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

[ x ]	 	ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934	
 	 	 	
 	 	For the fiscal year ended December 31, 2009	
 	 	 	
 	 	or	
 	 	 	
[  ]	 	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.
(Exact name of registrant as specified in its charter)

Oregon	 	91-1761992	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer Identification No.)	

16760 SW Upper Boones Ferry Road, Suite 101	 	97224	 	503-601-4545	
(Address of principal executive offices)	 	(Zip Code)	 	(Registrant’s telephone number,
including area code)	
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	 	Name of each exchange on which registered	
Common Stock	 	NASDAQ Global Market	
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes            No     X    
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
 
Yes            No     X    
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes     X     No           
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes            No           
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.            
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer     	 	Accelerated filer     	 	Non-accelerated filer     
(Do not check if a smaller reporting company)	 	Smaller reporting company   X  	
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes            No     X    
 
Aggregate market value of voting Common Stock held by non-affiliates of the registrant at June 30, 2009: $16,207,762. For purposes of this calculation, executive officers and directors are considered affiliates.
 
Number of shares of Common Stock outstanding as of February 28, 2010: 13,448,320.
 
Documents Incorporated by Reference
 
Portions of the registrant’s definitive proxy statement relating to its 2010 Annual Meeting of Shareholders, to be filed not later than 120 days after the close of the 2009 fiscal year are incorporated by reference into Part I and Part III of this Annual Report on Form 10-K.

 
 
PIXELWORKS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009

TABLE OF CONTENTS

PART I	
 	Item 1.	 	 	Business.	 	 	1	 	
 	Item 1A.	 	 	Risk Factors.	 	 	9	 	
 	Item 1B.	 	 	Unresolved Staff Comments.	 	 	22	 	
 	Item 2.	 	 	Properties.	 	 	22	 	
 	Item 3.	 	 	Legal Proceedings.	 	 	23	 	
 	Item 4.	 	 	(Removed and Reserved).	 	 	23	 	
 	
PART II	
 	 	 	 	 	 	 	 	 	
 	Item 5.	 	 	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	 	 	24	 	
 	Item 6.	 	 	Selected Financial Data.	 	 	26	 	
 	Item 7.	 	 	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	 	 	27	 	
 	Item 7A.	 	 	Quantitative and Qualitative Disclosures About Market Risk.	 	 	39	 	
 	Item 8.	 	 	Financial Statements and Supplementary Data.	 	 	40	 	
 	Item 9.	 	 	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	 	 	69	 	
 	Item 9A.	 	 	Controls and Procedures.	 	 	69	 	
 	Item 9B.	 	 	Other Information.	 	 	71	 	
 	
PART III	
 	 	 	 	 	 	 	 	 	
 	Item 10.	 	 	Director, Executive Officers and Corporate Governance.	 	 	71	 	
 	Item 11.	 	 	Executive Compensation.	 	 	71	 	
 	Item 12.	 	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	 	 	71	 	
 	Item 13.	 	 	Certain Relationships and Related Transactions, and Director Independence.	 	 	71	 	
 	Item 14.	 	 	Principal Accounting Fees and Services.	 	 	71	 	
 	
PART IV	
 	 	 	 	 	 	 	 	 	
 	Item 15.	 	 	Exhibits, Financial Statement Schedules.	 	 	71	 	
 	
SIGNATURES	
 EX-3.3	
 EX-10.9	
 EX-10.13	
 EX-10.18	
 EX-10.21	
 EX-21	
 EX-23	
 EX-31.1	
 EX-31.2	
 EX-32.1	
 EX-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, adverse economic conditions, lack of acceptance of new products, increased competition, failure to design, develop and manufacture new products, lack of success in technological advancements, unexpected changes in the demand for our products and services, the inability to successfully manage inventory pricing pressures, failure to reduce costs or improve operating efficiencies, changes to and compliance with international laws and regulations, currency fluctuations, our ability to attract, hire and retain key and qualified employees, and other risks identified in the risk factors contained in Part I, Item 1A of this Annual Report on Form 10-K. These forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Annual Report on Form 10-K. If we do update or correct one or more forward-looking statements, you should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. Except where the context otherwise requires, in this Annual Report on Form 10-K, the “Company,” “Pixelworks,” “we,” “us” and “our” refer to Pixelworks, Inc., an Oregon corporation, and, where appropriate, its subsidiaries.
 
PART I

Item 1.    	Business.	
 
Overview
 
We are an innovative designer, developer and marketer of video and pixel processing semiconductors and software for high-end digital video applications and hold 119 patents related to the visual display of digital image data. Our solutions enable manufacturers of digital display and projection devices, such as large-screen flat panel displays and digital front projectors, to differentiate their products with a consistently high level of video quality, regardless of the content’s source or format. Our core technology leverages unique proprietary techniques for intelligently processing video signals from a variety of sources to ensure that all resulting images are optimized. Additionally, our products help our customers reduce costs and differentiate their display and projection devices, an important factor in industries that experience rapid innovation. Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.
 
Pixelworks’ flexible design architecture enables our technology to produce outstanding image quality in our customers’ products with a range of single-purpose integrated circuits (“ICs”), to system-on-chip (“SoC”) ICs that integrate microprocessor, memory and image processing functions. Additionally, we provide full solutions, including a software development environment and operating system, which enable our customers to more quickly develop and customize their display products, thus reducing their time to market and allowing them to incorporate differentiated features and functions.
 
Our primary target markets are liquid crystal display (“LCD”) large-screen televisions and digital front projectors, however we also target other segments within the flat panel display market, including digital signage.
 
We have adopted a product strategy that leverages our core competencies in video processing to address the evolving needs of the advanced flat panel display, digital projection and other markets that require superior image quality. We focus our product investments on developing video enhancement solutions for these markets, with particular focus on adding increased performance and functionality. Additionally, we look for
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ways to leverage our research and development investment into products that address other high-value markets where our innovative proprietary technology provides differentiation for us and our customers. We continually seek to expand our technology portfolio through internal development, co-development with business partners and evaluation of acquisition opportunities.
 
Digital Video Technology Trends
 
Over the course of the last several years, video technology has moved rapidly from analog technology, which utilizes waveform signals, to a new generation of digital technologies that utilize a grid of thousands of tiny picture elements, or pixels. Consequently, digital display devices have rapidly evolved to incorporate higher pixel counts and faster rates of screen refresh, both of which contribute to a sharper, clearer image. At the same time, digital display devices have increased in size and begun to incorporate newer video capabilities such as high-definition and, most recently, 3D. Accordingly, the video image processors that drive newer displays have had to increase their capabilities as well to keep pace with the ever growing needs for greater resolution, size and speed that digital technology affords.
 
The number and variety of digital video applications is increasing rapidly, and video is expanding to play a pervasive role across many aspects of business and personal lifestyle. Digital video content is being delivered from an increasing array of sources that vary dramatically in quality – on Blu-ray DVDs, via cable and satellite, across the Internet and on cell phones. The sources and quality of video content range from very high-resolution programming produced by network or movie studios to very poor quality clips created by individuals.
 
Regardless of the source or quality, increasingly, consumers are sharing video with others and viewing video on an increasing variety of form factors – from handheld devices to large screen displays. At the same time, the consumer expectation for ever higher quality video continues to rise, driven by higher display resolutions on larger TVs. These trends place new demands on video signal and pixel processing technology to enable display and projection devices to provide the best viewing experience possible across multiple display formats. For example, content created for one type of display device, such as a PC, must be scaled up or down to play back clearly on a different device, such as a television. On larger, higher-resolution TV screens, image quality deteriorates significantly, and must be compensated for with video processing technology that restores or even creates higher video quality.
 
The latest generations of advanced digital display devices enhance image performance in a number of ways, chief among them being increasing the size of the display, increasing the display resolution and increasing the number of times per second the image is refreshed. Premium displays currently feature “full HD” resolutions of 1920 columns by 1080 rows of pixels progressively scanned (“1080p”), display frame rates of 240Hz or more, are 3D ready and measure from 32 inches or more diagonally. In addition to the need for image enhancement, various applications, such as digital signage, Internet-enabled televisions and connected classroom environments, are creating a need for new networking capabilities that can enable the sharing of video across display devices and display environments.
 
Large-Screen Flat Panel Display Market
 
The market for flat panel displays has risen rapidly over the past decade and is projected to be worth more than $100 billion annually by 2012, according to the industry research firm DisplaySearch. Key segments of growth within the flat panel display industry are consumer applications, such as PC monitors and digital televisions. Digital TVs in particular have transformed the flat panel market, as consumers have enthusiastically embraced advanced television displays that offer sharper and more lifelike images on larger and thinner screens. Increasingly, commercial applications such as public-space advertising, a form of digital signage, are also contributing to the growth of the flat panel market and the drive to improve the image and video quality of the panels themselves.
 
Flat panel display technologies include LCD, plasma display, rear-projection using LCDs, digital micro-mirror, and newer technologies, such as liquid crystal on silicon (“LCoS”) and organic light emitting diodes (“OLED”). Within flat panel displays, LCD and plasma have emerged as the preferred digital display
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technologies, with LCD leading the market in growth. The digital TV market has helped to secure the dominance of LCD technology. Shipments of LCD TVs are expected to grow from 86 million units in 2007 to 171 million units in 2010, according to DisplaySearch.
 
A large consumer market has pressured flat panel manufacturers to continually improve the quality of their displays, and as a result LCDs and other flat panel displays continue to increase in resolution and size. 1080p resolution is now the high-end standard, and larger flat panel displays are shifting rapidly from refresh rates of 50/60Hz to faster rates of 100/120Hz, and even 200/240Hz. The shift to large, high-resolution flat panel displays combined with the transition to 1080p content and 120Hz refresh rates is driving the need for high performance processor solutions to meet the enhanced video quality requirements of next generation display products. As flat panel display resolution and size increase, the challenge of “judder” becomes more of an issue. Judder occurs when content recorded at one rate of frames per second for film content must be converted to faster video rates, and as a result there is a jerkiness, or judder in the resulting video performance. This problem is intensified in larger displays and can be a problem regardless of the panel technology being used.
 
