    
    
    
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Fair Value
Measurements
 54




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Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
    55




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
  Report of Independent Registered Public Accounting Firm
    
    
    57Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    58Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    59Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    60Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years
ended December 31, 2006, 2005 and 2004
    
    
    61Notes to Consolidated Financial Statements
    
    
    62
 56




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Report of Independent Registered Public Accounting Firm
 
     Internal ControlIntegrated
Framework
  
 57




---



##### Table of Contents



PIXELWORKS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share data)
 December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    63,095
    
    
    $
    68,604Short-term marketable securities
    
    
    53,985
    
    
    
    59,888Accounts receivable, net
    
    
    9,315
    
    
    
    19,927Inventories, net
    
    
    13,809
    
    
    
    26,577Prepaid expenses and other current assets
    
    
    6,374
    
    
    
    7,277Total current assets
    
    
    146,578
    
    
    
    182,273Long-term marketable securities
    
    
    17,504
    
    
    
    17,145Property and equipment, net
    
    
    21,931
    
    
    
    29,029Other assets, net
    
    
    9,287
    
    
    
    18,277Debt issuance costs, net
    
    
    2,922
    
    
    
    3,780Acquired intangible assets, net
    
    
    9,549
    
    
    
    37,321Goodwill
    
    
    
    
    
    
    133,731Total assets
    
    $
    207,771
    
    
    $
    421,556LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,738
    
    
    $
    7,206Accrued liabilities and current portion of long-term liabilities
    
    
    21,674
    
    
    
    26,269Income taxes payable
    
    
    10,997
    
    
    
    9,507Total current liabilities
    
    
    38,409
    
    
    
    42,982Long-term liabilities, net of current portion
    
    
    7,414
    
    
    
    13,357Long-term debt
    
    
    140,000
    
    
    
    150,000Total liabilities
    
    
    185,823
    
    
    
    206,339Commitments and contingenciesShareholders equity:Preferred stock, $0.001 par value; 50,000,000 shares authorized, 1 share issued and
issued and outstanding as of December 31, 2006 and 2005
    
    
    
    
    
    
    Common stock, $0.001 par value; 250,000,000 shares authorized, 48,613,826 and
47,168,311 shares issued and outstanding as of December 31, 2006 and 2005, respectively
    
    
    331,567
    
    
    
    316,257Exchangeable shares; 1,731,099 shares issued, 47,635 and 574,467 shares
issued and outstanding as of December 31, 2006 and 2005, respectively
    
    
    450
    
    
    
    5,434Accumulated other comprehensive loss
    
    
    (3,693
    )
    
    
    (3,503
    )Deferred stock-based compensation
    
    
    
    
    
    
    (773
    )Accumulated deficit
    
    
    (306,376
    )
    
    
    (102,198
    )Total shareholders equity
    
    
    21,948
    
    
    
    215,217Total liabilities and shareholders equity
    
    $
    207,771
    
    
    $
    421,556
  58




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PIXELWORKS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenue, net
    
    $
    133,607
    
    
    $
    171,704
    
    
    $
    176,211Cost of revenue (1)
    
    
    84,057
    
    
    
    108,748
    
    
    
    90,991Impairment loss on acquired developed technology
    
    
    21,330
    
    
    
    
    
    
    
    Restructuring
    
    
    2,119
    
    
    
    
    
    
    
    Gross profit
    
    
    26,101
    
    
    
    62,956
    
    
    
    85,220Operating expenses:Research and development (2)
    
    
    57,019
    
    
    
    51,814
    
    
    
    32,969Selling, general and administrative (3)
    
    
    35,053
    
    
    
    30,616
    
    
    
    23,736Impairment loss on goodwill
    
    
    133,739
    
    
    
    
    
    
    
    Impairment loss on acquired intangible assets
    
    
    1,753
    
    
    
    
    
    
    
    Restructuring
    
    
    13,316
    
    
    
    1,162
    
    
    
    Amortization of acquired intangible assets
    
    
    602
    
    
    
    1,084
    
    
    
    486Total operating expenses
    
    
    241,482
    
    
    
    84,676
    
    
    
    57,191Income (loss) from operations
    
    
    (215,381
    )
    
    
    (21,720
    )
    
    
    28,029Interest income
    
    
    5,833
    
    
    
    5,658
    
    
    
    3,823Interest expense
    
    
    (2,721
    )
    
    
    (2,637
    )
    
    
    (1,609
    )Settlement proceeds, net
    
    
    4,800
    
    
    
    
    
    
    
    Gain on repurchase of long-term debt, net
    
    
    3,009
    
    
    
    
    
    
    
    Realized loss on sale of marketable securities
    
    
    
    
    
    
    (779
    )
    
    
    Amortization of debt issuance costs
    
    
    (667
    )
    
    
    (710
    )
    
    
    (472
    )Interest and other income, net
    
    
    10,254
    
    
    
    1,532
    
    
    
    1,742Income (loss) before income taxes
    
    
    (205,127
    )
    
    
    (20,188
    )
    
    
    29,771Provision (benefit) for income taxes
    
    
    (949
    )
    
    
    22,422
    
    
    
    7,990Net income (loss)
    
    $
    (204,178
    )
    
    $
    (42,610
    )
    
    $
    21,781Net income (loss) per share:Basic
    
    $
    (4.23
    )
    
    $
    (0.90
    )
    
    $
    0.47Diluted
    
    $
    (4.23
    )
    
    $
    (0.90
    )
    
