##### Table of Contents





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

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
    SECURITIES
    EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008or[  ]

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

91-1761992(I.R.S. Employer Identification No.)   16760 SW Upper Boones Ferry Road, Suite 101

97224(Address of principal executive offices)

(Zip Code)  503-601-4545
     Title of each class

Name of each exchange on which registeredCommon Stock

NASDAQ Global Market    None
   X
    X
    X
  Regulation S-K Form 10-K Form 10-K.
  Rule 12b-2
  Large accelerated filer

Accelerated filer

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

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




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##### 





PIXELWORKS,
    INC.FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2008
   TABLE OF
    CONTENTS
   
 PART IItem 1.


Business.


1Item 1A.


Risk Factors.


11Item 1B.


Unresolved Staff Comments.


26Item 2.


Properties.


27Item 3.


Legal Proceedings.


27Item 4.


Submission of Matters to a Vote of Security
    Holders.


27PART IIItem 5.


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


28Item 6.


Selected Financial Data.


31Item 7.


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


32Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk.


46Item 8.


Financial Statements and Supplementary
    Data.


47Item 9.


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


78Item 9A.


Controls and Procedures.


78Item 9B.


Other Information.


80PART IIIItem 10.


Director, Executive Officers and Corporate
    Governance.


80Item 11.


Executive Compensation.


80Item 12.


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


80Item 13.


Certain Relationships and Related
    Transactions, and Director Independence.


80Item 14.


Principal Accounting Fees and
    Services.


80PART IVItem 15.


Exhibits, Financial Statement
    Schedules.


80SIGNATURESEX-23EX-31.1EX-31.2EX-32.1EX-32.2




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




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




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Digital
    Projection Market
     3




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Additional
    Markets
    Our
    Technologies and Products
        ® tm
  tm
    Our
    Products
    ImageProcessor
    ICs.
 4




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tm tm
    Video
    Co-Processor ICs.
  Networked
    Display ICs.
  Broadband Signal
    Processor ICs.
  Our Core
    Technologies
    Adaptive Image
    Optimization.
  Advanced Image
    Scaling and Shaping.
  Chroma Key
    Window. PC-TV picture-in-picture
  Color
    Compensation Technology.
 5




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Digital Keystone
    Correction. ,
  DNX
    MotionEngine.
  Dynamic
    Deblocking.
  Fully
    Customizable On-Screen Display. start-up
  Motion-Adaptive
    De-Interlacing.
  Noise
    Reduction.
  PixelAmptm

    Color Processing. side-by-side
  Customers,
    Sales and Marketing
   6




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Distributors.
      Direct
    Relationships.
    Integrators.
  Branded
    Manufacturers.
  Branded
    Suppliers.
    Seasonality
   7




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Geographic
    Distribution of Sales
        Backlog
    Competition
      start-up
 8




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Research
    and Development
      Manufacturing
      Intellectual
    Property
       9




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Environmental
    Matters
      Employees
    Availability
    of Securities and Exchange Commission Filings
  Form 10-K, Form 10-Q, Form 8-K www.pixelworks.com 1-800-SEC-0330. www.sec.gov
 10




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##### Table of Contents



Item
    1A.
    Risk
    Factors.  Investing in our shares of common stock involves a high
    degree of risk, and investors should carefully consider the
    risks described below before making an investment decision. If
    any of the following risks occur, the market price of our shares
    of common stock could decline and investors could lose all or
    part of their investment. Additional risks that we currently
    believe are immaterial may also impair our business operations.
    In assessing these risks, investors should also refer to the
    other information contained or incorporated by reference in this
    Annual Report on
    Form 10-K
    for the year ended December 31, 2008, including our
    consolidated financial statements and related notes, and our
    other filings made from time to time with the Securities and
    Exchange Commission.
  The
    current crisis in global credit and financial markets could
    materially and adversely affect our business and results of
    operations.
    Our
    product strategy, which is targeted at markets demanding
    superior video and image quality, may not significantly lead to
    increased revenue or gross profit in a timely manner or at all,
    which could materially adversely affect our results of
    operations.
  system-on-chip
   11




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We
    have incurred substantial indebtedness as a result of the sale
    of convertible debentures and may be unable to meet our future
    capital requirements.
        The
    June 4, 2008 one-for-three reverse split of outstanding
    shares of our common stock has not resulted in a material
    increase in the bid price of our common stock and we may be
    unable to maintain compliance with NASDAQ Marketplace Rules
    without taking additional action, which could include effecting
    an additional reverse stock split. If we are delisted from the
    NASDAQ Global Market, there may not be a market for our common
    stock, which could cause a decrease in the value of an
    investment in us and adversely affect our business, financial
    condition and results of operations.
   12




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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;
    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; 13




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
    announcements of future expectations by our customers;
    changes in market valuations of other technology companies; and
    inconsistent trading volume levels of our common stock.  Intense
    competition in our markets may reduce sales of our products,
    reduce our market share, decrease our gross profit and result in
    large losses.
    start-up
    If we
    do not achieve additional design wins in the future, our ability
    to grow will be seriously limited. Even if we achieve additional
    design wins in the future, we may not realize significant
    revenue from the design wins.
   14




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Despite
    our restructuring efforts, we may not achieve profitability in
    the future and, if we do, we may not be able to sustain or
    increase profitability on a quarterly or annual basis. If we are
    not profitable in the future, we may be unable to continue our
    operations.
      If we
    engage in further restructuring efforts, we may be unable to
    successfully implement new products or enhancements to our
    current products, which will adversely affect our future sales
    and financial condition.
    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.
   15




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Because
    of the complex nature of our semiconductor designs and
    associated manufacturing processes and the rapid evolution of
    our customers product designs, we may not be able to
    develop new products or product enhancements in a timely manner,
    which could decrease customer demand for our products and reduce
    our revenue.
    
    accurate prediction of customer requirements and evolving
    industry standards;
    development of advanced display technologies and capabilities;
    use of advanced foundry processes and achievement of high
    manufacturing yields; and
    market acceptance of new products.    The
    cyclical nature of the semiconductor industry may lead to
    significant variances in the demand for our products and could
    harm our operations.
    Because
    of our long product development process and sales cycles, we may
    incur substantial costs before we earn associated revenue and
    ultimately may not sell as many units of our products as we
    originally anticipated.
     16




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Our
    products are characterized by average selling prices that
    decline over relatively short periods of time, which will
    negatively affect our financial results unless we are able to
    reduce our product costs or introduce new products with higher
    average selling prices.
    Because
    we do not have long-term commitments from our customers and plan
    inventory purchases based on estimates of customer demand which
    may be inaccurate, we contract for the manufacture of our
    products based on potentially inaccurate
    estimates.
    A
    significant amount of our revenue comes from a limited number of
    customers and distributors. Any decrease in revenue from, or
    loss of, any of these customers or distributors could
    significantly reduce our revenue.
   17




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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.
    The
    anti-takeover provisions of Oregon law and in our articles of
    incorporation could adversely affect the rights of the holders
    of our common stock by preventing a sale or takeover of us at a
    price or prices favorable to the holders of our common
    stock.
    
    our board of directors is authorized, without prior shareholder
    approval, to change the size of the board. Our articles of
    incorporation provide that if the board is increased to eight or
    more members, the board will be divided into three classes
    serving staggered terms, which would make it more difficult for
    a group of shareholders to quickly change the composition of our
    board;
    our board of directors is authorized, without prior shareholder
    approval, to create and issue preferred stock with voting or
    other rights or preferences that could impede the success of any
    attempt to acquire us or to effect a change of control, commonly
    referred to as blank check preferred stock;
    members of our board of directors can only be removed for cause
    and at a meeting of shareholders called expressly for that
    purpose, by the vote of 75 percent of the votes then
    entitled to be cast for the election of directors;
    the board of directors may alter our bylaws without obtaining
    shareholder approval; and
    shareholders are required to provide advance notice for
    nominations for election to the board of directors or for
    proposing matters to be acted upon at a shareholder meeting.  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.
   18




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The
    competitiveness and viability of our products could be harmed if
    necessary licenses of third-party technology are not available
    to us or are only available on terms that are not commercially
    viable.
    Our
    limited ability to protect our IP and proprietary rights could
    harm our competitive position by allowing our competitors to
    access our proprietary technology and to introduce similar
    products.
      Others
    may bring infringement actions against us that could be time
    consuming and expensive to defend.
    