In addition to judder, LCD panels also suffer from blur in motion images as a result of the way the human brain processes the longer frame durations produced by an LCD panel. In the past, LCD panel manufacturers have tried to reduce blur by increasing the refresh rate of the panel to higher rates and inserting an extra “black” frame to reduce frame duration. But the black frame insertion method has had drawbacks – one of which was to make LCD screens seem less bright. Newer motion estimation/motion compensation (“MEMC”) technology uses the insertion of interpolated frames based on complex mathematical algorithms to shorten the duration of the video frame and create a clearer, crisper picture. MEMC also provides de-judder processing that smoothes out the jerkiness often apparent with large screen displays.
 
Additionally, the increasing trend towards convergence of video and the Internet is presenting new challenges to video processing, as low quality Internet video content increasingly is being displayed on high-end TVs and other devices. Limitations in bandwidth, latency, noise and content resolution create significant challenges for displaying Internet video on large flat panel displays. Video processors must be able to scale poorer quality video, reduce signal noise inherent to networks and enhance image quality in order to ensure optimal video performance.
 
During 2009, lower sales of flat panel displays due to the global economic recession stimulated the industry to find new strategies, markets and solutions. TV manufacturers therefore accelerated development of design elements and performance features to differentiate products and slow price declines. Among these were the adoption of light emitting diode (“LED”) backlighting, an emphasis on lower power consumption, and most recently, the development of 3D-enabled TVs. All of these trends are driving the need for high performance processor solutions to meet the enhanced video quality requirements of next generation display products.
 
LED backlighting enables higher contrast images in higher refresh-rate TVs. Manufacturers can use either dynamic color LEDs that are positioned behind the panel and allow for local area dimming, which provides higher contrast on selected sections of the screen; or white edge-LEDs positioned around the rim of the screen, which use a special diffusion panel to spread the light evenly behind the screen. LED backlighting also serves as a critical enabler of reduced power consumption. Because of its advantages, LED backlighting is expected to surpass traditional backlights that use fluorescent tubes by 2011 and achieve 74% penetration in 2013, according to DisplaySearch. LED backlighting requires a video processing control mechanism that determines when certain LEDs are lit, and how brightly, based on the video being displayed.
 
The combination of LED backlighting and 200/240Hz technologies provides an enabling platform for new feature developments in LCD TVs, particularly 3D technology, which is an area of intense interest to television manufacturers and consumers alike. DisplaySearch forecasts 3D-ready TVs will grow from 0.2 million units in 2009 to 64 million units in 2018.
 
Increasing screen sizes, higher frame rates, the desire to view Internet content on high-resolution displays, LED backlighting, 3D and other trends all present video performance challenges that must be addressed and are exacerbated with each new cycle of additional features. To differentiate their products, advanced flat panel
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manufacturers must implement video processing technologies that address these video performance issues as rapidly, as fully and as cost effectively as possible. Additionally, the interplay of performance, features, cost and power consumption is a key area of differentiation for digital television manufacturers. Most features and performance improvements carry cost premiums and increased power consumption, but intelligent design and utilization of appropriate video processing technologies can enable simultaneous improvements.
 
Digital Projection Market
 
Increasingly affordable price points are driving continued adoption of digital projectors in business and education, as well as among consumers. Technology improvements are helping reduce the size and weight of projection devices and increasing their performance. Projector models range from larger units designed to be permanently installed in a conference hall or other venue, to ultra portable devices weighing less than two pounds for maximum portability.
 
Currently, the largest segment of the installed front projector market consists of business users who employ multimedia projectors to display both still and video presentation materials from PCs or other sources. Requirements for the business market include portability, compatibility with multiple software and hardware applications and features that ensure simple operation. In educational environments from elementary schools to university campuses, projectors help teachers integrate media-rich instruction into classrooms. Growth in overall projector sales is expected to come both from the business sector and the education market. Tiny, battery powered “pico” projectors embedded in a cell phone or PC, or available as independent devices weighing less than a pound, also are beginning to take hold in the consumer and business markets, fueled by their capability to display video content at high resolutions.
 
Worldwide, the emerging economies of Brazil, Russia, India and China, commonly referred to collectively as “BRIC,” are expected to be a leading driver of demand for information technology of all kinds, including projectors for business, education and the consumer sectors.
 
Consistent with the trends of other consumer products, digital projectors are increasingly incorporating networking capabilities that enable the sharing of video and other content among multiple devices. This in turn is enabling new use models for digital projection in both the education and business environments. For example, one teacher can present the same material simultaneously in multiple classrooms, and students in different classrooms can display and discuss their work. Such connectivity allows instant access to content and sharing of content, which promotes interaction and collaboration among dispersed groups. In the business setting, this connectivity enables teleconferencing and the seamless sharing of content for more effective meetings.
 
Additional Markets
 
In addition to the large-screen flat panel display and digital projection markets, other sectors are also taking advantage of the trend towards higher performance and connectivity in digital video technology. Some of the applications expected to grow as a result of enhanced video quality include digital signage, video conferencing and video surveillance.
 
Our Core Technologies and Products
 
We have developed a portfolio of advanced video algorithms and intellectual property (“IP”) to address a broad range of challenges in digital video. Our technologies can dramatically improve video quality and are increasingly important as screen size and resulting quality issues increase. Our products are designed with a flexible architecture that allows us to combine algorithms and functional blocks of digital and mixed signal circuitry. Accordingly, our technologies can be implemented across multiple products and in powerful combinations within single products. The majority of our products include one or more technologies to provide high-quality video solutions to our customers.
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Some of our proprietary core technologies include:
 
•      MEMC (motion estimation/motion compensation). Our proprietary MEMC technology significantly improves the performance and viewing experience of large advanced LCD panels by solving problems such as motion blur and judder. It also supports significant trends such as LED backlighting to improve video performance in digital TVs with 120Hz or higher frame rates and accommodates emerging 3D standards. Additionally, our MEMC technology improves video performance in non-TV applications such as video conferencing, 3D gaming and projection.
 
•      Networking. Our networking technology enables the same video stream to be networked across multiple displays, for applications such as connected video projection and digital signage.
 
•      Digital keystone correction. Our technology provides enhanced keystone and image correction performance for digital projection systems, particularly for “short throw” projectors which must project clearly at severe angles due to space limitations.
 
Our product development strategy is to leverage our expertise in video processing to address the evolving needs of the advanced flat panel display, digital projection and other markets that require superior image quality. We plan to continue to focus our development resources to maintain our market lead in the digital projection market and to enhance our video processing solutions for advanced flat panel displays and other markets. Additionally, we look for ways to leverage our research and development investment into products that address high-value markets where our innovative proprietary technology provides differentiation for us and our customers. We deliver our technology in a variety of offerings, which take the form of single-purpose chips, highly integrated SoCs that incorporate specialized software, and full solutions incorporating software and other tools.
 
Our primary product categories include the following:
 
•      ImageProcessor ICs. Our ImageProcessor ICs include embedded microprocessors, digital signal processing technology and software that control the operations and signal processing within high-end display systems such as projectors and high-resolution flat panels. ImageProcessor ICs were our first product offerings and continue to comprise the majority of our business. We have continued to refine the architectures for optimal performance, manufacturing our products on process technologies that align with our customers’ requirements. Additionally, we provide a software development environment and operating system that enables our customers to more quickly develop and customize the “look and feel” of their products.
 
•      Video Co-Processor ICs. Products in this category work in conjunction with an image processor to post-process video signals in order to enhance the performance or feature set of the overall video solution (for example, by significantly reducing judder and motion blur). Our video co-processor ICs can be used with our ImageProcessor ICs or with image processing solutions from other manufacturers, and in most cases can be incorporated by a display manufacturer without assistance from the supplier of the base image processor. This flexibility enables manufacturers to augment their existing or new designs to enhance their video display products.
 
•      Networked Display ICs. Our Networked Display ICs allow the same video stream to be networked across multiple displays, for example to connect projectors in different classrooms or to enable networked streaming of video in digital signage applications. Our Networked Display IC combines video sharing capabilities with video image processing, wireless connectivity and Internet connection to ensure high quality, multi-source video output and enhanced value to our projection display customers.
 
Customers, Sales and Marketing
 
The key focus of our global sales and marketing strategy is to achieve design wins with industry leading branded manufacturers in targeted markets and to continue building strong customer relationships. Once a design win has been achieved, sales and marketing efforts are focused on building long-term mutually
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beneficial business relationships with our customers by providing superior technology and reducing their costs, which complements our customers’ product development objectives and meets their expectations for price-performance and time to market. Marketing efforts are focused on building market-leading brand awareness and preference for our solutions.
 
We utilize direct sales and marketing resources in the U.S., China, Taiwan, Japan and Korea as well as indirect resources in several regions. In addition to sales and marketing representatives, we have field application engineers who provide technical expertise and assistance to manufacturing customers on final product development.
 
Our global distribution channel is multi-tiered and involves both direct and indirect distribution channels, as described below:
 
•      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 51%, 53% and 57% of revenue in 2009, 2008 and 2007, respectively.
 
Our largest distributor, Tokyo Electron Device Ltd. (“TED”), is located in Japan. TED represented 35%, 32% and 33% of revenue in 2009, 2008 and 2007, respectively, and accounted for 22% and 32% of accounts receivable at December 31, 2009 and 2008, respectively. No other distributor accounted for more than 10% of revenue in 2009, 2008 and 2007.
 
We also have distributor relationships in Taiwan, China, Korea, Europe, Southeast Asia and the U.S.
 
•      Direct Relationships. We have established direct relationships with companies that manufacture high-end display systems. Some of our direct relationships are supported by commission-based manufacturers’ representatives, who 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 49%, 47% and 43% of total revenue in 2009, 2008 and 2007, respectively.
 
We have direct relationships with companies falling into the following three classifications:
 
•       Integrators. Integrators are original equipment manufacturers (“OEMs”) who build display devices based on specifications provided by branded suppliers.
 
•       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.
 
•       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.
 
Revenue attributable to our top five end customers represented 56%, 55% and 47% of revenue in 2009, 2008 and 2007, respectively. End customers include customers who purchase directly from us as well as customers who purchase products indirectly through distributors. Sales to Seiko Epson Corporation represented more than 10% of revenue in 2009, 2008, and 2007. Sales to SANYO Electric Co., Ltd. represented more than 10% of revenue in 2009. No other end customer accounted for more than 10% of revenue in 2009, 2008 and 2007.
 