    $
    0.45Weighted average shares outstanding:Basic
    
    
    48,289
    
    
    
    47,337
    
    
    
    46,673Diluted
    
    
    48,289
    
    
    
    47,337
    
    
    
    52,062(1) Includes:Amortization of acquired developed technology
    
    $
    4,087
    
    
    $
    4,515
    
    
    $
    529Amortization of acquired inventory mark-up
    
    
    26
    
    
    
    5,217
    
    
    
    Amortization of acquired backlog
    
    
    
    
    
    
    600
    
    
    
    Stock-based compensation
    
    
    208
    
    
    
    60
    
    
    
    (2) Includes stock-based compensation
    
    
    3,884
    
    
    
    758
    
    
    
    222(3) Includes stock-based compensation
    
    
    5,464
    
    
    
    307
    
    
    
    131
  59




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##### Table of Contents



PIXELWORKS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (204,178
    )
    
    $
    (42,610
    )
    
    $
    21,781Adjustments to reconcile net income (loss) to net cash provided by operating activities:Impairment losses on goodwill and acquired intangible assets
    
    
    156,822
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    17,667
    
    
    
    13,469
    
    
    
    8,160Loss on asset disposals related to restructuring
    
    
    11,618
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    9,556
    
    
    
    1,125
    
    
    
    353Amortization of acquired intangible assets
    
    
    4,689
    
    
    
    6,199
    
    
    
    1,015Gain on repurchase of long-term debt, net
    
    
    (3,009
    )
    
    
    
    
    
    
    Deferred income tax expense (benefit)
    
    
    (967
    )
    
    
    13,636
    
    
    
    (1,101
    )Income tax benefit from stock options
    
    
    
    
    
    
    1,421
    
    
    
    4,485Realized loss on sale of marketable securities
    
    
    
    
    
    
    779
    
    
    
    Amortization of debt issuance costs
    
    
    667
    
    
    
    710
    
    
    
    472Loss on asset disposals
    
    
    90
    
    
    
    180
    
    
    
    381Other
    
    
    100
    
    
    
    150
    
    
    
    179Changes in operating assets and liabilities, net of effects of acquisition:Accounts receivable, net
    
    
    10,612
    
    
    
    (858
    )
    
    
    (6,137
    )Inventories, net
    
    
    12,768
    
    
    
    2,806
    
    
    
    (8,097
    )Prepaid expenses and other current and long-term assets
    
    
    842
    
    
    
    (2,340
    )
    
    
    (43
    )Accounts payable
    
    
    (1,468
    )
    
    
    (554
    )
    
    
    1,677Accrued current and long-term liabilities
    
    
    (233
    )
    
    
    (693
    )
    
    
    2,167Income taxes payable
    
    
    1,490
    
    
    
    7,114
    
    
    
    2,393Net cash provided by operating activities
    
    
    17,066
    
    
    
    534
    
    
    
    27,685Cash flows from investing activities:Proceeds from sales and maturities of available-for-sale marketable securities
    
    
    47,647
    
    
    
    263,375
    
    
    
    Proceeds from sales and maturities of held-to-maturity marketable securities
    
    
    
    
    
    
    54,928
    
    
    
    114,083Purchases of available-for-sale marketable securities
    
    
    (42,290
    )
    
    
    (124,108
    )
    
    
    Purchases of held-to-maturities marketable securities
    
    
    
    
    
    
    (36,345
    )
    
    
    (259,042
    )Acquisition of Equator Technologies, Inc., net of cash acquired
    
    
    
    
    
    
    (104,736
    )
    
    
    Payments on equipment and other asset financing
    
    
    (17,178
    )
    
    
    (9,825
    )
    
    
    (5,106
    )Purchases of property and equipment
    
    
    (5,255
    )
    
    
    (7,915
    )
    
    
    (8,471
    )Purchases of other assets
    
    
    (278
    )
    
    
    (1,929
    )
    
    
    (3,221
    )Proceeds from sales of property and equipment
    
    
    36
    
    
    
    61
    
    
    
    12Net cash provided by (used in) investing activities
    
    
    (17,318
    )
    
    
    33,506
    
    
    
    (161,745
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    145,500Repurchase of long-term debt
    
    
    (6,800
    )
    
    
    
    
    
    
    Proceeds from issuances of common stock
    
    
    1,543
    
    
    
    1,986
    
    
    
    5,110Debt issuance costs
    
    
    
    
    
    
    (7
    )
    
    
    (455
    )Net cash provided by (used in) financing activities
    
    
    (5,257
    )
    
    
    1,979
    
    
    
    150,155Net change in cash and cash equivalents
    
    
    (5,509
    )
    
    
    36,019
    
    
    
    16,095Cash and cash equivalents, beginning of year
    
    
    68,604
    
    
    
    32,585
    
    
    
    16,490Cash and cash equivalents, end of year
    
    $
    63,095
    
    
    $
    68,604
    
    
    $
    32,585
  60




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##### Table of Contents



PIXEL
WORKS, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (In thousands, except share data)
 AccumulatedOther
    
    
    
    
    
    
    Deferred
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Exchangeable Shares
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    Stock-based
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Income (Loss)
    
    
    Income (Loss)
    
    
    Compensation
    
    
    Deficit
    
    
    EquityBalance as of December 31, 2003
    
    
    45,113,662
    
    
    $
    294,235
    
    
    
    833,861
    
    
    $
    7,888
    
    
    $
    
    
    
    
    
    
    