    stop selling products using technology that contains the
    allegedly infringing IP;
    attempt to obtain a license to the relevant IP, which may not be
    available on reasonable terms or at all;
    attempt to redesign those products that contain the allegedly
    infringing IP; or
    pay damages for past infringement claims that are determined to
    be valid or which are arrived at in settlement of such
    litigation or threatened litigation.   19




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Failure
    to manage any future expansion efforts effectively could
    adversely affect our business and results of
    operations.
    International
    sales account for almost all of our revenue, and if we do not
    successfully address the risks associated with international
    sales, our revenue could decrease.
    
    increased difficulties in managing international distributors
    and manufacturers due to varying time zones, languages and
    business customs;
    foreign currency exchange fluctuations in the currencies of
    Japan, the Peoples Republic of China (PRC),
    Taiwan or Korea;
    potentially adverse tax consequences;
    difficulties regarding timing and availability of export and
    import licenses;
    political and economic instability, particularly in the PRC,
    Japan, Taiwan, or Korea;
    reduced or limited protection of our IP, particularly 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;
    difficulties in maintaining sales representatives outside of the
    U.S. that are knowledgeable about our industry and products;
    changes in the regulatory environment in the PRC, Japan, Taiwan
    and Korea that may significantly impact purchases of our
    products by our customers;
    outbreaks of SARS, bird flu or other pandemics in the PRC or
    other parts of Asia; and
    difficulties in collecting outstanding accounts receivable
    balances.  Our
    presence and investment within the Peoples Republic of
    China subjects us to risks of economic and political instability
    in the area, which could adversely impact our results of
    operations.
   20




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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.
    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.
      Dependence
    on a limited number of sole-source, third-party manufacturers
    for our products exposes us to shortages based on capacity
    allocation or low manufacturing yield, errors in manufacturing,
    price increases with little notice, volatile inventory levels
    and delays in product delivery, which could result in delays in
    satisfying customer demand, increased costs and loss of
    revenue.
     21




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If we
    have to qualify a new foundry or packaging, assembly and testing
    supplier for any of our products, we may experience delays that
    result in lost revenue and damaged customer
    relationships.
    Manufacturers
    of our semiconductor products periodically discontinue older
    manufacturing processes, which could make our products
    unavailable from our current suppliers.
    We are
    dependent on our foundries to implement complex semiconductor
    technologies and our operations could be adversely affected if
    those technologies are unavailable, delayed or inefficiently
    implemented.
   22




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Our
    highly integrated products and high-speed mixed signal products
    are difficult to manufacture without defects and the existence
    of defects could result in increased costs, delays in the
    availability of our products, reduced sales of products or
    claims against us.
        We use
    a customer owned tooling process for manufacturing most of our
    products which exposes us to the possibility of poor yields and
    unacceptably high product costs.
    Shortages
    of materials used in the manufacturing of our products may
    increase our costs or limit our revenue and impair our ability
    to ship our products on time.
    Shortages
    of other key components for our customers products could
    delay our ability to sell our products.
    Integration
    of software with our products adds complexity and cost that may
    affect our ability to achieve design wins and may affect our
    profitability.
   23




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Our
    software development tools may be incompatible with industry
    standards and challenging to implement, which could slow product
    development or cause us to lose customers and design
    wins.
    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.
    Decreased
    effectiveness of share-based payment awards could adversely
    affect our ability to attract and retain employees, officers and
    directors.
  Share-Based
    Payment
  We may
    be unable to successfully integrate any future acquisition or
    equity investment we make, which could disrupt our business and
    severely harm our financial condition.
   24




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
    issuance of stock that dilutes current shareholders
    percentage ownership;
    incurrence of debt;
    assumption of liabilities;
    amortization expenses related to acquired intangible assets;
    impairment of goodwill;
    large and immediate write-offs; or
    decreases in cash and marketable securities that could otherwise
    serve as working capital.    
    problems combining the acquired operations, technologies or
    products;
    unanticipated costs;
    diversion of managements attention from our core business;
    adverse effects on existing business relationships with
    customers;
    risks associated with entering markets in which we have no or
    limited prior experience; and
    potential loss of key employees, particularly those of the
    acquired organizations.    Continued
    compliance with regulatory and accounting requirements will be
    challenging and will require significant
    resources.
   25




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Environmental
    laws and regulations have caused us to incur, and may cause us
    to continue to incur, significant expenditures to comply with
    applicable laws and regulations, and may cause us to incur
    significant penalties for noncompliance.
    Item 1B.
    Unresolved
    Staff Comments.   26




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Item 2.
    Properties.    Total Square


Square Feet


Square Feet


Lease

SubleaseLocation

Function(s)

Feet Leased


Utilized


Subleased


Expiration

ExpirationOregon

None; vacated


49,000







3,000


February 2009

February 2009December 2008Oregon

Administration


5,000



5,000






December 2013

California

Administration;
    engineering


37,000



23,000



14,000


May 2013

May 2010Washington

None; fully subleased


10,000







10,000


October 2011

Various dates
    through
    October 2011China

Engineering; sales;
    customer support


46,000



46,000






November 2009

Taiwan

Customer support;
    sales; operations


16,000



16,000






Various dates
    through May 2011

Japan

Sales; customer
    support


4,000



4,000






January 2011

   Item 3.
    Legal
    Proceedings.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   27




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    for Registrants Common Equity and Related Stockholder
    Matters
    Fiscal 2008

High


LowFourth Quarter

$
1.45


$
0.55Third Quarter


1.90



1.08Second Quarter


2.95



1.53First Quarter


2.64



1.50   Fiscal 2007

High


LowFourth Quarter

$
3.99


$
2.25Third Quarter


5.67



2.43Second Quarter


5.28



3.96First Quarter


7.44



4.68       Securities
    Authorized for Issuance Under Equity Compensation
    Plans
  Form 10-K Form 10-K.
 28




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Issuer
    Purchases of Equity Securities
    Total number


Approximateof shares


dollar value ofpurchased as


shares thatpart of


may yet bepublicly


purchasedTotal number





announced


under theof shares


Average price


plans or


plans orPeriod

purchased(1)


paid per share


programs


programsOctober 1, 2008  October 31, 2008


373,300


$
1.04



373,300


$
3,290November 1, 2008  November 30, 2008


92,800



0.93



92,800



3,204December 1, 2008  December 31, 2008


128,200



0.77



128,200



3,105Total


594,300


$
0.96



594,300   (1)
 29




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Performance
    Graph
  The Performance Graph is being furnished and shall not be
    deemed to be filed for purposes of Section 18
    of the Securities Exchange Act of 1934, as amended (the
    Exchange Act), or otherwise subject to the liability
    of that section, nor shall the Performance Graph be deemed to be
    incorporated by reference in any registration statement or other
    document filed under the Securities Act of 1933, as amended, or
    the Exchange Act, except as otherwise stated in such filing.
    COMPARISON
    OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
    PIXELWORKS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND
    THE NASDAQ ELECTRONICS COMPONENTS INDEX
  
 30




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Item 6.
    Selected
    Financial Data.    Statement of
    Operations Data
  Year Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Revenue, net

$
85,164


$
105,980


$
133,607


$
171,704


$
176,211Cost of revenue


42,963



59,273



107,506



108,748



90,991Gross profit


42,201



46,707



26,101



62,956



85,220Operating expenses:Research and development


26,512



38,792



57,019



51,814



32,969Selling, general and administrative


17,945



25,437



35,053



30,616



23,736Restructuring


1,589



13,285



13,316



1,162



Amortization of acquired intangible assets


164



359



602



1,084



486Impairment loss on goodwill










133,739







Impairment loss on acquired intangible assets










1,753







Total operating expenses


46,210



77,873



241,482



84,676



57,191Income (loss) from operations


(4,009
)


(31,166
)


(215,381
)


(21,720
)


28,029Interest and other income, net


11,979



2,483



10,254



1,532



1,742Income (loss) before income taxes


7,970



(28,683
)


(205,127
)


(20,188
)


29,771Provision (benefit) for income taxes


(8
)


2,237



(949
)


22,422



7,990Net income (loss)

$
7,978


$
(30,920
)

$
(204,178
)

$
(42,610
)