Seasonality
 
Our business is subject to seasonality related to the markets we serve and the location of our customers. We have historically experienced higher revenue from the multimedia projector market in the third quarter of the year, and lower revenue in the first quarter of the year as our Japanese customers reduce inventories in
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anticipation of their March 31 fiscal year ends. Additionally, holiday demand for consumer electronics, including high-end televisions, has contributed to increased revenue in the second half of certain years. Our sales in 2009 and 2008 did not follow our historical trends due to the global crisis in the credit and financial markets and significant reductions in consumer spending during the last quarter of 2008 and throughout 2009. As a result of the worldwide economic slowdown, it is extremely difficult for us to determine when or if historical trends are likely to resume.
 
Geographic Distribution of Sales
 
Sales outside the U.S. accounted for approximately 97%, 95% and 96% of our revenue in 2009, 2008 and 2007, respectively.
 
Financial information regarding our domestic and foreign operations is presented in Note 11 of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
 
Backlog
 
Our sales are made pursuant to customer purchase orders for delivery of standard products. The volume of product actually purchased by our customers, as well as shipment schedules, are subject to frequent revisions that reflect changes in both the customers’ needs and product availability. Our entire order backlog is cancelable, with a portion subject to cancellation fees. In light of industry practice and our own experience, we do not believe that backlog as of any particular date is indicative of future results.
 
Competition
 
In general, the semiconductor industry is intensely competitive. The markets for higher performance display and projection devices, including the markets for advanced flat panel display televisions, multimedia projectors and other applications demanding high quality video, are characterized by rapid technological change, evolving industry standards, compressed product life cycles and declining average selling prices. We believe the principal competitive factors in our markets are levels of product integration, compliance with industry standards, time to market, cost, product performance, system design costs, IP, functional versatility provided by software and customer relationships and reputation.
 
Our current products face competition from specialized display controller developers and in-house display controller ICs designed by our customers and potential customers. Additionally, new alternative display processing technologies and industry standards may emerge that directly compete with technologies that we offer.
 
We compete with specialized and diversified electronics and semiconductor companies that offer display processors or scaling components. Some of these include Broadcom Corporation, i-Chips Technologies Inc., Integrated Device Technology, Inc., MediaTek Inc., MStar Semiconductor, Inc., Realtek Semiconductor Corp., Renesas Technology Corp., Sigma Designs, Inc., Silicon Image, Inc., STMicroelectronics N.V., Sunplus Technology Co., Ltd., Techwell, Inc., Trident Microsystems, Inc., Zoran Corporation and other companies. Potential and current competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including Intel Corporation, LG Electronics, Inc., Matsushita Electric Industrial Co., Ltd., Mitsubishi Digital Electronics America, Inc., National Semiconductor Corporation, NEC Corporation, NVIDIA Corporation, NXP Semiconductors, Samsung Electronics Co., Ltd., SANYO Electric Co., Ltd., Seiko Epson Corporation, Sharp Electronics Corporation, Sony Corporation, Texas Instruments Incorporated and Toshiba America, Inc. In addition, start-up companies may seek to compete in our markets.
 
Research and Development
 
Our internal research and development efforts are focused on the development of our solutions for the multimedia projector and high-end television markets. Our development efforts are focused on pursuing higher
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levels of video performance, integration and new features in order to provide our customers with solutions that enable them to introduce market leading products and help lower final systems costs for our customers.
 
We have invested, and expect to continue to invest, significant resources in research and development activities. Our research and development expense was $20.1 million, $26.5 million and $38.8 million in 2009, 2008 and 2007, respectively.
 
Manufacturing
 
Within the semiconductor industry we are known as a “fabless” company, meaning that we do not manufacture the semiconductors that we design and develop but instead contract with three third-party foundries for wafer fabrication and other manufacturers for packaging, assembly and testing of our products. The fabless approach allows us to concentrate our resources on product design and development where we believe we have greater competitive advantages.
 
See “Risk Factors” in Part I, Item 1A of this Form 10-K.
 
Intellectual Property
 
We rely on a combination of nondisclosure agreements and copyright, trademark and trade secret laws to protect the algorithms, design and architecture of our technology. Currently, we hold 119 patents and have 40 patent applications pending, which relate generally to improvements in the visual display of digital image data including, but not limited to, improvements in image scaling, image correction, automatic image optimization and video signal processing for digital displays. Our U.S. and foreign patents are generally enforceable for 20 years from the date they were filed. Accordingly, our issued patents have from approximately 7 to 16 years remaining in their respective term, depending on their filing date. We believe that the remaining term of our patents is adequate relative to the expected lives of our related products.
 
We intend to seek patent protection for other significant technologies that we have already developed and expect to seek patent protection for future products and technologies as necessary. Patents may not be issued as a result of any pending applications and any claims allowed under issued patents may be insufficiently broad to protect our technology. Existing or future patents may be invalidated, circumvented, challenged or licensed to others. To supplement the technologies we develop internally, we have also licensed rights to use IP held by third parties, and we expect to license additional technology rights in the future.
 
See “Risk Factors” in Part I, Item 1A, and “Note 8: Commitments and Contingencies” in Part II, Item 8 of this Form 10-K.
 
Environmental Matters
 
Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. 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 vendors’ products are in compliance with these regulations. We would be subject to significant penalties for failure to comply with these laws and regulations.
 
See “Risk Factors” in Part I, Item 1A of this Form 10-K.
 
Employees
 
As of December 31, 2009, we had a total of 222 employees compared to 229 employees as of December 31, 2008. We consider our relations with our employees to be good.
 
Availability of Securities and Exchange Commission Filings
 
We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports free of charge as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (“SEC”). Our Internet
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address is www.pixelworks.com. The content on, or that can be accessed through, our website is not incorporated by reference into this filing. Documents filed by us with the Securities and Exchange Commission may be read and copied at the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public through the SEC’s website at  www.sec.gov .

Item 1A.    	Risk Factors.	
 
Investing in our shares of common stock involves a high degree of risk, and investors should carefully consider the risks described below before making an investment decision. If any of the following risks occur, the market price of our shares of common stock could decline and investors could lose all or part of their investment. Additional risks that we currently believe are immaterial may also impair our business operations. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2009, including our consolidated financial statements and related notes, and our other filings made from time to time with the Securities and Exchange Commission.
 
Macroeconomic Risks Related to the Company
 
The current adverse global economic environment and volatility in global credit and financial markets could materially and adversely affect our business and results of operations.
 
Financial, commercial and consumer markets may continue to experience extreme disruption and there can be no assurance that there will not be further deterioration of these markets. While we do not currently require access to credit markets to finance our operations, these economic developments have adversely affected, and are likely to continue to affect, our business in a number of ways. For instance, the economic crisis has decreased, and may continue to decrease, market acceptance of, and reduce the demand for, our products and the success of our product strategy. We face an increased risk that our customers and suppliers, who may experience decreased revenue and difficulty obtaining financing, will be unable to make significant purchases and continue their operations. It may become more difficult for us to collect payments from our customers on a timely basis, or at all, and our suppliers may not be able to maintain their production capacity and fulfill our orders on a timely basis, or at all. This has resulted, and could continue to result, in a decrease or cancellation of orders for our products.
 
As a result of the worldwide economic slowdown, it is difficult for us and our customers to forecast future sales levels based on historical information and trends. Portions of our expenses are fixed and other expenses are tied to expected levels of sales activities. To the extent that we do not achieve our anticipated levels of sales, our gross profit and net income could continue to be adversely affected until such expenses are reduced to an appropriate level. Additionally, if we are unable to reduce our costs to respond to future decreases in revenue, we may utilize more of our cash resources than we planned. Any future actions that we take to limit our usage of cash may also reduce our ability to execute our plans and strategies, which may weaken our competitive positioning and cause us to lose market share. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.
 
Company Specific Risks
 
Our product strategy, which is targeted at markets demanding superior video and image quality, may not lead to new design wins or significantly increased revenue in a timely manner or at all, which could materially adversely affect our results of operations and limit our ability to grow.
 
We have adopted a product strategy that focuses on our core competencies in pixel processing and delivering high levels of video and image quality. With this strategy, we continue to make further investments in the development of our ImageProcessor architecture for the digital projector market, with particular focus on
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adding increased performance and functionality. For the advanced television market, we are shifting away from our previous approach of implementing our intellectual property (“IP”) exclusively in system-on-chip integrated circuits (“ICs”), to an approach designed to improve video performance of our customers’ image processors through the use of our line of Motion Estimation Motion Compensation (“MEMC”) co-processor ICs. This strategy is designed to address the needs of the large-screen, high-resolution, high-quality segment of the television market. Although our new product strategy is developed to take advantage of market trends, such markets may not develop or may take longer to develop than we expect. We cannot assure you that the products we are developing will adequately address the demands of our target customers, or that we will be able to produce our new products at costs that enable us to price these products competitively.
 
Even if our new product strategy is properly targeted, we cannot assure you that the products we are developing will lead to a significant increase in revenue from new design wins. To achieve design wins, we must design and deliver cost-effective, innovative and integrated semiconductors that overcome the significant costs associated with qualifying a new supplier and which make developers reluctant to change component sources. Further, design wins do not necessarily result in developers ordering large volumes of our products. Developers can choose at any time to discontinue using our products in their designs or product development efforts. A design win is not a binding commitment by a developer to purchase our products, but rather a decision by a developer to use our products in its design process. Even if our products are chosen to be incorporated into a developer’s products, we may still not realize significant revenue from the developer if its products are not commercially successful or it chooses to qualify, or incorporate the products, of a second source.
 
If we are not profitable in the future, we may be unable to continue our operations.
 
Excluding gains on the repurchase of our convertible subordinated debentures, 2004 is our only year of profitability since inception and we have incurred operating losses since 2004. If and when we achieve profitability depends upon a number of factors, including our ability to develop and market innovative products, accurately estimate inventory needs, contract effectively for manufacturing capacity and maintain sufficient funds to finance our activities. If we are not profitable in the future, we may be unable to continue our operations.
 