    $
    (449
    )
    
    $
    (81,369
    )
    
    $
    220,305Stock issued under stock option and stock purchase
plans and tax benefits associated therewith
    
    
    1,021,761
    
    
    
    9,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,595Stock-based compensation expense due to option
modification
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Reversal of deferred stock-based compensation due
to terminations
    
    
    
    
    
    
    (101
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    288Conversion of exchangeable shares to common stock
    
    
    184,205
    
    
    
    1,743
    
    
    
    (184,205
    )
    
    
    (1,743
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reversal of exchangeable shares due to termination
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Release and cancellation of shares held in escrow
    
    
    (31,876
    )
    
    
    (541
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (541
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,781
    
    
    
    
    
    
    
    21,781
    
    
    
    21,781Unrealized gain on available-for-sale securities, net of tax of $239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    531Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,312Balance 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 tax benefits associated therewith
    
    
    805,573
    
    
    
    2,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,595Fair value of options assumed in Equator Technologies, Inc.
acquisition and deferred stock-based compensation
associated therewith
    
    
    
    
    
    
    8,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,218
    )
    
    
    
    
    
    
    6,118Reversal of deferred stock-based compensation due
to terminations
    
    
    
    
    
    
    (380
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    Amortization of deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,125
    
    
    
    
    
    
    
    1,125Conversion of exchangeable shares to common stock
    
    
    74,986
    
    
    
    710
    
    
    
    (74,986
    )
    
    
    (710
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (42,610
    )
    
    
    
    
    
    
    (42,610
    )
    
    
    (42,610
    )Unrealized loss on available-for-sale securities, net of tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,034
    )
    
    
    (4,034
    )
    
    
    
    
    
    
    
    
    
    
    (4,034
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (46,644
    )Balance 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 to 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
    )
    
    $
    21,948
  61




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##### Table of Contents



PIXELWORKS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands, except share and per share data)
 NOTE 1. BASIS OF PRESENTATION
 Nature of Business
  Consolidated Financial Statements
  Use of Estimates
  Reclassifications
  NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Cash and Cash Equivalents
  Marketable Securities
 Accounting for Certain Investments in
Debt and Equity Securities
 62




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##### Table of Contents



Accounts Receivable
   Inventories
  Property and Equipment
  Software
    
    Lesser of 3 years or contractual license termEquipment, furniture and fixtures
    
    2 yearsTooling
    
    2 yearsLeasehold improvements
    
    Lessor of lease term or estimated useful life
 Accounting for the Impairment or Disposal of Long-lived Assets ,
  63




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##### Table of Contents



Acquired Intangible Assets
   Licensed Technology
  Goodwill
 Goodwill and Other Intangible Assets. Business Combinations st
 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.
 64




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##### Table of Contents



Warranty Program
  Stock-Based Compensation
 Share-Based Payment
 Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation
  65




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##### Table of Contents



Research and Development
  Income Taxes
 Accounting for Income Taxes ,
  Accumulated Other Comprehensive Loss
 Reporting Comprehensive Income
 December 31,2006
    
    
    2005Unrealized loss on available-for-sale securities, net of tax of $0
    
    $
    (3,645
    )
    
    $
    (3,503
    )Initial adjustment to adopt SFAS 158, net of tax of $16
    
    
    (48
    )
    
    
    Accumulated other comprehensive loss
    
    $
    (3,693
    )
    
    $
    (3,503
    )
 Leases
 Accounting for Leases
 66




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##### 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
 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
 67




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##### Table of Contents



NOTE 3. STOCK-BASED COMPENSATION
    Year Ended December 31,2006
    
    
    2005
    
    
    2004Stock Option Plans:Risk free interest rate
    
    
    4.00
    %
    
    
    3.95
    %
    
    
    3.88
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life (in years)
    
    
    3.6
    
    
    
    4.7
    
    
    
    6.1Volatility
    
    
    61
    %
    
    
    90
    %
    
    
    100
    %Employee Stock Purchase Plan:Risk free interest rate
    
    
    4.91
    %
    
    
    3.13
    %
    
    
    1.87
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    1.3Volatility
    
    
    57
    %
    
    
    68
    %
    
    
    103
    %
 68




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004Net income (loss) as reported
    
    $
    (42,610
    )
    
    $
    21,781Add: Stock-based compensation included in reported
net income (loss), net of related tax effects
    
    
    1,125
    
    
    
    258Deduct: Stock-based compensation determined under
the fair value based method, net of related tax effects
    
    
    (14,913
    )
    
    
    (11,750
    )Pro-forma net income (loss)
    
    $
    (56,398
    )
    
    $
    10,289Reported net income (loss) per share:Basic
    
    $
    (0.90
    )
    
    $
    0.47Diluted
    
    $
    (0.90
    )
    
    $
    0.45Pro-forma net income (loss) per share:Basic
    
    $
    (1.19
    )
    
    $
    0.22Diluted
    
    $
    (1.19
    )
    
    $
    0.21
  69




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##### Table of Contents



NOTE 4. BALANCE SHEET COMPONENTS
 Short- and Long-Term Marketable Securities
  Amortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain (Loss)
    
    
    ValueShort-term marketable securities:As 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
    )
    
    $
    53,985As of December 31, 2005:Auction rate securities
    
    $
    27,800
    
    
    $
    
    
    
    $
    27,800US government agencies debt securities
    
    
    14,814
    
    
    
    (103
    )
    
    
    14,711Commercial paper
    
    
    5,761
    
    
    