$
21,781Net income (loss) per share:Basic

$
0.55


$
(1.92
)

$
(12.69
)

$
(2.70
)

$
1.40Diluted

$
0.55


$
(1.92
)

$
(12.69
)

$
(2.70
)

$
1.35Weighted average shares outstanding:Basic


14,399



16,069



16,096



15,779



15,558Diluted


14,410



16,069



16,096



15,779



17,354  31




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Balance
    Sheet Data
  December 31,2008


2007


2006


2005


2004(In thousands)Cash and cash equivalents

$
53,149


$
74,572


$
63,095


$
68,604


$
32,585Short- and long-term marketable securities


10,168



44,385



71,489



77,033



239,696Working capital


61,947



112,360



108,169



139,291



209,653Total assets


91,732



161,916



207,771



421,556



423,569Long-term liabilities, net of current portion


73,250



151,871



147,414



163,357



150,365Total shareholders equity (deficit)


4,711



(8,027
)


21,948



215,217



252,023   Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation.  Overview
      system-on-chip
     32




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Factors
    Affecting Results of Operations and Financial
    Condition
  General
    Market Conditions
    Restructuring
    Plans
       33




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Goodwill
    and Intangible Asset Impairments
    Results
    of Operations
  Year ended December 31, 2008 compared with year ended
    December 31, 2007, and year ended December 31, 2007
    compared with year ended December 31, 2006.
  Revenue,
    net
    Year Ended December 31,


2008 v. 2007


2007 v. 2006%





%2008


2007


2006


$ change


change


$ change


changeDigital projector

$
52,926


$
58,674


$
59,236


$
(5,748
)


(10
)%

$
(562
)


(1
)%Advanced television


11,177



19,827



43,221



(8,650
)


(44
)


(23,394
)


(54
)Advanced media processor


11,342



16,098



18,135



(4,756
)


(30
)


(2,037
)


(11
)LCD monitor, panel and other


9,719



11,381



13,015



(1,662
)


(15
)


(1,634
)


(13
)Total revenue

$
85,164


$
105,980


$
133,607


$
(20,816
)


(20
)%

$
(27,627
)


(21
)%     Digital
    Projector
    Advanced
    Television
   34




---



##### Table of Contents



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





% of





% of2008


revenue


2007


revenue


2006


revenueDirect product costs and related overhead
    1

$
39,362



46
%

$
53,807



51
%

$
73,900



55
%Amortization of acquired intangible assets


2,820



3



2,820



3



4,087



3Provision for obsolete inventory, net of usage


488



1



2,376



2



5,836



4Restructuring


91



0



172







2,119



2Stock-based compensation


58



0



98







208



Additional amortization of non-cancelable prepaid royalty


144



0















Impairment loss on acquired developed technology


















21,330



16Amortization of acquired inventory markup


















26



0Total cost of revenue

$
42,963



50
%

$
59,273



56
%

$
107,506



80
%Gross profit

$
42,201



50
%

$
46,707



44
%

$
26,101



20
%   1
     35




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##### Table of Contents



Research
    and development
    Year ended December 31,


2008 v. 2007


2007 v. 2006%





%2008


2007


2006


$ change


change


$ change


changeResearch and development
    1

$
26,512


$
38,792


$
57,019


$
(12,280
)


(32
)%

$
(18,227
)


(32
)%1

    Includes stock-based compensation expense of:


1,250



2,320



3,884     
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased
    $6.4 million. This decrease is primarily due to the
    December 31, 2007 write-off of engineering software tools,
    which we are no longer using due to reductions in research and
    development personnel and changes in product development
    strategy.
    Compensation expense decreased $2.6 million. The decrease
    in compensation expense in 2008 is primarily due to headcount
    reductions that occurred in the second half of 2007. At
    December 31, 2008, we had 130 research and development
    employees compared to 146 at December 31, 2007.
    Facilities and information technology expense allocations
    decreased $1.7 million, primarily due to reductions in
    headcount, outsourced IT support, lower rent and decreased
    equipment depreciation.
    Stock-based compensation expense decreased $1.1 million due
    to personnel reductions and reduced valuation of our stock
    options.
    Travel and related expenses decreased $656,000.    
    Compensation expense decreased $6.4 million. At
    December 31, 2007, we had 146 research and development
    employees compared to 254 at December 31, 2006.
    Development-related expenses, including non-recurring
    engineering and outside services, decreased $4.7 million.
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased
    $2.5 million.
    Facilities and information technology expense allocations
    decreased $1.9 million, primarily due to lower rent expense.
    Stock-based compensation expense decreased $1.6 million.
    Travel and related expenses decreased $730,000.  Selling,
    general and administrative
   36




---



##### Table of Contents



Year ended December 31,


2008 v. 2007


2007 v. 2006%





%2008


2007


2006


$ change


change


$ change


changeSelling, general and administrative
    1

$
17,945


$
25,437


$
35,053


$
(7,492
)


(29
)%

$
(9,616
)


(27
)%1

    Includes stock-based compensation expense of:


1,198



3,527



5,464     
    Compensation expense decreased $3.3 million. The decrease
    in compensation expense in 2008 is primarily due to significant
    headcount reductions that occurred in the second half of 2007,
    partially off-set by headcount increases in the second half of
    2008. As of December 31, 2008, we had 74 employees in
    selling, general and administrative functions, compared to 69 as
    of December 31, 2007.
    Stock-based compensation expense decreased $2.3 million due
    to personnel reductions and reduced valuation of our stock
    options.
    Facilities and information technology allocations decreased
    $689,000, primarily due to reductions in headcount, outsourced
    IT support, lower rent and decreased equipment depreciation.
    Travel and related expenses decreased $530,000.      
    Compensation expense decreased $3.6 million. As of
    December 31, 2007, we had 69 employees in selling,
    general and administrative functions, compared to 150 as of
    December 31, 2006.
    Stock-based compensation expense decreased $1.9 million.
    Facilities and information technology allocations decreased
    $727,000.
    Travel and related expenses decreased $592,000.
    Depreciation and amortization expense, software maintenance
    expense and expensed equipment and software decreased $442,000.
    Professional service fees, including accounting and legal,
    decreased $376,000. 37




---



##### Table of Contents



Restructuring
  Year
    Ended December 31, 2008
    Dec. 08 Plan


Nov. 06 Plan


TotalTermination and retention benefits
    1

$
666


$
506


$
1,172Consolidation of leased space
    2






508



508Total restructuring expenses

$
666


$
1,014


$
1,680Included in cost of sales

$
91


$



$
91Included in operating expenses


575



1,014



1,589   1

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

    
    Expenses related to the consolidation of leased space included
    future non-cancelable rent payments due for vacated space (net
    of estimated sublease income) and moving expenses.      Year
    Ended December 31, 2007
    Nov. 06 PlanTermination and retention benefits
    1

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


3,905Contract termination fee
    3


1,693Payments, non-cancelable contracts
    4


1,524Consolidation of leased space
    5


827Other


88Total restructuring expenses

$
13,457Included in cost of sales

$
172Included in operating expenses


13,285   1

    
    Termination and retention benefits included severance and
    retention payments for terminated employees and retention
    payments for certain continuing employees. 38




---



##### Table of Contents



2

    
    We wrote off assets with a net book value of $6.9 million
    in 2007 as a result of our November 2006 restructuring plan.
    These assets consisted primarily of engineering software tools
    which we are no longer using due to the reductions in research
    and development personnel and changes in product development
    strategy. We also reversed accrued liabilities in the amount of
    $3.0 million related to the write-off of the engineering
    software tools.3

    
    We paid a contract termination fee of $1.7 million to
    cancel a software license agreement prior to its expiration.4

    
    Non-cancelable contract payments consist of amounts that we were
    obligated to pay, but for which we will not realize a benefit
    due to the restructuring plans.5

    
    Expenses related to the consolidation of leased space included
    future non-cancelable rent payments due for vacated space (net
    of estimated sublease income) and moving expenses.    Year
    Ended December 31, 2006
    Nov. 06 Plan


Apr. 06 Plan


TotalNet write-off of assets and reversal of related liabilities
    1

$
11,391


$
227


$
11,618Termination and retention benefits
    2


1,423



1,358



2,781Consolidation of leased space
    3






1,036



1,036Total restructuring expenses

$
12,814


$
2,621


$
15,435Included in cost of sales

$
2,119


$



$
2,119Included in operating expenses


10,695



2,621



13,316   1

    
    We wrote off assets with a net book value of $11.6 million
    in 2006 as a result of our restructuring plans. These assets
    consisted primarily of licensed technology and tooling.2