We have incurred indebtedness as a result of the sale of convertible debentures. We anticipate that we must repay or refinance the debentures by May 2011. We may be unable to meet this, or other, future capital requirements.
 
As of December 31, 2009, $15.8 million of our 1.75% convertible subordinated debentures were outstanding. Although the debentures are not due until 2024, the holders have the right to require us to purchase all or a portion of the debentures at each of the following dates: May 15, 2011, May 15, 2014 and May 15, 2019. Since the market price of our common stock is significantly below the conversion price of the debentures, we expect the holders to exercise their put option on May 15, 2011. We may not be able to refinance the debentures at terms that are as favorable as those currently contained in the debentures, or at terms that are acceptable to us at all. While we believe that our current cash and marketable securities balances will be sufficient to meet our capital requirements for the next twelve months, we cannot assure you that we will be able to maintain sufficient cash and marketable security balances to refinance or pay off the debentures when and if the put option is exercised, or that such a repurchase would not result in cash reserves too low for us to continue our business as a going concern. We may need, or could elect to seek, additional funding through public or private equity or debt financing, which we may not be able to obtain. If we issue equity securities, our shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of our common stock.
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Because of our long product development process and sales cycles, we may incur substantial costs before we earn associated revenue and ultimately may not sell as many units of our products as we originally anticipated.
 
We develop products based on anticipated market and customer requirements and incur substantial product development expenditures, which can include the payment of large up-front, third-party license fees and royalties, prior to generating associated revenue. Our work under these projects is technically challenging and places considerable demands on our limited resources, particularly on our most senior engineering talent. Because the development of our products incorporates not only our complex and evolving technology but also our customers’ specific requirements, a lengthy sales process is often required before potential customers begin the technical evaluation of our products. Our customers typically perform numerous tests and extensively evaluate our products before incorporating them into their systems. The time required for testing, evaluation and design of our products into a customer’s system can take up to nine months or more. It can take an additional nine months or longer before a customer commences volume shipments of systems that incorporate our products. We cannot assure you that the time required for the testing, evaluation and design of our products by our customers would not be significantly longer than nine months.
 
Because of the lengthy development and sales cycles, we will experience delays between the time we incur expenditures for research and development, sales and marketing and inventory and the time we generate revenue, if any, from these expenditures. Additionally, if actual sales volumes for a particular product are substantially less than originally anticipated, we may experience large write-offs of capitalized license fees, software development tools, product masks, inventories or other capitalized or deferred product-related costs, or increased amortization of non-cancelable prepaid royalties, any of which would negatively affect our operating results. For example, our provisions for obsolete inventory were $1.2 million, $1.5 million and $4.4 million in 2009, 2008 and 2007, respectively. Additionally, in 2007, we wrote off assets with a net book value of $6.9 million due to reductions in research and development personnel and changes in product development strategy.
 
We may be unable to successfully manage any future expansion efforts, including the integration of any future acquisition or equity investment, which could disrupt our business and severely harm our financial condition.
 
We may determine that it is beneficial to increase our capacity to develop new and enhanced products in the future as the economy recovers. If we do not manage any internal expansion efforts effectively, our operating expenses could increase more rapidly than our revenue, adversely affecting our financial condition and results of operations. To manage any future expansion efforts effectively in a rapidly evolving market, we must be able to maintain and improve our operational and financial systems, train and manage our employee base and attract and retain qualified personnel with relevant experience. We must also manage multiple relationships with customers, business partners, contract manufacturers, suppliers and other third parties. We could spend substantial amounts of time and money in connection with expansion efforts for which we may not realize any profit. Our systems, procedures or controls may not be adequate to support our operations and we may not be able to expand quickly enough to exploit potential market opportunities.
 
In addition, we may not be able to successfully integrate the businesses, products, technologies or personnel of any entity that we might acquire in the future, and any failure to do so could disrupt our business and seriously harm our financial condition. Our operation of any acquired business would involve numerous risks, including, but not limited to:

 	•    	problems combining the acquired operations, technologies or products;	
 	 	 	
 	•    	unanticipated costs;	
 	 	 	
 	•    	diversion of management’s attention from existing operations;	
 	 	 	
 	•    	adverse effects on existing business relationships with customers;	
 	 	 	
 	•    	risks associated with entering markets in which we have no or limited prior experience;	

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 	•    	potential loss of key employees, particularly those of the acquired organizations; and	
 	 	 	
 	•    	risks associated with implementing adequate internal control, management, financial and operating reporting systems.	
 
Any future acquisitions and investments could also result in any of the following negative events, among others:

 	•    	issuance of stock that dilutes current shareholders’ percentage ownership;	
 	 	 	
 	•    	incurrence of debt;	
 	 	 	
 	•    	assumption of liabilities;	
 	 	 	
 	•    	amortization expenses related to acquired intangible assets;	
 	 	 	
 	•    	impairment of goodwill;	
 	 	 	
 	•    	large and immediate write-offs; and	
 	 	 	
 	•    	decreases in cash and marketable securities that could otherwise serve as working capital.	
 
A significant amount of our revenue comes from a limited number of customers and distributors, exposing us to increased credit risk and subjecting our cash flow to the risk that any of our customers or distributors could decrease or cancel its orders.
 
The display manufacturing market is highly concentrated and we are, and will continue to be, dependent on a limited number of customers and distributors for a substantial portion of our revenue. Sales to our top distributor represented 35%, 32% and 33% of revenue in 2009, 2008 and 2007, respectively. Revenue attributable to our top five end customers represented 56%, 55% and 47% of revenue in 2009, 2008 and 2007, respectively. As of December 31, 2009 and 2008, we had three accounts that each represented 10% or more of accounts receivable. A reduction, delay or cancellation of orders from one or more of our significant customers, or a decision by one or more of our significant customers to select products manufactured by a competitor or to use its own internally-developed semiconductors, would significantly impact our revenue. Further, the concentration of our accounts receivable with a limited number of customers increases our credit risk. The failure of these customers to pay their balances, or any customer to pay future outstanding balances, would result in an operating expense and reduce our cash flows.
 
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.
 
Selling to distributors and original equipment manufacturers (“OEMs”) that build display devices based on specifications provided by branded suppliers, also referred to as integrators, reduces our ability to forecast sales accurately and increases the complexity of our business. Our sales are made on the basis of customer purchase orders rather than long-term purchase commitments. Our distributors, integrators and customers may cancel or defer purchase orders at any time but we must order wafer inventory from our contract manufacturers three to four months in advance.
 
The estimates we use for our advance orders from contract manufacturers are based, in part, on reports of inventory levels and production forecasts from our distributors and integrators, which act as intermediaries between us and the companies using our products. This process requires us to make numerous assumptions concerning demand and to rely on the accuracy of the reports and forecasts of our distributors and integrators, each of which may introduce error into our estimates of inventory requirements. These arrangements make it difficult to monitor the financial condition and creditworthiness of our distributors, integrators and customers and to predict demand for our products. Our failure to manage one or more of these challenges could result in excess inventory or inventory shortages that could materially impact our operating results or limit the ability of companies using our semiconductors to deliver their products. For example, we overestimated demand for certain of our products which led to significant charges for obsolete inventory in 2009, 2008 and 2007. On the
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other hand, if we underestimate demand, or if sufficient manufacturing capacity is not available, we would forego revenue opportunities, lose market share and damage our customer relationships.
 
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.
 
We contract with three third-party foundries for wafer fabrication and other manufacturers for packaging, assembly and testing of our products. We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. The wafers used in each of our products are fabricated by only one of these manufacturers. Sole sourcing each product increases our dependence on our suppliers.
 
We have limited control over delivery schedules, quality assurance, manufacturing yields, potential errors in manufacturing and production costs. We do not have long-term supply contracts with our third-party manufacturers, so they are not obligated to supply us with products for any specific period of time, quantity or price, except as may be provided in a particular purchase order. From time to time, our suppliers increase the prices of the products we purchase from them with little notice, which may cause us to increase the prices to our customers and harm our competitiveness. Because our requirements represent only a small portion of the total production capacity of our contract manufacturers, they are more likely to, and have in the past, reallocated capacity to other customers even during periods of high demand for our products. We expect this may occur again in the future.
 
Establishing a relationship with a new contract manufacturer in the event of delays or increased prices with our current contract manufacturers would be costly and cumbersome. The lead time to make such a change would be at least nine months, and the estimated time for us to adapt a product’s design to a particular contract manufacturer’s process is at least four months. If we have to qualify a new foundry or packaging, assembly and testing supplier for any of our products or if we are unable to obtain our products from our contract manufacturers on schedule, or at all, we could incur significant delays in shipping products, our ability to satisfy customer demand could be harmed, our revenue from the sale of products may be lost or delayed and our customer relationships and ability to obtain future design wins could be damaged.
 
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.
 
Sales outside the U.S. accounted for approximately 97%, 95% and 96% of revenue in 2009, 2008 and 2007, respectively. We anticipate that sales outside the U.S. will continue to account for a substantial portion of our revenue in future periods. In addition, customers who incorporate our products into their products sell a substantial portion of their products outside of the U.S., and all of our products are manufactured outside of the U.S. We are, therefore, subject to many international risks, including, but not limited to:

 	•    	increased difficulties in managing international distributors and manufacturers due to varying time zones, languages and business customs;	
 	 	 	
 	•    	foreign currency exchange fluctuations in the currencies of Japan, the People’s Republic of China (“PRC”), Taiwan or Korea;	
 	 	 	
 	•    	reduced or limited protection of our IP, particularly in software, which is more prone to design piracy;	
 	 	 	
 	•    	difficulties in collecting outstanding accounts receivable balances;	
 	 	 	
 	•    	potentially adverse tax consequences;	
 	 	 	
 	•    	difficulties regarding timing and availability of export and import licenses;	
 	 	 	
 	•    	political and economic instability, particularly in the PRC, Japan, Taiwan, or Korea;	

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 	•    	difficulties in maintaining sales representatives outside of the U.S. that are knowledgeable about our industry and products;	
 	 	 	
 	•    	changes in the regulatory environment in the PRC, Japan, Taiwan and Korea that may significantly impact purchases of our products by our customers;	
 	 	 	
 	•    	outbreaks of health epidemics in the PRC or other parts of Asia; and	
 	 	 	
 	•    	increased transaction costs related to sales transactions conducted outside of the U.S., such as charges to secure letters of credit.	
 