    (7
    )
    
    
    5,754Corporate debt securities
    
    
    4,171
    
    
    
    (9
    )
    
    
    4,162Foreign government debt securities
    
    
    3,188
    
    
    
    (23
    )
    
    
    3,165Municipal debt securities
    
    
    4,301
    
    
    
    (5
    )
    
    
    4,296$
    60,035
    
    
    $
    (147
    )
    
    $
    59,888Long-term marketable securities:As 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
    )
    
    $
    17,504As of December 31, 2005:Equity security
    
    $
    10,000
    
    
    $
    (3,240
    )
    
    $
    6,760US government agencies debt securities
    
    
    7,872
    
    
    
    (69
    )
    
    
    7,803Corporate debt securities
    
    
    609
    
    
    
    (13
    )
    
    
    596Foreign government debt securities
    
    
    990
    
    
    
    (30
    )
    
    
    960Municipal debt securities
    
    
    1,030
    
    
    
    (4
    )
    
    
    1,026$
    20,501
    
    
    $
    (3,356
    )
    
    $
    17,145
  70




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##### Table of Contents



Accounts Receivable, Net
  December 31,2006
    
    
    2005Accounts receivable, gross
    
    $
    9,515
    
    
    $
    20,139Allowance for doubtful accounts
    
    
    (200
    )
    
    
    (212
    )Accounts receivable, net
    
    $
    9,315
    
    
    $
    19,927
  Inventories, Net
  December 31,2006
    
    
    2005Finished goods
    
    $
    15,409
    
    
    $
    20,623Work-in-process
    
    
    4,350
    
    
    
    7,35019,759
    
    
    
    27,973Reserve for slow moving and obsolete items
    
    
    (5,950
    )
    
    
    (1,396
    )Inventories, net
    
    $
    13,809
    
    
    $
    26,577
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    1,396
    
    
    $
    1,589
    
    
    $
    1,942Usage:Inventory scrapped
    
    
    (1,282
    )
    
    
    (730
    )
    
    
    (521
    )Inventory utilized
    
    
    (379
    )
    
    
    (795
    )
    
    
    (735
    )Subtotal usage
    
    
    (1,661
    )
    
    
    (1,525
    )
    
    
    (1,256
    )Provision
    
    
    6,215
    
    
    
    1,332
    
    
    
    903Balance at end of year
    
    $
    5,950
    
    
    $
    1,396
    
    
    $
    1,589
  71




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##### Table of Contents



Property and Equipment, Net
  December 31,2006
    
    
    2005Software
    
    $
    39,042
    
    
    $
    36,948Equipment, furniture and fixtures
    
    
    18,515
    
    
    
    15,924Tooling
    
    
    5,003
    
    
    
    5,000Leasehold improvements
    
    
    3,365
    
    
    
    2,67465,925
    
    
    
    60,546Accumulated depreciation and amortization
    
    
    (43,994
    )
    
    
    (31,517
    )Property and equipment, net
    
    $
    21,931
    
    
    $
    29,029
  Other Assets, Net
   72




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##### Table of Contents



Acquired Intangible Assets, Net
  December 31,2006
    
    
    2005Gross carrying amount:Developed technology
    
    $
    19,170
    
    
    $
    40,500Customer relationships
    
    
    1,689
    
    
    
    3,400Backlog and trademark
    
    
    758
    
    
    
    80021,617
    
    
    
    44,700Accumulated amortization:Developed technology
    
    
    (10,144
    )
    
    
    (6,057
    )Customer relationships
    
    
    (1,166
    )
    
    
    (614
    )Backlog and trademark
    
    
    (758
    )
    
    
    (708
    )(12,068
    )
    
    
    (7,379
    )Acquired intangible assets, net
    
    $
    9,549
    
    
    $
    37,321
   Year ending December 31:2007
    
    $
    3,1792008
    
    
    2,9842009
    
    
    2,3362010
    
    
    1,050$
    9,549
 Goodwill
   73




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##### Table of Contents



Accrued Liabilities and Current Portion of Long-Term Liabilities
  December 31,2006
    
    
    2005Current portion of accrued liabilities for asset financings
    
    $
    7,733
    
    
    $
    11,940Accrued payroll and related liabilities
    
    
    6,130
    
    
    
    5,294Accrued manufacturing liabilities
    
    
    2,338
    
    
    
    3,612Current portion of accrued remaining lease payments
    
    
    762
    
    
    
    Accrued commissions and royalties
    
    
    693
    
    
    
    1,232Reserve for warranty returns
    
    
    662
    
    
    
    577Reserve for sales returns and allowances
    
    
    479
    
    
    
    237Accrued interest payable
    
    
    399
    
    
    
    335Other
    
    
    2,478
    
    
    
    3,042$
    21,674
    
    
    $
    26,269
  74




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004Reserve for sales returns and allowances:Balance at beginning of year
    
    $
    237
    
    
    $
    524
    
    
    $
    202Provision
    
    
    665
    
    
    
    52
    
    
    
    977Charge offs
    
    
    (423
    )
    
    
    (339
    )
    
    
    (655
    )Balance at end of year
    
    $
    479
    
    
    $
    237
    
    
    $
    524Reserve for warranty returns:Balance at beginning of year
    
    $
    577
    
    
    $
    419
    
    
    $
    569Provision
    
    
    990
    
    
    
    813
    
    
    
    241Charge offs
    
    
    (905
    )
    