    
    Termination and retention benefits included severance and
    retention payments for terminated employees and retention
    payments for certain continuing employees.3

    
    Expenses related to the consolidation of leased space included
    future non-cancelable rent payments due for vacated space (net
    of estimated sublease income) and moving expenses.     39




---



##### Table of Contents



Amortization
    of acquired intangible assets
    Year ended December 31,2008


2007


2006Amortization of acquired intangible assets

$
164


$
359


$
602     Interest
    and other income, net
    Year ended December 31,


$ change2008


2007


2006


2008 v. 2007


2007 v. 2006Gain on repurchase of long-term debt,
    net 1

$
19,670


$



$
3,009


$
19,670


$
(3,009
)Other-than-temporary impairment of marketable security,
    net 2


(7,890
)










(7,890
)


Interest income
    3


2,102



5,786



5,833



(3,684
)


(47
)Interest expense
    4


(1,695
)


(2,642
)


(2,721
)


947



79Amortization of debt issuance costs
    5


(426
)


(661
)


(667
)


235



6Settlement proceeds,
    net 6










4,800







(4,800
)Other income
    7


218











218



Total interest and other income, net

$
11,979


$
2,483


$
10,254


$
9,496


$
(7,771
)   1

    
    In August 2008, we repurchased and retired $29.1 million of
    our outstanding debt for $20.6 million in cash. We
    recognized a gain on this repurchase of $8.1 million, net
    of a write-off of debt issuance costs of $390,000. In February
    2008, we repurchased and retired $50.2 million of our
    outstanding debt for $37.9 million in cash, including legal
    and other professional fees of $755,000. We recognized a gain on
    this repurchase of $11.6 million, net of a write-off of
    debt issuance costs of $752,000. In February 2006, we
    repurchased and retired $10.0 million of our outstanding
    debt for $6.8 million in cash. We recognized a gain on this
    repurchase of $3.0 million, net of a write-off of debt
    issuance costs of $191,000.2

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

    
    Interest income is earned on cash equivalents and short- and
    long-term marketable securities. The decrease in the 2008 period
    is due to lower balances of marketable securities, which
    resulted from our repurchases of long-term debt and decreased
    yields on our invested funds.4

    
    Interest expense primarily relates to interest payable on our
    long-term debt. The decrease in the 2008 period is due to the
    reduced outstanding principal balance which resulted from our
    2008 repurchases of our long-term debt.5

    
    The fees associated with the issuance of our long-term debt have
    been capitalized and are being amortized over a period of seven
    years. The remaining amortization period is approximately two
    years as of December 31, 2008. The decrease in the 2008
    period is due to the write-off of fees associated with the
    portion of our long-term debt repurchased in 2008. 40




---



##### Table of Contents



6

    
    During the fourth quarter of 2006, our claim against funds
    placed in escrow in connection with the Equator acquisition was
    settled. In the settlement, we received proceeds of
    $4.8 million net of legal fees.7

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


2007


2006Provision (benefit) for income taxes

$
(8
)

$
2,237


$
(949
)           Business
    Outlook
  Form 8-K.
    
    First quarter revenue of $10.0 million to
    $13.0 million.
    Gross profit margin of approximately 35% to 40%.
    Operating expenses of $9.5 million to $10.5 million.
    Interest expense, net of approximately $200,000.
    A benefit for income tax of approximately $1.5 million. 41




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##### Table of Contents



Liquidity
    and Capital Resources
  Cash and
    short- and long-term marketable
    securities
    December 31,


% Change2008


2007


2006


2008 v. 2007


2007 v. 2006Cash and cash equivalents

$
53,149


$
74,572


$
63,095



(29
)%


18
%Short-term marketable securities


8,058



34,581



53,985



(77
)


(36
)Long-term marketable securities


2,110



9,804



17,504



(78
)


(44
)Total cash and marketable securities

$
63,317


$
118,957


$
134,584



(47
)%


(12
)%         A-1 / P-1
       42




---



##### Table of Contents



Accounts
    receivable, net
    Inventories,
    net
    Capital
    resources
       43




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
      Revenue Recognition. Revenue Recognition
  Sales Returns and Allowances. case-by-case
      Product Warranties.
    Allowance for Doubtful Accounts.
  Inventory Valuation.
 44




---



##### Table of Contents



Useful Lives and Recoverability of Equipment and Other
    Long-Lived Assets. Accounting
    for the Impairment or Disposal of Long-Lived Assets
  Valuation of Investments. FAS 115-1/FAS 124-1, The Meaning of Other-Than Temporary Impairment and Its
    Application to Certain Investments
  Stock-Based Compensation.
  Income Taxes. Accounting
    for Uncertainty in Income Taxes an
    Interpretation of FASB Statement 109
 45




---



##### Table of Contents



Contractual
    Payment Obligations
    Payments Due By PeriodLess than 1








More than 5Contractual Obligation

Total


year


1-3 years


3-5 years


yearsLong-term debt
    1

$
60,634


$



$
60,634


$



$
Interest on long-term debt


2,653



1,061



1,592







Operating leases
    2


6,806



2,182



3,028



1,596



Payments on accrued balances related to asset purchases


1,815



1,116



699







Estimated Q1 2009 purchase commitments to contract manufacturers


4,531



4,531











Other purchase obligations and commitments


1,500



1,000



500







Total 3

$
77,939


$
9,890


$
66,453


$
1,596


$
   1

    
    The earliest date on which the holders of our 1.75% convertible
    subordinated debentures due 2024 have the right to require us to
    purchase all or a portion of the outstanding debentures is
    May 15, 2011. We expect holders of the debentures to
    require us to purchase all of the outstanding debentures on that
    date.2

    
    The operating lease payments above are net of sublease rental
    income of $483,000, $194,000 and $49,000 for the years ending
    December 31, 2009, 2010 and 2011 respectively.3

    
    We are unable to reliably estimate the timing of future payments
    related to uncertain tax positions; therefore,
    $10.6 million of income taxes payable has been excluded
    from the table above.  Off-Balance
    Sheet Arrangements
    Recent
    Accounting Pronouncements and Accounting Changes
  Form 10-K
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk.  Interest
    Rate Risk
     46




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data.    Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2008 and 2007Consolidated Statements of Operations for the years ended
    December 31, 2008, 2007 and 2006Consolidated Statements of Cash Flows for the years ended
    December 31, 2008, 2007 and 2006Consolidated Statements of Shareholders Equity (Deficit)
    and Comprehensive Income (Loss) for the years ended
    December 31, 2008, 2007 and 2006Notes to Consolidated Financial Statements  47




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
             Internal Control  Integrated
    Framework
      48




---



##### Table of Contents



PIXELWORKS,
    INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands, except share data)
  December 31,2008


2007ASSETSCurrent assets:Cash and cash equivalents

$
53,149


$
74,572Short-term marketable securities


8,058



34,581Accounts receivable, net


6,149



6,223Inventories, net


4,981



11,265Prepaid expenses and other current assets


3,381



3,791Total current assets


75,718



130,432Long-term marketable securities


2,110



9,804Property and equipment, net


5,187



6,148Other assets, net


4,639



6,902Debt issuance costs, net


692



2,260Acquired intangible assets, net


3,386



6,370Total assets

$
91,732


$
161,916LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
4,215


$
3,992Accrued liabilities and current portion of long-term liabilities


9,419



13,848Current portion of income taxes payable


137



232Total current liabilities


13,771



18,072Long-term liabilities, net of current portion


2,035



1,236Income taxes payable, net of current portion


10,581



10,635Long-term debt


60,634



140,000Total liabilities


87,021



169,943Commitments and contingencies (Note 8)Shareholders equity (deficit):Preferred stock, $0.001 par value; 50,000,000 shares
    authorized, 1 share issued and outstanding as of
    December 31, 2008 and 2007






Common stock, $0.001 par value; 250,000,000 shares
    authorized, 13,508,127 and 15,104,926 shares issued and
    outstanding as of December 31, 2008 and 2007, respectively