Our future success depends upon the continued services of key personnel, many of whom would be difficult to replace, and the loss of one or more of these employees could seriously harm our business by delaying product development.
 
We believe our success depends, in large part, upon our ability to identify, attract and retain qualified hardware and software engineers, sales, marketing, finance and managerial personnel. Competition for talented personnel is intense and we may not be able to retain our key personnel or identify, attract or retain other highly qualified personnel in the future. Because of the highly technical nature of our business, the loss of key engineering personnel could delay product introductions and significantly impair our ability to successfully create future products. If we do not succeed in hiring and retaining employees with appropriate qualifications, our product development efforts, revenue and business could be seriously harmed. We have experienced, and may continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. In the last three years a significant portion of our executive management team has turned over, including the Chief Executive Officer, Chief Financial Officer, Vice President of Sales, Vice President of Marketing, Vice President of Business Operations and Vice President, Strategy and Market Development.
 
If we engage in further restructuring efforts, we may be unable to successfully implement new products or enhancements to our current products, which will adversely affect our future sales and financial condition.
 
In 2006, we initiated restructuring plans aimed at returning the Company to profitability. In December 2008, we initiated an additional restructuring plan to reduce our operating expenses in response to decreases in current and forecasted revenue. The December 2008 plan reduced operations, research and development and administrative headcount in our San Jose, Taiwan and China offices and was completed during the second quarter of 2009. The restructuring plans and any additional reductions in headcount may slow our development of new or enhanced products by limiting our research and development and engineering activities. If we are unable to successfully introduce new or enhanced products, our sales and financial condition will be adversely affected.
 
The concentration of our manufacturers and customers in the PRC, Japan, Korea and Taiwan increases our risk that a natural disaster, work stoppages or economic or political instability in the region could disrupt our operations.
 
Most of our current manufacturers and customers are located in the PRC, Japan, Korea or Taiwan. In addition, a significant percentage of our employees are located in this region. Disruptions from natural disasters, health epidemics and political, social and economic instability may affect the region and would have a negative impact on our results of operations. In addition, the economy of the PRC differs from the economies of many countries in respects such as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation, foreign currency flows and balance of payments position, among others. We cannot be assured that the PRC’s economic policies will be consistent or effective. Our results of operations and financial position may be harmed by changes in the PRC’s political, economic or social conditions.
 
In addition, the risk of earthquakes in the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area. Common consequences of earthquakes include power outages and disruption or impairment of production capacity. Earthquakes, fire, flooding, power outages and other natural disasters in
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the Pacific Rim region, or political unrest, labor strikes or work stoppages in countries where our manufacturers and customers are located, would likely result in the disruption of our manufacturers’ and customers’ operations. Any disruption resulting from extraordinary events could cause significant delays in shipments of our products until we are able to shift our manufacturing from the affected contractor to another third-party vendor. There can be no assurance that alternative capacity could be obtained on favorable terms, or in a timely manner, if at all.
 
Continued compliance with regulatory and accounting requirements will be challenging and will require significant resources.
 
We spend a significant amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including evolving Securities and Exchange Commission rules and regulations, NASDAQ Global Market rules and the Sarbanes-Oxley Act of 2002, which requires management’s annual review and evaluation of internal control over financial reporting. While we invest significant time and money in our effort to evaluate and test our internal control over financial reporting and assess our risk management strategies, there are inherent limitations to the effectiveness of any system of internal controls and procedures, including cost limitations, the possibility of human error, judgments and assumptions regarding the likelihood of future events, and the circumvention or overriding of the controls and procedures. Accordingly, even effective controls and procedures can provide only reasonable assurance of achieving their control objectives.
 
Additionally, one of the covenants of the indenture governing the debentures could possibly be interpreted such that if we are late with any of our required filings under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and if we fail to affect a cure within 60 days, the holders of the debentures can put the debentures back to the Company, whereby the debentures become immediately due and payable. As a result of our restructuring efforts, we have fewer employees to perform day-to-day controls, processes and activities and, additionally, certain functions have been transferred to new employees who are not as familiar with our procedures. These changes increase the risk that we will be unable to make timely filings in accordance with the Exchange Act. Any resulting default under our debentures would have a material adverse effect on our cash position and operating results.
 
Our effective income tax rate is subject to unanticipated changes in, or different interpretations of tax rules and regulations and forecasting our effective income tax rate is complex and subject to uncertainty.
 
As a global company, we are subject to taxation by a number of taxing authorities and as such, our tax rates vary among the jurisdictions in which we operate. Unanticipated change in our tax rates could affect our future results of operations. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or the interpretation of tax laws either in the United States or abroad, or by changes in the valuation of our deferred tax assets and liabilities. The ultimate outcomes of any future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them would have a material effect on our operating results and financial position.
 
The computation of income tax expense (benefit) is complex as it is based on the laws of numerous tax jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provision under U.S. generally accepted accounting principles. Income tax expense (benefit) for interim quarters is based on a forecast of our global tax rate for the year, which includes forward looking financial projections, including the expectations of profit and loss by jurisdiction, and contains numerous assumptions. For these reasons, our global tax rate may be materially different than our forecast.
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Company Risks Related to the Semiconductor Industry and Our Markets
 
Intense competition in our markets may reduce sales of our products, reduce our market share, decrease our gross profit and result in large losses.
 
Rapid technological change, evolving industry standards and customer requirements, compressed product life cycles and declining average selling prices are characteristics of our market and could have a material adverse effect on our business, financial condition and results of operations. As the overall price of digital projectors and advanced flat panel displays continues to fall, we may be required to offer our products to customers at discounted prices due to increased price competition. At the same time, new alternative technologies and industry standards may emerge that directly compete with technologies we offer. We may be required to increase our investment in research and development at the same time that product prices are falling. In addition, even after making this investment, we cannot assure you that our technologies will be superior to those of our competitors or that our products will achieve market acceptance, whether for performance or price reasons. Failure to effectively respond to these trends could reduce the demand for our products.
 
We compete with specialized and diversified electronics and semiconductor companies that offer display processors or scaling components. Some of these include Broadcom Corporation, i-Chips Technologies Inc., Integrated Device Technology, Inc., MediaTek Inc., MStar Semiconductor, Inc., Realtek Semiconductor Corp., Renesas Technology Corp., Sigma Designs, Inc., Silicon Image, Inc., STMicroelectronics N.V., Sunplus Technology Co., Ltd., Techwell, Inc., Trident Microsystems, Inc., Zoran Corporation and other companies. Potential and current competitors may include diversified semiconductor manufacturers and the semiconductor divisions or affiliates of some of our customers, including Intel Corporation, LG Electronics, Inc., Matsushita Electric Industrial Co., Ltd., Mitsubishi Digital Electronics America, Inc., National Semiconductor Corporation, NEC Corporation, NVIDIA Corporation, NXP Semiconductors, Samsung Electronics Co., Ltd., SANYO Electric Co., Ltd., Seiko Epson Corporation, Sharp Electronics Corporation, Sony Corporation, Texas Instruments Incorporated and Toshiba America, Inc. In addition, start-up companies may seek to compete in our markets.
 
Many of our competitors have longer operating histories and greater resources to support development and marketing efforts than we do. Some of our competitors operate their own fabrication facilities. These competitors may be able to react more quickly and devote more resources to efforts that compete directly with our own. Our current or potential customers have developed, and may continue to develop, their own proprietary technologies and become our competitors. Increased competition from both competitors and our customers’ internal development efforts could harm our business, financial condition and results of operations by, for example, increasing pressure on our profit margin or causing us to lose sales opportunities. We cannot assure you that we can compete successfully against current or potential competitors.
 
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.
 
We license technology from independent third parties that is incorporated into our products or product enhancements. Future products or product enhancements may require additional third-party licenses that may not be available to us or may not be available on terms that are commercially reasonable. In addition, in the event of a change in control of one of our licensors, it may become difficult to maintain access to its licensed technology. If we are unable to obtain or maintain any third-party license required to develop new products and product enhancements, we may have to obtain substitute technology with lower quality or performance standards, or at greater cost, either of which could seriously harm the competitiveness of our products.
 
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.
 
Our ability to compete effectively with other companies will depend, in part, on our ability to maintain the proprietary nature of our technology, including our semiconductor designs and software. We provide the computer programming code for our software to customers in connection with their product development
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efforts, thereby increasing the risk that customers will misappropriate our proprietary software. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to help protect our proprietary technologies. As of December 31, 2009 we held 119 patents and had 40 patent applications pending for protection of our significant technologies. Competitors in both the U.S. and foreign countries, many of whom have substantially greater resources than we do, may apply for and obtain patents that will prevent, limit or interfere with our ability to make and sell our products, or they may develop similar technology independently or design around our patents. Effective copyright, trademark and trade secret protection may be unavailable or limited in foreign countries.
 
We cannot assure you that the degree of protection offered by patent or trade secret laws will be sufficient. Furthermore, we cannot assure you that any patents will be issued as a result of any pending applications or that any claims allowed under issued patents will be sufficiently broad to protect our technology. In addition, it is possible that existing or future patents may be challenged, invalidated or circumvented.
 
Others may bring infringement actions against us that could be time consuming and expensive to defend.
 
We may become subject to claims involving patents or other IP rights. IP claims could subject us to significant liability for damages and invalidate our proprietary rights. In addition, IP claims may be brought against customers that incorporate our products in the design of their own products. These claims, regardless of their success or merit and regardless of whether we are named as defendants in a lawsuit, would likely be time consuming and expensive to resolve and would divert the time and attention of management and technical personnel. Any IP litigation or claims also could force us to do one or more of the following:

 	•    	stop selling products using technology that contains the allegedly infringing IP;	
 	 	 	
 	•    	attempt to obtain a license to the relevant IP, which may not be available on reasonable terms or at all;	
 	 	 	
 	•    	attempt to redesign those products that contain the allegedly infringing IP; or	
 	 	 	
 	•    	pay damages for past infringement claims that are determined to be valid or which are arrived at in settlement of such litigation or threatened litigation.	
 