    
    (655
    )
    
    
    (391
    )Balance at end of year
    
    $
    662
    
    
    $
    577
    
    
    $
    419
 Long-Term Debt and Debt Issuance Costs
   th th
  75




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##### Table of Contents



Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys
Own Stock Accounting for Derivative Instruments and Hedging Activities
  NOTE 5. EARNINGS PER SHARE
 Earnings per Share
 The Effect of
Contingently Convertible Debt on Diluted Earnings per Share.
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Basic weighted average shares outstanding
    
    
    48,288,907
    
    
    
    47,337,122
    
    
    
    46,672,766Incremental shares related to:Conversion of debentures
    
    
    
    
    
    
    
    
    
    
    3,772,495Stock options
    
    
    
    
    
    
    
    
    
    
    1,604,200Restricted stock subject to vesting
    
    
    
    
    
    
    
    
    
    
    12,397Diluted weighted average shares outstanding
    
    
    48,288,907
    
    
    
    47,337,122
    
    
    
    52,061,858
 76




---



##### Table of Contents



Year Ended December 31,2006
    
    2005Stock options
    
    
    8,612,964
    
    
    
    8,990,140Conversion of debentures
    
    
    5,797,716
    
    
    
    6,159,405
   Net income used in calculating basic net income per share
    
    $
    21,781Add: Interest expense and amortization of debt issuance costs, net of tax
    
    
    1,522Net income used in calculating diluted net income per share
    
    $
    23,303
 NOTE 6. RESTRUCTURINGS
   77




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##### Table of Contents



Cost of revenue  restructuring:Licensed technology and tooling write offs
    
    $
    2,072Termination and retention benefits
    
    
    472,119Operating expenses  restructuring:Licensed technology, software and other assets write offs
    
    
    8,490Termination and retention benefits
    
    
    2,734Consolidation of leased space
    
    
    2,09213,316Total restructuring expense
    
    $
    15,435
  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
   78




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##### Table of Contents



NOTE 7. INCOME TAXES
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Domestic
    
    $
    (206,239
    )
    
    $
    (21,482
    )
    
    $
    28,891Foreign
    
    
    1,112
    
    
    
    1,294
    
    
    
    880$
    (205,127
    )
    
    $
    (20,188
    )
    
    $
    29,771
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    (1,535
    )
    
    $
    73
    
    
    $
    8,391State
    
    
    4
    
    
    
    260
    
    
    
    457Foreign
    
    
    1,549
    
    
    
    8,453
    
    
    
    243Total current
    
    
    18
    
    
    
    8,786
    
    
    
    9,091Deferred:Federal
    
    
    
    
    
    
    11,754
    
    
    
    (161
    )State
    
    
    
    
    
    
    1,882
    
    
    
    (940
    )Foreign
    
    
    (967
    )
    
    
    
    
    
    
    Total deferred
    
    
    (967
    )
    
    
    13,636
    
    
    
    (1,101
    )Income tax expense (benefit)
    
    $
    (949
    )
    
    $
    22,422
    
    
    $
    7,990
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Change in gross deferred tax assets and liabilities
    
    $
    (49,304
    )
    
    $
    (57,359
    )
    
    $
    3,362Deferred tax assets reducing goodwill
    
    
    
    
    
    
    7,445
    
    
    
    Increase (decrease) in valuation allowance
for deferred tax assets
    
    
    48,337
    
    
    
    63,550
    
    
    
    (4,463
    )Deferred income tax expense (benefit)
    
    $
    (967
    )
    
    $
    13,636
    
    
    $
    (1,101
    )
 79




---



##### Table of Contents



Year Ended December 31,2006
    
    2005
    
    2004Goodwill
    
    $
    
    
    
    $
    (8,257
    )
    
    $
    (1,110
    )Shareholders equity
    
    
    
    
    
    
    (609
    )
    
    
    (4,485
    )
   Year Ended December 31,2006
    
    
    2005
    
    
    2004Expected income tax rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %Increase (decrease) resulting from:Change in valuation allowance
    
    
    (13
    )
    
    
    (192
    )
    
    
    (1
    )Impairment loss on goodwill
    
    
    (23
    )
    
    
    
    
    
    
    Research and experimentation credit
    
    
    1
    
    
    
    21
    
    
    
    (7
    )Increase in deferred tax rates
    
    
    
    
    
    
    13
    
    
    
    Increase in beginning balance of acquired deferred
tax assets
    
    
    
    
    
    
    11
    
    
    
    Foreign tax refund
    
    
    
    
    
    
    3
    
    
    
    Difference
between financial and tax reporting for stock option exercises
    
    
    
    
    
    
    (2
    )
    
    
    State income taxes, net of federal tax benefit
    
    
    1
    
    
    
    2
    
    
    
    1Amortization of acquired intellectual property,
assembled workforce and deferred tax charge
    
    
    
    
    
    
    1
    
    
    
    (1
    )Other
    
    
    (1
    )
    
    
    (3
    )
    
    
    Actual tax (expense) benefit
    
    
    
    %
    
    
    (111
    )%
    
    
    27
    %
 80




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##### Table of Contents



December 31,2006
    
    
    2005Deferred tax assets:Net operating loss carryforwards
    
    $
    80,074
    
    
    $
    60,439Research and experimentation credit carryforwards
    
    
    25,709
    
    
    
    14,270Foreign tax credit carryforwards
    
    
    8,048
    
    
    
    7,598Deferred compensation
    
    
    3,315
    
    
    