333,974



333,934Exchangeable shares; 577,033 shares issued, 0 and
    4,009 shares issued and outstanding as of December 31,
    2008 and 2007, respectively






113Accumulated other comprehensive income (loss)


55



(4,778
)Accumulated deficit


(329,318
)


(337,296
)Total shareholders equity (deficit)


4,711



(8,027
)Total liabilities and shareholders equity

$
91,732


$
161,916    49




---



##### Table of Contents



PIXELWORKS,
    INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    (In thousands, except per share data)
  Year Ended December 31,2008


2007


2006Revenue, net

$
85,164


$
105,980


$
133,607Cost of revenue (1)


42,963



59,273



107,506Gross profit


42,201



46,707



26,101Operating expenses:Research and development (2)


26,512



38,792



57,019Selling, general and administrative (3)


17,945



25,437



35,053Restructuring


1,589



13,285



13,316Amortization of acquired intangible assets


164



359



602Impairment loss on goodwill










133,739Impairment loss on acquired intangible assets










1,753Total operating expenses


46,210



77,873



241,482Loss from operations


(4,009
)


(31,166
)


(215,381
)Gain on repurchase of long-term debt, net


19,670







3,009Other-than-temporary impairment of marketable security


(7,890
)






Interest income


2,102



5,786



5,833Interest expense


(1,695
)


(2,642
)


(2,721
)Amortization of debt issuance costs


(426
)


(661
)


(667
)Settlement proceeds, net










4,800Other income


218







Interest and other income, net


11,979



2,483



10,254Income (loss) before income taxes


7,970



(28,683
)


(205,127
)Provision (benefit) for income taxes


(8
)


2,237



(949
)Net income (loss)

$
7,978


$
(30,920
)

$
(204,178
)Net income (loss) per shareBasic

$
0.55


$
(1.92
)

$
(12.69
)Diluted

$
0.55


$
(1.92
)

$
(12.69
)Weighted average shares outstandingBasic


14,399



16,069



16,096Diluted


14,410



16,069



16,096(1) Includes:Amortization of acquired developed technology

$
2,820


$
2,820


$
4,087Additional amortization of non-cancelable prepaid royalty


144







Restructuring


91



172



2,119Stock-based compensation


58



98



208Impairment loss on acquired developed technology










21,330Amortization of acquired inventory
    mark-up










26(2) Includes stock-based compensation


1,250



2,320



3,884(3) Includes stock-based compensation


1,198



3,527



5,464    50




---



##### Table of Contents



PIXELWORKS,
    INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (In thousands)
  Year Ended December 31,2008


2007


2006Cash flows from operating activities:Net income (loss)

$
7,978


$
(30,920
)

$
(204,178
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:Gain on repurchase of long-term debt, net


(19,670
)






(3,009
)Other-than-temporary impairment of marketable security


7,890







Depreciation and amortization


6,700



13,999



17,667Amortization of acquired intangible assets


2,984



3,179



4,689Stock-based compensation


2,506



5,945



9,556Amortization of debt issuance costs


426



661



667Accretion on short- and long-term marketable securities


(345
)


(583
)


(246
)Deferred income tax expense (benefit)


291



512



(967
)Loss on asset disposals


180



210



90Write off of assets to restructuring


14



3,905



11,618Impairment losses on goodwill and acquired intangible assets










156,822Other


55



55



100Changes in operating assets and liabilities:Accounts receivable, net


74



3,092



10,612Inventories, net


6,284



2,544



12,768Prepaid expenses and other current and long-term assets, net


974



3,300



842Accounts payable


223



(4,101
)


(2,742
)Accrued current and long-term liabilities


(1,454
)


(2,995
)


1,041Income taxes payable


(149
)


(130
)


1,490Net cash provided by (used in) operating activities


14,961



(1,327
)


16,820Cash flows from investing activities:Proceeds from sales and maturities of available-for-sale
    marketable securities


54,532



79,482



47,647Purchases of marketable securities


(22,999
)


(52,885
)


(42,044
)Purchases of property and equipment


(2,158
)


(2,886
)


(5,255
)Proceeds from sales of property and equipment


20



26



36Purchases of other assets






(303
)


(278
)Net cash provided by investing activities


29,395



23,434



106Cash flows from financing activities:Repurchase of long-term debt


(58,554
)






(6,800
)Payments on asset financings


(4,646
)


(6,715
)


(17,178
)Repurchase of common stock


(2,626
)


(4,269
)


Proceeds from issuances of common stock


47



354



1,543Net cash used in financing activities


(65,779
)


(10,630
)


(22,435
)Net change in cash and cash equivalents


(21,423
)


11,477



(5,509
)Cash and cash equivalents, beginning of period


74,572



63,095



68,604Cash and cash equivalents, end of period

$
53,149


$
74,572


$
63,095    51




---



##### Table of Contents



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











TotalOther





Deferred





ShareholdersCommon Stock


Exchangeable Shares


Comprehensive


Comprehensive


Stock-based


Accumulated


EquityShares


Amount


Shares


Amount


Income (loss)


Income (loss)


Compensation


Deficit


(Deficit)Balance as of December 31, 2005


15,722,676


$
316,257



191,489


$
5,434


$
(3,503
)





$
(773
)

$
(102,198
)

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


306,227



1,543



























1,543Conversion of exchangeable shares into common stock


175,611



4,984



(175,611
)


(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


16,204,514



331,567



15,878



450



(3,693
)










(306,376
)


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


149,376



354



























354Repurchase of common stock


(1,260,833
)


(4,269
)


























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


11,869



337



(11,869
)


(337
)


















Stock-based compensation expense






5,945



























5,945Net loss





















$
(30,920
)






(30,920
)


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


















(1,090
)


(1,090
)










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


















5



5











5Comprehensive loss





















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


15,104,926



333,934



4,009



113



(4,778
)










(337,296
)


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


24,929



47



























47Repurchase of common stock


(1,625,737
)


(2,626
)


























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


4,009



113



(4,009
)


(113
)


















Stock-based compensation expense






2,506



























2,506Net income





















$
7,978







7,978



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


















4,810



4,810











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


















50



50











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


















(27
)


(27
)










(27
)Comprehensive Income





















$
12,811











Balance as of December 31, 2008


13,508,127


$
333,974






$



$
55






$



$
(329,318
)

$
4,711




---



##### 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
 53




---



##### Table of Contents



Accounts
    Receivable
      Inventories
  work-in-process, first-in,
  Property
    and Equipment
    Software

Lesser of 3 years or contractual license termEquipment, furniture and fixtures

2 yearsTooling

2 yearsLeasehold improvements

Lessor of lease term or estimated useful life   Accounting for the
    Impairment or Disposal of Long-lived Assets ,
    Acquired
    Intangible Assets
   54




---



##### Table of Contents



Licensed
    Technology
    Goodwill
  Goodwill and Other Intangible Assets.
  Revenue
    Recognition
  Revenue
    Recognition
  
    an authorized purchase order has been received;
    title and risk of loss have transferred;
    the sales price is fixed or determinable; and
    collectibility of the receivable is reasonably assured.  case-by-case
    Warranty
    Program
   55




---



##### Table of Contents



Stock-Based
    Compensation
  Share-Based Payment
  Research
    and Development
    Income
    Taxes
  Accounting for Income Taxes ,
  Accounting for Uncertainty in Income
    Taxes an Interpretation of FASB
    Statement 109
  Accumulated
    Other Comprehensive Income (Loss)
  Reporting Comprehensive Income
  December 31,2008


2007Accumulated net unrealized holding gain (loss) on
    available-for-sale marketable securities

$
125


$
(4,735
)Accumulated transition pension obligation under SFAS 158


(48
)


(48
)Actuarial gain (loss) on pension obligation


(22
)


5Accumulated other comprehensive income (loss)

$
55


$
(4,778
)   Leases
  Accounting for
    Leases
 56




---



##### 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
  Business Combinations Business Combinations
 57




---



##### Table of Contents



Fair Value
    Measurements. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement
    No. 13 and Other Accounting Pronouncements That Address
    Fair Value Measurements for Purposes of Lease Classification or
    Measurement under Statement 13, FAS 157-2, Effective Date of FASB Statement No. 157 , FSP
    FAS 157-3
    Determining the Fair value of a Financial Asset When the Market
    for That Asset Is Not Active
  NOTE 3.
    BALANCE
    SHEET COMPONENTS  Short-
    and Long-Term Marketable Securities
    Unrealized