If we are forced to take any of the foregoing actions, we may incur significant additional costs or be unable to manufacture and sell our products, which could seriously harm our business. In addition, we may not be able to develop, license or acquire non-infringing technology under reasonable terms. These developments could result in an inability to compete for customers or otherwise adversely affect our results of operations.
 
If we are not able to respond to the rapid technological changes and evolving industry standards in the markets in which we compete, or seek to compete, our products may become less desirable or obsolete.
 
The markets in which we compete or seek to compete are subject to rapid technological change and miniaturization capabilities, frequent new product introductions, changing customer requirements for new products and features and evolving industry standards. The introduction of new technologies and emergence of new industry standards could render our products less desirable or obsolete, which could harm our business and significantly decrease our revenue. Examples of changing industry standards include the growing use of broadband to deliver video content, faster screen refresh rates, the proliferation of new display devices and the drive to network display devices together. Our products are incorporated into our customers’ products, which have different parts and specifications and utilize multiple protocols that allow them to be compatible with specific computers, video standards and other devices. If our customers’ products are not compatible with these protocols and standards, consumers will return, or not purchase, these products and the markets for our customers’ products could be significantly reduced. As a result, a portion of our market would be eliminated, and our business would be harmed.
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We are dependent on manufacturers of our semiconductor products not only to respond to changes in technology and industry standards but also to continue the manufacturing processes on which we rely.
 
To respond effectively to changes in technology and industry standards, we are dependent on our foundries to implement advanced semiconductor technologies and our operations could be adversely affected if those technologies are unavailable, delayed or inefficiently implemented. In order to increase performance and functionality and reduce the size of our products, we are continuously developing new products using advanced technologies that further miniaturize semiconductors and we are dependent on our foundries to develop and provide access to the advanced processes that enable such miniaturization. We cannot be certain that future advanced manufacturing processes will be implemented without difficulties, delays or increased expenses. Our business, financial condition and results of operations could be materially adversely affected if advanced manufacturing processes are unavailable to us, substantially delayed or inefficiently implemented.
 
Creating the capacity for new technological changes may cause manufacturers to discontinue older manufacturing processes in favor of newer ones. We must then either retire the affected part or develop a new version of the part that can be manufactured with a newer process. In the event that a manufacturing process is discontinued, our current suppliers may be unwilling or unable to manufacture our current products. We may not be able to place last time buy orders for the old technology or find alternate manufacturers of our products to allow us to continue to produce products with the older technology while we expend the significant costs for research and development and time to migrate to new, more advanced processes. For instance, a portion of our products use embedded dynamic random access memory (“DRAM”) technology, which requires manufacturing processes that are being phased out. We also utilize 0.18um and 0.15um standard logic processes, which may only be available for the next five to seven years.
 
Our software development tools may be incompatible with industry standards and challenging and costly to implement, which could slow product development or cause us to lose customers and design wins.
 
We provide software development tools to help customers evaluate our products and bring them into production. Software development is a complex process and we are dependent on software development languages and operating systems from vendors that may limit our ability to design software in a timely manner. Also, as software tools and interfaces change rapidly, new software languages introduced to the market may be incompatible with our existing systems and tools, requiring significant engineering efforts to migrate our existing systems in order to be compatible with those new languages. Existing or new software development tools could make our current products obsolete or hard to use. Software development disruptions could slow our product development or cause us to lose customers and design wins. The integration of software with our products adds complexity, may extend our internal development programs and could impact our customers’ development schedules. This complexity requires increased coordination between hardware and software development schedules and may increase our operating expenses without a corresponding increase in product revenue. This additional level of complexity lengthens the sales cycle and may result in customers selecting competitive products requiring less software integration.
 
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.
 
The manufacture of semiconductors is a complex process and it is often difficult for semiconductor foundries to produce semiconductors free of defects. Because many of our products are more highly integrated than other semiconductors and incorporate mixed analog and digital signal processing, multi-chip modules and embedded memory technology, they are even more difficult to produce without defects. Defective products can be caused by design or manufacturing difficulties. Therefore, identifying quality problems can occur only by analyzing and testing our semiconductors in a system after they have been manufactured. The difficulty in identifying defects is compounded because the process technology is unique to each of the multiple semiconductor foundries we contract with to manufacture our products. Despite testing by both our customers and us, errors or performance problems may be found in existing or new semiconductors.
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Failure to achieve defect-free products may result in increased costs and delays in the availability of our products. Additionally, customers could seek damages from us for their losses and shipments of defective products may harm our reputation with our customers. We have experienced field failures of our semiconductors in certain customer applications that required us to institute additional testing. As a result of these field failures, we incurred warranty costs due to customers returning potentially affected products. Our customers have also experienced delays in receiving product shipments from us that resulted in the loss of revenue and profits. Shipments of defective products could cause us to lose customers or to incur significant replacement costs, either of which would harm our business.
 
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.
 
We are building most of our products on a customer owned tooling basis, also known in the semiconductor industry as COT, where we directly contract the manufacture of wafers and assume the responsibility for the assembly and testing of our products. As a result, we are subject to increased risks arising from wafer manufacturing yields and risks associated with coordination of the manufacturing, assembly and testing process. Poor product yields result in higher product costs, which could make our products less competitive if we increase our prices to compensate for our higher costs, or could result in lower gross profit margins if we do not increase our prices.
 
Shortages of materials used in the manufacturing of our products and other key components of our customers’ products may increase our costs, impair our ability to ship our products on time and delay our ability to sell our products.
 
From time to time, shortages of components and materials that are critical to the design and manufacture of our and our customers’ products may occur. Such critical components and materials include semiconductor wafers and packages, display components, analog-to-digital converters, digital receivers and video decoders. If material shortages occur, we may incur additional costs or be unable to ship our products to our customers in a timely fashion, both of which could harm our business and adversely affect our results of operations.
 
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.
 
Average selling prices for our products decline over relatively short periods of time, while many of our product costs are fixed. When our average selling prices decline, our gross profit declines unless we are able to sell more units or reduce the cost to manufacture our products. We have experienced declines in our average selling prices and expect that we will continue to experience them in the future, although we cannot predict when they may occur or how severe they will be. The current crisis in global credit and financial markets may result in more rapid declines in average selling prices as our competitors reduce their prices in attempts to gain market share or as our potential customers have less cash available for purchases and operations and, in some instances, exit the market. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs, adding new features to our existing products or developing new or enhanced products in a timely manner with higher selling prices or gross profits.
 
The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products and could harm our operations.
 
In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. Also, the industry has experienced significant fluctuations in anticipation of changes in general economic conditions, including economic conditions in Asia and North America. The current global economic crisis has caused a slowdown in the demand for our products and other semiconductor products in general, and the slowdown may continue for an extended period of time. The cyclical nature of the semiconductor industry has also led to significant variances in product demand and production capacity. We
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have experienced, and may continue to experience, periodic fluctuations in our future financial results because of changes in industry-wide conditions.
 
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.
 
We are subject to numerous environmental laws and regulations. Compliance with current or future environmental laws and regulations could require us to incur substantial expenses which could harm our business, financial condition and results of operations. We have worked, and will continue to work, with our suppliers and customers to ensure that our products are compliant with enacted laws and regulations. Failure by us or our contract manufacturers to comply with such legislation could result in customers refusing to purchase our products and could subject us to significant monetary penalties in connection with a violation, either of which would have a material adverse effect on our business, financial condition and results of operations. Current environmental laws and regulations could become more stringent over time, imposing even greater compliance costs and increasing risks and penalties associated with violations, which could seriously harm our business, financial condition and results of operations. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of our inability to obtain permits, human error, equipment failure or other causes.
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Other Risks
 
The price of our common stock has and may continue to fluctuate substantially.
 
Our stock price and the stock prices of technology companies similar to Pixelworks have been highly volatile. The price of our common stock may decline, and the value of your investment may be reduced regardless of our performance. Market fluctuations, as well as general economic and political conditions, including recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. Additional factors that could negatively impact our stock price include:

 	•    	actual or anticipated fluctuations in our operating results;	
 	 	 	
 	•    	changes in expectations as to our future financial performance;	
 	 	 	
 	•    	changes in financial estimates of securities analysts;	
 	 	 	
 	•    	announcements by us or our competitors of technological innovations, design wins, contracts, standards or acquisitions;	
 	 	 	
 	•    	the operating and stock price performance of other comparable companies;	
 	 	 	
 	•    	inconsistent trading volume levels of our common stock; and	
 	 	 	
 	•    	changes in market valuations of other technology companies.	
 
Any inability or perceived inability of investors to realize a gain on an investment in our common stock could have an adverse effect on our business, financial condition and results of operations by potentially limiting our ability to retain our customers, to attract and retain qualified employees and to raise capital.
 
We may be unable to maintain compliance with NASDAQ Marketplace Rules which could cause our common stock to be delisted from the NASDAQ Global Market. This could result in the lack of a market for our common stock, cause a decrease in the value of an investment in us, and adversely affect our business, financial condition and results of operations.
 
On June 4, 2008, we effected a one-for-three reverse split of our common stock. We effected the reverse split to regain compliance with NASDAQ Marketplace Rules, particularly the minimum $1.00 per share requirement for continued inclusion on the NASDAQ Global Market. Though the per share price of our common stock increased to over $2.00 per share immediately following the reverse split, the price has fluctuated significantly and was below $1.00 as recently as May 6, 2009. We cannot guarantee that it will remain at or above $1.00 per share and if the price again drops below $1.00 per share, the stock could become subject to delisting again, and we may seek shareholder approval for an additional reverse split.
 
A second reverse split could produce negative effects. We could not guarantee that an additional reverse split would result in a long-term or permanent increase in the price of our common stock. The market might perceive a decision to effect an additional reverse split as a negative indicator of our future prospects, and as a result, the price of our common stock might decline after such a reverse split (perhaps by an even greater percentage than would have occurred in the absence of such a reverse split). An additional reverse split could also make it more difficult for us to meet certain other requirements for continued listing on the NASDAQ Global Market, including rules related to the minimum number of shares that must be in the public float, the minimum market value of the public float and the minimum number of round lot holders. Investors might consider the increased proportion of unissued authorized shares to issued shares to have an anti-takeover effect under certain circumstances by allowing for dilutive issuances which could prevent certain shareholders from changing the composition of the board, or could render tender offers for a combination with another entity more difficult to complete successfully. Additionally, customers, suppliers or employees might consider a company with low trading volume risky and might be less likely to transact business with us.
 