    29Reserves and accrued expenses
    
    
    3,124
    
    
    
    1,456Depreciation
    
    
    2,680
    
    
    
    1,135Accrued vacation
    
    
    570
    
    
    
    599Other
    
    
    2,252
    
    
    
    1,151Total gross deferred tax assets
    
    
    125,772
    
    
    
    86,677Deferred tax liability  amortization
    
    
    (3,522
    )
    
    
    (13,731
    )Less valuation allowance
    
    
    (120,877
    )
    
    
    (72,540
    )Net deferred tax assets
    
    $
    1,373
    
    
    $
    406
     81




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##### Table of Contents



NOTE 8. COMMITMENTS AND CONTINGENCIES
 Royalties
  401(k) Plan
  82




---



##### Table of Contents



Leases
  Year Ending December 31:2007
    
    $
    3,6412008
    
    
    2,6792009
    
    
    1,3652010
    
    
    1,2072011
    
    
    1,167Thereafter
    
    
    1,324$
    11,383
  Contract Manufacturers
  Indemnifications
 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others-an interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34
 Legal Proceedings
   83




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##### Table of Contents



NOTE 9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Year Ended December 31,2006
    
    2005
    
    2004Cash paid during the year for:Interest
    
    $
    2,657
    
    
    $
    2,638
    
    
    $
    1,293Income taxes
    
    
    123
    
    
    
    1,691
    
    
    
    530Non-cash investing and financing activities:Acquisitions of property and equipment and other assets
under extended payment terms
    
    $
    5,822
    
    
    $
    28,820
    
    
    $
    8,450Increase 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
    
    
    
    Transfer of cost-based investment to available-for-sale
marketable security
    
    
    
    
    
    
    
    
    
    
    10,000Debt issuance costs withheld from proceeds
    
    
    
    
    
    
    
    
    
    
    4,500Release and cancellation of shares held in escrow
    
    
    
    
    
    
    
    
    
    
    541
 NOTE 10. SHAREHOLDERS EQUITY
 Preferred Stock
    Common Stock
  Exchangeable Shares
  84




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##### Table of Contents



Stock Option Plans
     85




---



##### Table of Contents



WeightedaverageNumber
    
    
    exerciseof shares
    
    
    priceOptions outstanding as of December 31, 2003
    
    
    6,271,739
    
    
    $
    9.86Granted
    
    
    2,595,005
    
    
    
    14.03Exercised
    
    
    (809,966
    )
    
    
    4.91Forfeited
    
    
    (403,857
    )
    
    
    10.26Expired
    
    
    (127,786
    )
    
    
    20.90Options 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
    
    
    $
    7.32
  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
    
    2006
    
    life
    
    price
    
    2006
    
    price$
    0.07
    
    
    
    
    $
    2.44
    
    
    
    837,217
    
    
    
    8.14
    
    
    $
    1.94
    
    
    
    260,559
    
    
    $
    1.252.45
    
    
    
    
    
    2.49
    
    
    
    840,167
    
    
    
    8.38
    
    
    
    2.49
    
    
    
    
    
    
    
    2.50
    
    
    
    
    
    4.65
    
    
    
    942,128
    
    
    
    9.01
    
    
    
    4.01
    
    
    
    83,473
    
    
    
    4.334.66
    
    
    
    
    
    6.25
    
    
    
    706,285
    
    
    
    8.16
    
    
    
    5.39
    
    
    
    256,516
    
    
    
    5.906.30
    
    
    
    
    
    7.57
    
    
    
    754,610
    
    
    
    6.86
    
    
    
    7.07
    
    
    
    582,700
    
    
    
    7.137.66
    
    
    
    
    
    9.15
    
    
    
    756,635
    
    
    
    7.42
    
    
    
    8.37
    
    
    
    448,147
    
    
    
    8.419.22
    
    
    
    
    
    9.83
    
    
    
    696,503
    
    
    
    6.93
    
    
    
    9.41
    
    
    
    372,894
    
    
    
    9.4110.03
    
    
    
    
    
    15.41
    
    
    
    721,312
    
    
    
    7.23
    
    
    
    13.47
    
    
    
    417,531
    
    
    
    13.3615.70
    
    
    
    
    
    32.50
    
    
    
    589,428
    
    
    
    5.40
    
    
    
    18.38
    
    
    
    561,150
    
    
    
    18.42$
    0.07
    
    
    
    
    $
    32.50
    
    
    
    6,844,285
    
    
    
    7.62
    
    
    $
    7.32
    
    
    
    2,982,970
    
    
    $
    9.91
  86




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##### Table of Contents



Employee Stock Purchase Plan
  NOTE 11. SEGMENT INFORMATION
 Disclosures about Segments of an Enterprise and Related Information
 Geographic Information
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Japan
    
    $
    58,958
    
    
    $
    56,770
    
    
    $
    70,749China
    
    
    18,098
    
    
    
    23,884
    
    
    
    30,587Taiwan
    
    
    17,798
    
    
    
    29,752
    
    
    
    36,766Korea
    
    
    12,055
    
    
    
    15,396
    
    
    
    14,032Europe
    
    
    9,035
    
    
    
    25,861
    
    
    
    14,342Canada
    
    
    6,821
    
    
    
    4,826
    
    
    
    U.S.
    