FairCost


Gain (Loss)


ValueShort-term marketable securities:As of December 31, 2008:US government agencies debt securities

$
3,487


$
105


$
3,592Commercial paper


3,486



2



3,488Corporate debt securities


960



18



978$
7,933


$
125


$
8,058As of December 31, 2007:Commercial paper

$
19,573


$
(12
)

$
19,561Foreign government debt securities


7,005



(5
)


7,000Corporate debt securities


5,581



(5
)


5,576US government agencies debt securities


2,444







2,444$
34,603


$
(22
)

$
34,581   Unrealized


FairCost


Gain (Loss)


ValueLong-term marketable securities:As of December 31, 2008:Equity security

$
2,110


$



$
2,110$
2,110


$



$
2,110As of December 31, 2007:Equity security

$
10,000


$
(4,810
)

$
5,190US government agencies debt securities


3,541



81



3,622Corporate debt securities


976



16



992$
14,517


$
(4,713
)

$
9,804  58




---



##### Table of Contents



The Meaning of
    Other-Than-Temporary Impairment and Its Application to Certain
    Investments
  Accounts
    Receivable, Net
    December 31,2008


2007Accounts receivable, gross

$
6,691


$
6,765Allowance for doubtful accounts


(542
)


(542
)Accounts receivable, net

$
6,149


$
6,223     Year Ended December 31,2008


2007


2006Balance at beginning of year

$
542


$
200


$
212Provision






483



Recoveries






(141
)


(12
)Balance at end of year

$
542


$
542


$
200   Inventories,
    Net
    December 31,2008


2007Finished goods

$
4,617


$
12,733Work-in-process


5,358



4,4829,975



17,215Reserve for slow moving and obsolete items


(4,994
)


(5,950
)Inventories, net

$
4,981


$
11,265  59




---



##### Table of Contents



Year Ended December 31,2008


2007


2006Balance at beginning of year

$
5,950


$
5,950


$
1,396Provision


1,496



4,365



6,215Usage:Scrap


(1,444
)


(2,376
)


(1,282
)Sales


(1,008
)


(1,989
)


(379
)Total usage


(2,452
)


(4,365
)


(1,661
)Balance at end of year

$
4,994


$
5,950


$
5,950     Prepaid
    Expenses and Other Current Assets
    Property
    and Equipment, Net
    December 31,2008


2007Software

$
9,141


$
6,909Equipment, furniture and fixtures


6,668



6,401Tooling


1,244



1,035Leasehold improvements


3,174



2,76420,227



17,109Accumulated depreciation and amortization


(15,040
)


(10,961
)Property and equipment, net

$
5,187


$
6,148       Other
    Assets, Net
   60




---



##### Table of Contents



Acquired
    Intangible Assets, Net
    December 31,2008


2007Gross carrying amount:Developed technology

$
19,170


$
19,170Customer relationships


1,689



1,68920,859



20,859Accumulated amortization:Developed technology


(15,784
)


(12,964
)Customer relationships


(1,689
)


(1,525
)(17,473
)


(14,489
)Acquired intangible assets, net

$
3,386


$
6,370       Year ending December 31:2009

$
2,3362010


1,050$
3,386   Goodwill
   61




---



##### Table of Contents



Accrued
    Liabilities and Current Portion of Long-Term
    Liabilities
    December 31,2008


2007Accrued payroll and related liabilities

$
3,749


$
3,366Current portion of accrued liabilities for asset financings


1,116



4,150Accrued costs related to restructuring


940



2,918Accrued commissions and royalties


728



381Reserve for warranty returns


593



932Accrued interest payable


236



405Reserve for sales returns and allowances


100



175Other


1,957



1,521$
9,419


$
13,848       Year Ended December 31,2008


2007


2006Reserve for warranty returns:Balance at beginning of year

$
932


$
662


$
577Provision (benefit)


(203
)


1,418



990Charge offs


(136
)


(1,148
)


(905
)Balance at end of year

$
593


$
932


$
662Reserve for sales returns and allowances:Balance at beginning of year

$
175


$
479


$
237Provision


25



123



665Charge offs


(100
)


(427
)


(423
)Balance at end of year

$
100


$
175


$
479  62




---



##### Table of Contents



Long-Term
    Liabilities, Net of Current Portion
    December 31,2008


2007Accrued liabilities for asset financings

$
699


$
Deferred rent


617



619Accrued costs related to restructuring


262



353Payroll and related liabilities


182



181Other


275



83$
2,035


$
1,236   Long-Term
    Debt and Debt Issuance Costs
            No. 00-19, Accounting for Derivative Financial Instruments Indexed to,
    and Potentially Settled in, a Companys Own Stock
 63




---



##### Table of Contents



Accounting for Derivative
    Instruments and Hedging Activities
    NOTE 4:
    FAIR
    VALUE MEASUREMENT    Level 1:
    Valuations based on quoted prices in active markets for
    identical assets and liabilities.Level 2:
    Valuations based on observable inputs other than quoted prices
    in active markets for identical assets and liabilities.Level 3:
    Valuations based on unobservable inputs in which there is little
    or no market data available, which require the reporting entity
    to develop its own assumptions.    Level 1


Level 2


Level 3


TotalCash equivalents

$
34,213


$



$



$
34,213Short-term marketable securities






8,058







8,058Long-term marketable securities


2,110











2,110Total

$
36,323


$
8,058


$



$
44,381     The Fair
    Value Option for Financial Assets and Financial Liabilities
  NOTE 5.
    EARNINGS
    PER SHARE  Earnings per Share
   64




---



##### Table of Contents



Year Ended December 31,2008


2007


2006Net income (loss)

$
7,978


$
(30,920
)

$
(204,178
)Basic weighted average shares outstanding


14,399



16,069



16,096Common share equivalents:Dilutive effect of stock options


11







Diluted weighted average shares outstanding


14,410



16,069



16,096Net income (loss) per common share  basic and diluted

$
0.55


$
(1.92
)

$
(12.69
)     Year Ended December 31,2008


2007


2006Stock options


1,793,187



1,962,893



2,870,988Conversion of debentures


1,191,026



1,916,259



1,932,572   NOTE 6.
    RESTRUCTURINGS       65




---



##### Table of Contents



2008


2007


2006Cost of revenue  restructuring:Termination and retention benefits

$
91


$
172


$
47Licensed technology and tooling write offs










2,07291



172



2,119Operating expenses  restructuring:Termination and retention benefits


1,081



5,248



2,734Consolidation of leased space


508



1,524



1,036Net write off of assets and reversal of related liabilities






3,905



9,546Contract termination fee






1,693



Payments, non-cancelable contracts






827



Other






88



1,589



13,285



13,316Total restructuring expense

$
1,680


$
13,457


$
15,435           Balance as of








Balance as ofDecember 31,








December 31,2007


Expensed


Payments


2008Termination and retention benefits

$
1,758


$
1,172


$
(2,193
)

$
737Lease termination costs


999



508



(1,042
)


465Contract termination and other costs


514







(514
)


Total

$
3,271


$
1,680


$
(3,749
)

$
1,202   66




---



##### Table of Contents



Balance as of








Balance as ofDecember 31,








December 31,2006


Expensed


Payments


2007Termination and retention benefits

$
1,193


$
5,420


$
(4,855
)

$
1,758Lease termination costs


1,524



1,524



(2,049
)


999Contract termination and other costs






2,520



(2,006
)


514Total

$
2,717


$
9,464


$
(8,910
)

$
3,271   NOTE 7.
    INCOME
    TAXES  Current
    and Deferred Income Tax Expense (Benefit)
    Year Ended December 31,2008


2007


2006Domestic

$
6,141


$
(31,614
)

$
(206,239
)Foreign


1,829



2,931



1,112$
7,970


$
(28,683
)

$
(205,127
)     Year Ended December 31,2008


2007


2006Current:Federal

$
55


$
55


$
(1,535
)State


142



6



4Foreign


(496
)


1,664



1,549Total current


(299
)


1,725



18Deferred:Federal










State










Foreign


291



512



(967
)Total deferred


291



512



(967
)Income tax expense (benefit)

$
(8
)