If our common stock is delisted, trading of the stock will most likely take place on an over-the-counter market established for unlisted securities, such as the Pink Sheets or the OTC Bulletin Board. An investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an
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over-the-counter market, and many investors may not buy or sell our common stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from trading in securities not listed on a national exchange or other reasons. In addition, as a delisted security, our common stock would be subject to SEC rules regarding “penny stock,” which impose additional disclosure requirements on broker-dealers. The regulations relating to penny stocks, coupled with the typically higher cost per trade to investors in penny stocks due to factors such as broker commissions generally representing a higher percentage of the price of a penny stock than of a higher priced stock, would further limit the ability and willingness of investors to trade in our common stock. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified executives and employees and to raise capital.
 
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.
 
Provisions of our articles of incorporation and bylaws and provisions of Oregon law may have the effect of delaying or preventing a merger or acquisition of us, making a merger or acquisition of us less desirable to a potential acquirer or preventing a change in our management, even if our shareholders consider the merger, acquisition or change in management favorable or if doing so would benefit our shareholders. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. The following are examples of such provisions in our articles of incorporation or bylaws:

 	•    	our board of directors is authorized, without prior shareholder approval, to change the size of the board (our articles of incorporation provide that if the board is increased to eight or more members, the board will be divided into three classes serving staggered terms, which would make it more difficult for a group of shareholders to quickly change the composition of our board);	
 	 	 	
 	•    	our board of directors is authorized, without prior shareholder approval, to create and issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us or to effect a change of control, commonly referred to as “blank check” preferred stock;	
 	 	 	
 	•    	members of our board of directors can be removed only for cause and at a meeting of shareholders called expressly for that purpose, by the vote of 75 percent of the votes then entitled to be cast for the election of directors;	
 	 	 	
 	•    	our board of directors may alter our bylaws without obtaining shareholder approval; and shareholders are required to provide advance notice for nominations for election to the board of directors or for proposing matters to be acted upon at a shareholder meeting.	

Item 1B.    	Unresolved Staff Comments.	
 
Not applicable.

Item 2.    	Properties.	
 
We lease facilities around the world to house our engineering, sales, sales support, administrative and operations functions. We do not own any of our facilities. As a result of the restructuring plan we initiated in
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2006 and completed in 2008, we have consolidated office space and sublease portions of our facilities. At December 31, 2009, our major facilities consisted of the following:

 	 	 	 	Total Square
	 	Square Feet
	 	Square Feet
	 	Lease
	 	Sublease
	
Location	 	Function(s)	 	Feet Leased	 	Utilized	 	Subleased	 	Expiration	 	Expiration	

China	 	Engineering; sales;	 	 	46,000	 	 	 	46,000	 	 	 	–	 	 	November 2011	 	–	
 	 	customer support	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
California	 	Administration;	 	 	37,000	 	 	 	23,000	 	 	 	14,000	 	 	June 2013	 	May 2010	
 	 	engineering; sales	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taiwan	 	Customer support;	 	 	22,000	 	 	 	22,000	 	 	 	–	 	 	Various dates	 	–	
 	 	sales; operations	 	 	 	 	 	 	 	 	 	 	 	 	 	through
November 2011	 	 	
Oregon	 	Administration	 	 	5,000	 	 	 	5,000	 	 	 	–	 	 	November 2013	 	–	
Japan	 	Sales; customer	 	 	4,000	 	 	 	4,000	 	 	 	–	 	 	January 2011	 	–	
 	 	support	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Washington	 	None; fully	 	 	10,000	 	 	 	–	 	 	 	10,000	 	 	October 2011	 	Various dates	
 	 	subleased	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	through
October 2011	

Item 3.    	Legal Proceedings.	
 
On February 26, 2010, we filed an action against Intersil Corporation (“Intersil”) in the Superior Court of the State of California for the County of Santa Clara, Case No. 1-10-CV-164894. The Complaint filed by the Company alleges breach by Intersil of a license agreement between Intersil and the Company, as well as causes of action for breach of the implied covenant of good faith and fair dealing and declaratory relief. The Complaint alleges that the technology provided by Intersil under the license agreement is defective, and as a result the Company was entitled to stop making payments under the agreement. Payments not made under the agreement will total $1.25 million as of the end of the second quarter of 2010. Intersil contends that the technology provided is not defective, that it is entitled to the additional payments of $1.25 million, and that it had the right to terminate the license agreement for the Company’s failure to make the additional payments. The Company believes that it is not obligated to make the payments due to breach of the license agreement by Intersil, and seeks declaratory relief from the Court that the payments are not due. The first Case Management Conference in the case is scheduled for July 20, 2010. As the Complaint was just recently filed, no discovery has yet been taken, and Intersil has not yet responded to the Complaint. The Company intends to vigorously prosecute the action to enforce its rights under the license agreement.
 
We are subject to other legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these matters are subject to inherent uncertainties and our view of these matters may change in the future.

Item 4.    	(Removed and Reserved).	

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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
 
Our common stock is listed for trading on the NASDAQ Global Market under the symbol “PXLW”. The stock began trading on May 19, 2000. The following table sets forth, for the periods indicated, the highest and lowest sales prices of our common stock as reported on the NASDAQ Global Market.

Fiscal 2009	 	High	 	 	Low	 	
 	 	 	 	 	 	 	 	 	
Fourth Quarter	 	$	    4.09	 	 	$	    2.15	 	
Third Quarter	 	 	4.06	 	 	 	1.25	 	
Second Quarter	 	 	1.97	 	 	 	0.56	 	
First Quarter	 	 	0.84	 	 	 	0.37	 	

Fiscal 2008	 	High	 	 	Low	 	
 	 	 	 	 	 	 	 	 	
Fourth Quarter	 	$	    1.45	 	 	$	    0.55	 	
Third Quarter	 	 	1.90	 	 	 	1.08	 	
Second Quarter	 	 	2.95	 	 	 	1.53	 	
First Quarter	 	 	2.64	 	 	 	1.50	 	
 
As of February 26, 2010, there were 69 shareholders of record and the last per share sales price of the common stock on that date was $4.01. The number of beneficial owners is substantially greater than the number of shareholders of record because a significant portion of our outstanding common stock is held in broker “street name” for the benefit of individual investors.
 
The payment of dividends is within the discretion of our board of directors and will depend on our earnings, capital requirements and operating and financial condition, among other factors. To date, we have not declared any cash dividends and we currently expect to retain any earnings to finance the expansion and development of our business.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
Information regarding our equity compensation plans as of December 31, 2009 is disclosed in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Annual Report on Form 10-K and is incorporated herein by reference from the section titled “Information About Our Equity Compensation Plans” in our Proxy Statement for our 2010 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
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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.
 
Set forth below is a graph that compares the cumulative total shareholder return on our common stock with the cumulative total return on the NASDAQ Stock Market (U.S.) Index and the NASDAQ Electronics Components Index over the five-year period ended December 31, 2009. Measurement points are the market close on the last trading day of each of our fiscal years ended December 31, 2004, December 31, 2005, December 31, 2006, December 31, 2007, December 31, 2008 and December 31, 2009. The graph assumes that $100 was invested on December 31, 2004 in our common stock, the NASDAQ Stock Market (U.S.) Index and the NASDAQ Electronics Components Index. In accordance with guidelines of the Securities and Exchange Commission, the shareholder return for each entity in the peer group index has been weighted on the basis of market capitalization. The stock price performance in the graph is not intended to forecast or indicate future stock price performance.
 
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
PIXELWORKS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE
NASDAQ ELECTRONICS COMPONENTS INDEX

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Item 6.    	Selected Financial Data.	
 
The following consolidated selected financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation and Item 8. Financial Statements and Supplementary Data.
 
Statement of Operations Data

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	
 	 	(In thousands, except per share data)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue, net	 	$	 61,093	 	 	$	  85,164	 	 	$	 105,980	 	 	$	 133,607	 	 	$	 171,704	 	
Cost of revenue	 	 	33,798	 	 	 	42,963	 	 	 	59,273	 	 	 	107,506	 	 	 	108,748	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	 	27,295	 	 	 	42,201	 	 	 	46,707	 	 	 	26,101	 	 	 	62,956	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	20,075	 	 	 	26,512	 	 	 	38,792	 	 	 	57,019	 	 	 	51,814	 	
Selling, general and administrative	 	 	13,745	 	 	 	17,945	 	 	 	25,437	 	 	 	35,053	 	 	 	30,616	 	
Restructuring	 	 	235	 	 	 	1,589	 	 	 	13,285	 	 	 	13,316	 	 	 	1,162	 	
Amortization of acquired intangible assets	 	 	—	 	 	 	164	 	 	 	359	 	 	 	602	 	 	 	1,084	 	
Impairment loss on goodwill	 	 	—	 	 	 	—	 	 	 	—	 	 	 	133,739	 	 	 	—	 	
Impairment loss on acquired intangible assets	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,753	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	34,055	 	 	 	46,210	 	 	 	77,873	 	 	 	241,482	 	 	 	84,676	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from operations	 	 	(6,760	)	 	 	(4,009	)	 	 	(31,166	)	 	 	(215,381	)	 	 	(21,720	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and other income, net	 	 	12,338	 	 	 	11,979	 	 	 	2,483	 	 	 	10,254	 	 	 	1,532	 	

Income (loss) before income taxes	 	 	5,578	 	 	 	7,970	 	 	 	(28,683	)	 	 	(205,127	)	 	 	(20,188	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision (benefit) for income taxes	 	 	(877	)	 	 	(8	)	 	 	2,237	 	 	 	(949	)	 	 	22,422	 	

Net income (loss)	 	$	6,455	 	 	$	7,978	 	 	$	(30,920	)	 	$	(204,178	)	 	$	(42,610	)	

Net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.48	 	 	$	0.55	 	 	$	(1.92	)	 	$	(12.69	)	 	$	(2.70	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	0.47	 	 	$	0.55	 	 	$	(1.92	)	 	$	(12.69	)	 	$	(2.70	)	