    
    5,571
    
    
    
    6,324
    
    
    
    2,265Other
    
    
    5,271
    
    
    
    8,891
    
    
    
    7,470$
    133,607
    
    
    $
    171,704
    
    
    $
    176,211
 87




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##### Table of Contents



Significant Customers
  Year Ended December 31,2006
    
    2005
    
    2004Distributor A
    
    
    26
    %
    
    
    22
    %
    
    
    31
    %Distributor B
    
    
    0
    %
    
    
    1
    %
    
    
    13
    %
   December 31,2006
    
    2005Account A
    
    
    23
    %
    
    
    16
    %Account B
    
    
    13
    %
    
    
    1
    %Account C
    
    
    10
    %
    
    
    11
    %Account D
    
    
    10
    %
    
    
    5
    %Account E
    
    
    2
    %
    
    
    14
    %
 NOTE 12. ACQUISITION
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NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
 Quarterly Period EndedMarch 31
    
    June 30
    
    September 30
    
    December 312006Revenue, 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
    )2005Revenue, net
    
    $
    40,261
    
    
    $
    41,315
    
    
    $
    46,794
    
    
    $
    43,334Gross profit
    
    
    16,918
    
    
    
    16,202
    
    
    
    14,647
    
    
    
    15,189Income (loss) from operations
    
    
    271
    
    
    
    (2,654
    )
    
    
    (10,170
    )
    
    
    (9,167
    )Income (loss) before income taxes
    
    
    1,152
    
    
    
    (2,578
    )
    
    
    (9,973
    )
    
    
    (8,789
    )Net income (loss)
    
    
    836
    
    
    
    (2,275
    )
    
    
    (5,257
    )
    
    
    (35,914
    )Net income (loss) per share  basic
and diluted
    
    
    0.02
    
    
    
    (0.05
    )
    
    
    (0.11
    )
    
    
    (0.75
    )
 
 Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
  
 Item 9A. Controls and Procedures.
  Managements Report on Internal Control over Financial Reporting
  Internal ControlIntegrated Framework,
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Internal ControlIntegrated Framework
  Changes to Internal Controls
  Report of Independent Registered Public Accounting Firm
 
 Internal Control-Integrated Framework
    90




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##### Table of Contents



Internal ControlIntegrated Framework Internal ControlIntegrated Framework
   
 
 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.
  91




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PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 (a) 1. Financial Statements.
  
 (a) 2. Financial Statement Schedules.
  (a) 3. Exhibits.
  ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger dated as of December 13, 2000 among Pixelworks, Inc.,
Panther Acquisition, Inc., Panstera, Inc. and those certain shareholders of Panstera, Inc.
signatories thereto (incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on February 13, 2001).2.2
    
    Amendment to Agreement and Plan of Merger dated as of January 26, 2001 among Pixelworks
Inc., Panther Acquisition, Inc. and Panstera, Inc. (incorporated by reference to Exhibit
2.2 to the Companys Current Report on Form 8-K filed on February 13, 2001).2.3
    
    Agreement and Plan of Merger and Reorganization dated as of December 6, 2001 among
Pixelworks, Inc., Nighthawk Acquisition Corp. and those certain shareholders of nDSP
Delaware, Inc. who are signatories thereto (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K filed on January 29, 2002).2.4
    
    Reorganization Agreement among Pixelworks, Inc., Pixelworks Nova Scotia Company,
Certain Shareholders of Jaldi Semiconductor Corp. and Jaldi Semiconductor Corp. dated
August 2, 2002 (incorporated by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-3 filed on October 15, 2002).2.5
    
    Jaldi Semiconductor, Inc. Exchangeable Share Provisions (incorporated by reference to
Exhibit 99.2 to the Companys Registration Statement on Form S-3 filed on October 15,
2002).2.6
    
    Exchangeable Share Support Agreement among Jaldi Semiconductor Corp., Pixelworks, Inc.,
Pixelworks Nova Scotia and Jaldi Semiconductor Corp. dated September 6, 2002 (incorporated
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##### Table of Contents



ExhibitNumber
    
    Descriptionby reference to Exhibit 99.3 to the Companys Registration Statement on Form S-3 filed on
October 15, 2002).2.7
    
    Voting and Exchange Trust Agreement among Jaldi Semiconductor Corp., Pixelworks, Inc.,
Pixelworks Nova Scotia Company and CIBC Mellon Trust Company, dated September 6, 2002 (incorporated
by reference to Exhibit 99.4 to the Companys Registration Statement
on Form S-3 filed on October 15, 2002).2.8
    
    Agreement and Plan of Merger, dated as of March 17, 2003 among Pixelworks, Inc.,
Display Acquisition Corp. and Genesis Microchip Inc. (incorporated by reference to Exhibit
2.1 to the Companys Current Report on Form 8-K filed on March 20, 2003).2.9
    
    Agreement and Plan of Merger dated April 28, 2005 among Pixelworks, Inc., Equator
Technologies, Inc., Twain Sub, Inc., and Robert C. Fox, Jr., as Shareholders Agent
(incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed
on May 3, 2005).3.1
    
    Sixth Amended and Restated Articles of Incorporation of Pixelworks, Inc., As Amended
(incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q
filed on August 9, 2004).3.2
    
    First Restated Bylaws of Pixelworks, Inc. (incorporated by reference to Exhibit 3.3 to
the Companys Registration Statement on Form S-1 declared effective May 19, 2000).4.1
    
    Reference is made to Exhibit 3.1 above (incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on Form S-1 declared effective May 19, 2000).4.2
    