$
2,237


$
(949
)     Year Ended December 31,2008


2007


2006Change in gross deferred tax assets and liabilities

$
8,537


$
(6,915
)

$
(49,304
)Change in valuation allowance for deferred tax assets


(8,246
)


7,427



48,337Deferred income tax expense (benefit)

$
291


$
512


$
(967
)  67




---



##### Table of Contents



Year Ended December 31,2008


2007


2006Expected income tax rate


35
%


35
%


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


(67
)


(40
)


(13
)Impact of foreign earnings


26







Stock compensation


3







State income taxes, net of federal tax benefit


2







1Research and experimentation credit






1



1Decrease in deferred tax rates






(1
)


Impairment loss on goodwill










(23
)Other


1



(3
)


(1
)Actual tax expense



%


(8
)%



%   Deferred
    Tax Assets, Liabilities and Valuation Allowance
    December 31,2008


2007Deferred tax assets:Net operating loss carryforwards

$
73,861


$
79,420Research and experimentation credit carryforwards


12,951



15,600Foreign tax credit carryforwards


9,073



9,486Deferred compensation


3,372



2,975Other-than-temporary impairment of marketable security


2,983



Reserves and accrued expenses


2,651



3,734Depreciation


2,613



1,797Accrued vacation


338



253Other


2,256



2,282Total gross deferred tax assets


110,098



115,547Deferred tax liabilities:Amortization


(1,225
)


(2,350
)Foreign earnings


(3,983
)


Other


(230
)


(5,438
)


(2,350
)Less valuation allowance


(104,090
)


(112,336
)Net deferred tax assets

$
570


$
861    68




---



##### Table of Contents



Uncertain
    Tax Positions
   69




---



##### Table of Contents



2008


2007Uncertain tax positions:Balance at beginning of year

$
8,539


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


(49
)


334Accrual for positions taken in current year


91



200Settlements






(738
)Reversals due to lapse of statute of limitations


(324
)


Balance at end of year

$
8,257


$
8,539Interest and penalties:Balance at beginning of year

$
2,096


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


463



451Settlements






(102
)Reversals due to lapse of statute of limitations


(235
)


Balance at end of year

$
2,324


$
2,096           NOTE 8.
    COMMITMENTS
    AND CONTINGENCIES  Royalties
    401(k)
    Plan
   70




---



##### Table of Contents



Leases
    Year Ending December 31:2009

$
2,1822010


1,6882011


1,3402012


1,0732013


523$
6,806     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
     71




---



##### Table of Contents



NOTE 9.
    SUPPLEMENTAL
    DISCLOSURE OF CASH FLOW INFORMATION    Year Ended December 31,2008


2007


2006Cash paid during the year for:Interest

$
1,882


$
2,618


$
2,657Income taxes, net of refunds received


218



101



123Non-cash investing and financing activities:Acquisitions of property and equipment and other assets under
    extended payment terms

$
1,815


$
1,818


$
5,822Increase in leasehold improvements and deferred rent related to
    tenant improvement allowances received


140







1,002   NOTE 10.
    SHAREHOLDERS
    EQUITY  Preferred
    Stock
        Common
    Stock
    Exchangeable
    Shares
    Reverse
    Stock Split
   72




---



##### Table of Contents



Stock
    Incentive Plans
    Stock
    Options
      WeightedaverageNumber


exerciseof shares


priceOptions outstanding as of December 31, 2007


1,604,372


$
19.07Granted


649,387



2.88Exercised


(1,376
)


0.48Forfeited


(126,609
)


8.42Expired


(171,078
)


16.06Options outstanding as of December 31, 2008


1,954,696


$
14.66    73




---



##### Table of Contents



Options Outstanding


Options ExercisableWeightedNumber


average


Weighted


Number


Weightedoutstanding as of


remaining


average


exercisable as of


averageRange of

December 31,


contractual


exercise


December 31,


exerciseExercise prices

2008


life


price


2008


price$ 0.21 - $ 6.00


813,490



7.93


$
2.60



227,300


$
3.076.01 - 12.00


337,413



5.59



7.32



258,223



7.3312.01 - 18.00


137,796



6.38



14.72



86,501



14.7918.01 - 24.00


229,074



3.44



21.56



217,397



21.5324.01 - 30.00


217,570



5.30



27.41



208,338



27.4130.01 - 36.00


5,591



6.04



31.75



5,329



31.8236.01 - 42.00


1,666



4.92



40.20



1,666



40.2042.01 - 48.00


82,947



5.16



46.19



82,947



46.1948.01 - 54.00


89,666



3.22



49.77



89,666



49.7754.01 - 68.00


39,483



2.07



66.03



39,483



66.03$ 0.21 - $68.00


1,954,696



6.14


$
14.66



1,216,850


$
20.87       WeightedaverageWeighted


remainingaverage


contractual


AggregateNumber of shares


exercise price


term


intrinsic valueVested


1,216,850


$
20.87



5.13


$
3Expected to vest


576,612



4.73



7.65



1Total


1,793,462


$
15.68



5.94


$
4   Restricted
    Stock Awards
    Employee
    Stock Purchase Plan
   74




---



##### Table of Contents



Stock-Based
    Compensation Expense
    Year Ended December 31,2008


2007


2006Stock Option Plans:Risk free interest rate


2.71
%


4.65
%


4.00
%Expected dividend yield


0
%


0
%


0
%Expected life (in years)


4.8



5.2



3.6Volatility


68
%


70
%


61
%Employee Stock Purchase Plan:Risk free interest rate


2.05
%


5.09
%


4.91
%Expected dividend yield


0
%


0
%


0
%Expected life (in years)


0.5



0.5



0.5Volatility


85
%


55
%


57
%         Stock
    Repurchase
   75




---



##### Table of Contents



NOTE 11.
    SEGMENT
    INFORMATION  Disclosures about Segments
    of an Enterprise and Related Information
  Geographic
    Information
    Year Ended December 31,2008


2007


2006Japan

$
50,408


$
60,135


$
58,958Taiwan


10,582



12,053



17,798Europe


6,639



6,734



9,035Korea


5,583



8,338



12,055U.S.


3,872



4,627



5,571China


1,734



6,253



18,098Canada










6,821Other


6,346



7,840



5,271$
85,164


$
105,980


$
133,607   Significant
    Customers
        December 31,2008


2007Account A


32
%


27
%Account B


20
%


0
%Account C


15
%


3
%Account D


0
%


21
%  76




---



##### Table of Contents



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


June 30


September 30


December 312008Revenue, net

$
23,976


$
20,793


$
21,479


$
18,916Gross profit


11,671



10,498



11,451



8,581Income (loss) from operations


(835
)


(1,102
)


441



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


4,496



(875
)


8,533



(4,184
)Net income (loss)


6,133



(1,250
)


8,219



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


0.41



(0.09
)


0.57



(.37
)Diluted


0.41



(0.09
)


0.56



(.37
)2007Revenue, net

$
23,981


$
26,896


$
28,133


$
26,970Gross profit


9,853



11,602



12,108



13,144Loss from operations


(12,505
)


(7,811
)


(4,285
)


(6,565
)Loss before income taxes


(11,800
)


(7,221
)


(3,654
)


(6,008
)Net loss


(12,422
)


(7,620
)


(4,429
)


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


(0.75
)


(0.48
)


(0.27
)


(0.42
)     NOTE 13.
    SUBSEQUENT
    EVENT   77




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##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Disclosure
    Controls and Procedures
  Rule 13a-15(e)
    Managements
    Report on Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  Internal Control  Integrated Framework,
    Changes
    in Internal Control Over Financial Reporting
  Rules 13a-15 15d-15
 78




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
       Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework
    KPMG
    LLP
    79




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##### Table of Contents



Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance.    Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accounting Fees and Services.   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules.  (a) 1.    Financial Statements.
    Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2008 and 2007Consolidated Statements of Operations for the years ended
    December 31, 2008, 2007 and 2006Consolidated Statements of Cash Flows for the years ended
    December 31, 2008, 2007 and 2006Consolidated Statements of Shareholders Equity (Deficit)
    and Comprehensive Income (Loss) for the years ended
    December 31, 2008, 2007 and 2006Notes to Consolidated Financial Statements   (a) 2.    Financial Statement
    Schedules.
   80




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##### Table of Contents



(a) 3.    Exhibits.
    ExhibitNumber

Description3
.1

Sixth Amended and Restated Articles of Incorporation of
    Pixelworks, Inc., As Amended (incorporated by reference to
    Exhibit 3.1 to the Companys Quarterly Report on
    Form 10-Q
    filed on August 9, 2004).3
.2

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

First Restated Bylaws of Pixelworks, Inc. (incorporated by
    reference to Exhibit 3.3 to the Companys Registration
    Statement on
    Form S-1
    declared effective May 19, 2000).4
.1

Reference is made to Exhibit 3.1 above (incorporated by
    reference to Exhibit 4.1 to the Companys Registration
    Statement on
    Form S-1
    declared effective May 19, 2000).4
.2

Third Amended Registration Rights Agreement dated
    February 22, 2000 (incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-1
    declared effective May 19, 2000).4
.3

Indenture dated May 18, 2004 between Pixelworks, Inc. and
    Wells Fargo Bank, National Association (incorporated by
    reference to Exhibit 4.1 to the Companys Quarterly
    Report on
    Form 10-Q
    filed on August 9, 2004).4
.4

Form of 1.75% Convertible Subordinated Debentures due 2024
    dated May 18, 2004 (incorporated by reference to
    Exhibit 4.2 to the Companys Quarterly Report on
    Form 10-Q
    filed on August 9, 2004).4
.5

Registration Rights Agreement, dated May 18, 2004 among
    Pixelworks, Inc., Citigroup Global Markets Inc. and D.A.
    Davidson & Co. (incorporated by reference to
    Exhibit 4.3 to the Companys Quarterly Report on
    Form 10-Q
    filed on August 9, 2004).4
.6

Purchase Agreement, dated May 12, 2004 among Pixelworks,
    Inc. and Citigroup Global Markets Inc. (incorporated by
    reference to Exhibit 4.4 to the Companys Quarterly
    Report on
    Form 10-Q
    filed on August 9, 2004).10
.1

Form of Indemnity Agreement between Pixelworks, Inc. and each of
    its Officers and Directors (incorporated by reference to
    Exhibit 10.1 to the Companys Registration Statement
    on
    Form S-1
    declared effective May 19, 2000).+10
.2

Pixelworks, Inc. 1997 Stock Incentive Plan, as amended
    (incorporated by reference to Exhibit 99.1 to the
    Companys Registration Statement on
    Form S-8
    filed on June 21, 2005).+10
.3

Pixelworks, Inc. 2000 Employee Stock Purchase Plan, As Amended
    (incorporated by reference to Exhibit 99.2 to the
    Companys Registration Statement on
    Form S-8
    filed on March 23, 2005).+10
.4

Pixelworks, Inc. 2001 Nonqualified Stock Option Plan
    (incorporated by reference to Exhibit 99.1 to the
    Companys Registration Statement on
    Form S-8
    filed on May 31, 2001).+10
.5

Equator Technologies, Inc. 1996 Stock Option Plan, as amended
    (incorporated by reference to Exhibit 99.1 to the
    Companys Registration Statement on
    Form S-8
    filed on June 17, 2005).+10
.6

Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan
    (incorporated by reference to Exhibit 10.2 the
    Companys Quarterly Report on
    Form 10-Q
    filed on August 11, 2008).+10
.7

Summary of Pixelworks Non-Employee Director Compensation
    (incorporated by reference to Exhibit 10.1 to the
    Companys Quarterly Report on
    Form 10-Q
    filed on November 7, 2008).+10
.8

Chair and Board Service Agreement dated and effective
    December 12, 2006, by and between Allen Alley and
    Pixelworks, Inc. (incorporated by reference to Exhibit 10.9
    to the Companys Annual Report on
    Form 10-K
    filed on March 12, 2007).+10
.9

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

Executive Employment Agreement dated and effective
    March 31, 2008, by and between Bruce Walicek and
    Pixelworks, Inc (incorporated by reference to Exhibit 10.1
    to the Companys Quarterly Report on
    Form 10-Q
    filed on May 8, 2008).+ 81




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##### Table of Contents



ExhibitNumber

Description10
.11

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

Pixelworks, Inc. 2008 Senior Management Bonus Plan (incorporated
    by reference to Exhibit 10.1 to the Companys
    Quarterly Report on
    Form 10-Q
    filed on August 11, 2008).+10
.13

Restricted Stock Award Agreement dated May 3, 2007 between
    Pixelworks, Inc. and Hans H. Olsen (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q
    filed August 9, 2007).+10
.14

Offer letter dated June 22, 2007 between Pixelworks, Inc.
    and Steven L. Moore (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q
    filed August 9, 2007).+10
.15

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

Change of Control Severance Agreement dated November 20,
    2008, by and between Pixelworks, Inc. and Steven L. Moore
    (incorporated by reference to Exhibit 10.1 to the
    Companys
    Form 8-K
    filed November 20, 2008).+10
.17

Change of Control Severance Agreement dated November 20,
    2008, by and between Pixelworks, Inc. and Hongmin (Bob) Zhang
    (incorporated by reference to Exhibit 10.2 to the
    Companys
    Form 8-K
    filed November 20, 2008).+10
.18

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
.19

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
.20

Office Lease dated June 20, 2005 and commencing
    March 1, 2006, by and between Pixelworks, Inc. and Union
    Bank of California as Trustee for Quest Group Trust VI
    (incorporated by reference to Exhibit 10.22 to the
    Companys Annual Report on
    Form 10-K
    filed March 12, 2007).10
.21

Office Lease dated October 2, 2007 and commencing
    November 1, 2007 by and between Pixelworks, Inc. and Union
    Bank of California as Trustee for Quest Group Trust VI
    (incorporated by reference to Exhibit 10.19 to the
    Companys Annual Report on Form 10-K filed March 12,
    2008).10
.22

Amendment to Office Lease dated October 2, 2007 and
    commencing November 1, 2007 by and between Pixelworks, Inc.
    and Union Bank of California as Trustee for Quest Group
    Trust IV (incorporated by reference to Exhibit 10.2
    the Companys Quarterly Report on
    Form 10-Q
    filed on November 7, 2008).10
.23

Office Lease Agreement dated December 2005, by and between
    CA-The Concourse Limited Partnership and Pixelworks, Inc.
    (incorporated by reference to Exhibit 10.42 to the
    Companys Annual Report on
    Form 10-K
    filed March 13, 2006).10
.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).10
.26

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


Subsidiaries of Pixelworks, Inc. (incorporated by reference to
    Exhibit 21 to the Companys Quarterly Report on
    Form 10-Q
    filed November 7, 2008).23


Consent of KPMG LLP.31
.1

Certification of Chief Executive Officer.31
.2

Certification of Chief Financial Officer. 82




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##### Table of Contents



ExhibitNumber

Description32
.1*

Certification of Chief Executive Officer.32
.2*

Certification of Chief Financial Officer.     +
    
    Indicates a management contract or compensation arrangement.*
    
    Exhibits 32.1 and 32.2 are being furnished and shall not be
    deemed to be filed for purposes of Section 18
    of the Securities Exchange Act of 1934, as amended (the
    Exchange Act), or otherwise subject to the liability
    of that section, nor shall such exhibits be deemed to be
    incorporated by reference in any registration statement or other
    document filed under the Securities Act of 1933, as amended, or
    the Exchange Act, except as otherwise stated in such filing. 83




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##### Table of Contents



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

Title

Date/s/  Bruce
    A. WalicekBruce
    A. Walicek

President and
    Chief Executive Officer

March 16, 2009/s/  Steven
    L. MooreSteven
    L. Moore

Vice President, Chief Financial Officer, Secretary and Treasurer

March 16, 2009/s/  Allen
    H. AlleyAllen
    H. Alley

Chairman of the Board

March 16, 2009/s/  Mark
    A. ChristensenMark
    A. Christensen

Director

March 16, 2009/s/  James
    R. FiebigerJames
    R. Fiebiger

Director

March 16, 2009/s/  C.
    Scott GibsonC.
    Scott Gibson

Director

March 16, 2009/s/  Daniel
    J. HeneghanDaniel
    J. Heneghan

Director

March 16, 2009/s/  Hans
    H. OlsenHans
    H. Olsen

Director

March 16, 2009/s/  Bruce
    A. WalicekBruce
    A. Walicek

Director

March 16, 2009