    Third Amended Registration Rights Agreement dated February 22, 2000 (incorporated by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-1 declared
effective May 19, 2000).4.3
    
    Indenture dated May 18, 2004 between Pixelworks, Inc. and Wells Fargo Bank, National
Association (incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on
Form 10-Q filed on August 9, 2004).4.4
    
    Form of 1.75% Convertible Subordinated Debentures due 2024 dated May 18, 2004
(incorporated by reference to Exhibit 4.2 to the Companys Quarterly Report on Form 10-Q
filed August 9, 2004).4.5
    
    Registration Rights Agreement, dated May 18, 2004 among Pixelworks, Inc., Citigroup
Global Markets Inc. and D.A. Davidson & Co. (incorporated by reference to Exhibit 4.3 to
the Companys Quarterly Report on Form 10-Q filed August 9, 2004).4.6
    
    Purchase Agreement, dated May 12, 2004 among Pixelworks, Inc. and Citigroup Global
Markets Inc. (incorporated by reference to Exhibit 4.4 to the Companys Quarterly Report on
Form 10-Q filed August 9, 2004).10.1
    
    Form of Indemnity Agreement between Pixelworks, Inc. and each of its Officers and
Directors (incorporated by reference to Exhibit 10.1 to the Companys Registration
Statement on Form S-1 declared effective May 19, 2000). +
 93




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##### Table of Contents



ExhibitNumber
    
    Description10.2
    
    Pixelworks, Inc. 1997 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed June 21, 2005). +10.3
    
    Pixelworks, Inc. 2000 Employee Stock Purchase Plan, As Amended (incorporated by
reference to Exhibit 99.2 to the Companys Registration Statement on Form S-8 filed March
23, 2005). +10.4
    
    Pixelworks, Inc. 2001 Nonqualified Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed on May 31, 2001). +10.5
    
    Equator Technologies, Inc. 1996 Stock Option Plan, as amended (incorporated by
reference to Exhibit 99.1 to the Companys Registration Statement on Form S-8 filed June
17, 2005). +10.6
    
    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
    
    Pixelworks, Inc. 2005 Senior Management Bonus Plan (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 10, 2005). +10.8
    
    Pixelworks, Inc. 2006 Senior Management Bonus Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 6,
2006). +10.9
    
    Chair and Board Service Agreement dated and effective December 12, 2006, by and between
Allen Alley and Pixelworks, Inc. +10.10
    
    CEO Transition Agreement dated and effective December 12, 2006, by and between Allen
Alley and Pixelworks, Inc. +10.11
    
    Transition Employment Agreement dated and effective December 12, 2006, by and between
Hans Olsen and Pixelworks, Inc. +10.12
    
    Severance Agreement dated and effective December 12, 2006, by and between Hans Olsen
and Pixelworks, Inc. +10.13
    
    Transition Employment Agreement dated and effective December 12, 2006, by and between
Michael Yonker and Pixelworks, Inc. +10.14
    
    Employment Agreement effective February 28, 2006 between Pixelworks, Inc. and Michael
D. Yonker. +10.15
    
    Severance Agreement dated March 24, 2006 between Pixelworks, Inc. and Michael D.
Yonker (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed March 27, 2006). +10.16
    
    Separation and Transition Agreement and Release effective December 16, 2006, by and
between Richard J. Tobias and Pixelworks, Inc. (incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K filed December 18, 2006). +10.17
    
    Registration Rights Agreement dated as of December 6, 2001 among Pixelworks, Inc.,
nDSP Delaware, Inc. and those certain shareholders of nDSP Delaware, Inc. who are
signatories thereto (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on January 29, 2002).
 94




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##### Table of Contents



ExhibitNumber
    
    Description10.18
    
    VAutomation Incorporated Synthesizable Soft Core Agreement dated November 4, 1997
between VAutomation Incorporated and Pixelworks, Inc. (incorporated by reference to Exhibit
10.8 to the Companys Registration Statement on Form S-1 declared effective May 19, 2000).10.19
    
    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).10.20
    
    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).10.21
    
    Shareholders Agreement dated as of January 15, 2001 among Pixelworks, Inc., Panstera,
Inc., and those certain shareholders of Panstera, Inc. (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February 13, 2001).10.22
    
    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.10.23
    
    Office Lease Agreement 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).10.24
    
    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).10.25
    
    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. 95




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SIGNATURES
  PIXELWORKS, INC.Dated:  March 12, 2007
    By:
    /s/ Hans H. OlsenHans H. OlsenPresident and

Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Hans H. Olsen

Hans H. Olsen
    
    President and
Chief Executive Officer
    
    March 12, 2007/s/ Michael D. Yonker

Michael D. Yonker
    
    Vice President, Chief
Financial Officer, Treasurer
and Secretary
    
    March 12, 2007/s/ Allen H. Alley

Allen H. Alley
    
    Chairman of the Board
    
    March 12, 2007/s/ Mark A.. Christensen

Mark A. Christensen
    
    Director
    
    March 12, 2007/s/ James R. Fiebiger

James R. Fiebiger
    
    Director
    
    March 12, 2007/s/ C. Scott Gibson

C. Scott Gibson
    
    Director
    
    March 12, 2007/s/ Frank Gill

Frank Gill
    
    Director
    
    March 12, 2007/s/ Daniel J. Heneghan

Daniel J. Heneghan
    
    Director
    
    March 12, 2007/s/ Bruce A. Walicek

Bruce A. Walicek
    
    Director
    
    March 12, 2007
 96