Weighted average shares outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	13,318	 	 	 	14,399	 	 	 	16,069	 	 	 	16,096	 	 	 	15,779	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	13,687	 	 	 	14,410	 	 	 	16,069	 	 	 	16,096	 	 	 	15,779	 	

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Balance Sheet Data

 	 	December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	
 	 	(In thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	17,797	 	 	$	53,149	 	 	$	74,572	 	 	$	63,095	 	 	$	68,604	 	
Short- and long-term marketable securities	 	 	13,062	 	 	 	10,168	 	 	 	44,385	 	 	 	71,489	 	 	 	77,033	 	
Working capital	 	 	25,359	 	 	 	61,947	 	 	 	112,360	 	 	 	108,169	 	 	 	139,291	 	
Total assets	 	 	56,078	 	 	 	91,732	 	 	 	161,916	 	 	 	207,771	 	 	 	421,556	 	
Long-term liabilities, net of current portion	 	 	26,703	 	 	 	73,250	 	 	 	151,871	 	 	 	147,414	 	 	 	163,357	 	
Total shareholders’ equity (deficit)	 	 	13,073	 	 	 	4,711	 	 	 	(8,027	)	 	 	21,948	 	 	 	215,217	 	

Item 7.    	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	
 
Overview
 
We are an innovative designer, developer and marketer of video and pixel processing semiconductors and software for high-end digital video applications and hold 119 patents related to the visual display of digital image data. Our solutions enable manufacturers of digital display and projection devices, such as large-screen flat panel displays and digital front projectors, to differentiate their products with a consistently high level of video quality, regardless of the content’s source or format. Our core technology leverages unique proprietary techniques for intelligently processing video signals from a variety of sources to ensure that all resulting images are optimized. Additionally, our products help our customers reduce costs and differentiate their display and projection devices, an important factor in industries that experience rapid innovation. Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.
 
Pixelworks’ flexible design architecture enables our technology to produce outstanding image quality in our customers’ products with a range of single-purpose integrated circuits (“ICs”), to system-on-chip (“SoC”) ICs that integrate microprocessor, memory and image processing functions. Additionally, we provide full solutions, including a software development environment and operating system, which enable our customers to more quickly develop and customize their display products, thus reducing their time to market and allowing them to incorporate differentiated features and functions. Our primary target markets are liquid crystal display (“LCD”) large-screen televisions and digital front projectors, however we also target other segments within the flat panel display market, including digital signage.
 
We have adopted a product strategy that leverages our core competencies in video processing to address the evolving needs of the advanced flat panel display, digital projection and other markets that require superior image quality. We focus our product investments on developing video enhancement solutions for these markets, with particular focus on adding increased performance and functionality. Additionally, we look for ways to leverage our research and development investment into products that address other high-value markets where our innovative proprietary technology provides differentiation for us and our customers. We continually seek to expand our technology portfolio through internal development, co-development with business partners and evaluation of acquisition opportunities.
 
Historically, significant portions of our revenue have been generated by sales to a relatively small number of end customers and distributors. We sell our products worldwide through a direct sales force, distributors and manufacturers’ representatives. We sell to distributors in Japan, Taiwan, China, Korea, Europe, Southeast Asia and the U.S, and our manufacturers’ representatives support some of our U.S., Korean and European sales. Our distributors typically provide engineering support to our end customers and often have valuable and established relationships with our end customers. 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, the distributors may provide longer payment terms to end customers than those we would offer.
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Significant portions of our products are sold overseas. Sales outside the U.S. accounted for approximately 97%, 95% and 96% of revenue in 2009, 2008 and 2007, respectively. Our integrators, branded manufacturers and branded suppliers incorporate our products into systems that are sold worldwide. All of our revenue to date has been denominated in U.S. dollars.
 
Factors Affecting Results of Operations and Financial Condition
 
General Market Conditions
 
Financial, commercial and consumer markets experienced significant disruption during the last quarter of 2008 and throughout 2009 and adversely affected our results of operations during 2009. We experienced a significant decrease in revenue during the first and second quarters of 2009 as consumer demand decreased and our customers reduced their inventory levels in response to general economic uncertainty and lack of visibility regarding expected future sales. We responded to the economic downturn by initiating a restructuring plan in December 2008 to reduce our operating expenses by reducing operations, research and development and administrative headcount in our San Jose, Taiwan and China offices as well as implementing other cost reduction efforts, including company-wide salary reductions during the second and third quarters of 2009. Although the macroeconomic environment and our business appear to have stabilized during the second half of 2009, consumer confidence and spending are still down significantly and we are unable to predict how the challenging global economic environment may impact our future results of operations and financial position.
 
Restructuring Plan Initiated in November 2006
 
In November 2006, we initiated a restructuring plan to reduce operating expenses and continued to implement this plan throughout 2007 and 2008. As part of this plan we closed certain offices and consolidated our operations and research and development activities. We also narrowed and redefined our product development strategy which resulted in the write-off of intellectual property (“IP”) assets, tooling, software development tools and charges for related non-cancelable contracts. This plan significantly decreased our expenses for compensation, software amortization and maintenance, equipment depreciation, information technology, facilities and stock compensation and was completed during the fourth quarter of 2008. Accordingly, 2009 is the first year that fully reflects the cost reductions attributable to the plan initiated in November 2006.
 
Results of Operations
 
Year ended December 31, 2009 compared with year ended December 31, 2008, and year ended December 31, 2008 compared with year ended December 31, 2007.
 
Revenue, net
 
Net revenue was as follows (in thousands):

 	 	Year ended December 31,	 	2009 v. 2008	 	2008 v. 2007	
 	 	 	 	 	 	 	 	 	 	%
	 	 	 	%
	
 	 	2009	 	2008	 	2007	 	$ change	 	change	 	$ change	 	change	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue, net	 	$	  61,093	 	 	$	  85,164	 	 	$	  105,980	 	 	$	  (24,071	)	 	 	(28	)%	 	$	  (20,816	)	 	 	(20	)%	
 
2009 v. 2008
 
Net revenue decreased $24.1 million, or 28%, from 2008 to 2009 as the result of a 30% decrease in units sold, partially offset by a 3% increase in average selling price (“ASP”). The decrease in units sold during 2009 compared to 2008 resulted primarily from weakened customer demand due to the worldwide economic downturn, particularly during the first half of 2009. Decreased revenue also resulted from lower sales of our legacy products, including those we acquired in our acquisition of Equator Technologies, Inc. (“Equator”) in June 2005, and lower sales into markets which we no longer pursue. These decreases were partially offset by an increase in sales of our Motion Estimation Motion Compensation (“MEMC”) co-processor ICs, and sales of our next generation projector image processors.
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We did experience some recovery in revenue levels in the second half of 2009 compared to the first half of 2009 as the worldwide economy strengthened. Our most significant recovery was in digital projector market sales which were up slightly from the second half of 2008 to the second half of 2009, compared with a decrease of 50% from the first half of 2008 to the first half of 2009. Revenue from our advanced television market, which includes the panel market and our MEMC co-processor ICs, was approximately flat from the second half of 2008 to the second half of 2009, an improvement over the 24% decrease from the first half of 2008 to the first half of 2009. Our revenue from other markets did not experience a recovery during the second half of 2009, compared to the second half of 2008, primarily due to consistent decreases in sales of legacy products in markets which we no longer pursue.
 
2008 v. 2007
 
Net revenue decreased $20.8 million, or 20%, from 2007 to 2008 as the result of a 26% decrease in units sold, partially offset by a 9% increase in ASP. The increase in ASP from 2007 to 2008 was primarily the result of an increase in the percentage of total revenue from the digital projector market, which generally has higher ASPs than our other products. The decrease in units sold during 2008 compared to 2007 resulted from decreases in revenue across all of our markets. Digital projector and advanced television market sales decreased due to a general weakening of the market, particularly during the fourth quarter of 2008 as our customers decreased their inventory levels due to macroeconomic uncertainty. Additionally, advanced television market sales decreased due to our decision to shift our focus away from the commoditized SoC segment of the market to focus on our line of MEMC co-processor ICs. Sales of legacy products acquired in the Equator acquisition also decreased as we discontinued our development efforts related to these parts and existing customers switched to next generation designs from other suppliers.
 
Cost of revenue and gross profit
 
Cost of revenue and gross profit were as follows (in thousands):

 	 	Year ended December 31,	
 	 	 	 	% of
	 	 	 	% of
	 	 	 	% of
	
 	 	2009	 	revenue	 	2008	 	revenue	 	2007	 	revenue	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct product costs and related overhead  1	 	$	  30,630	 	 	 	50	%	 	$	  39,362	 	 	 	46	%	 	$	  53,807	 	 	 	51	%	
Amortization of acquired intangible assets	 	 	2,336	 	 	 	4	 	 	 	2,820	 	 	 	3	 	 	 	2,820	 	 	 	3	 	
Provision for obsolete inventory, net of usage	 	 	518	 	 	 	1	 	 	 	488	 	 	 	1	 	 	 	2,376	 	 	 	2	 	
Other 2	 	 	314	 	 	 	0	 	 	 	293	 	 	 	0	 	 	 	270	 	 	 	0	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total cost of revenue	 	$	33,798	 	 	 	55	%	 	$	42,963	 	 	 	50	%	 	$	59,273	 	 	 	56	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	$	27,295	 	 	 	45	%	 	$	42,201	 	 	 	50	%	 	$	46,707	 	 	 	44	%	

1 Includes purchased materials, assembly, test, labor, employee benefits, warranty expense and royalties.
 
2 Includes restructuring, stock-based compensation and additional amortization of non-cancelable prepaid royalty.
 
2009 v. 2008
 
Total cost of revenue increased to 55% of revenue in 2009 from 50% of revenue in 2008. The increase was primarily attributable to an increase in direct product costs due to changes in the mix of products sold, including increased sales of our MEMC products and next generation projector processors and decreased sales of our legacy Equator products. Gross profit margins also decreased due to the impact of lower overhead cost absorption due to decreased revenue without corresponding reductions in our fixed costs.
 
We expect future cost improvements on our MEMC products and next generation projector processors as we continue to ramp production and begin to realize production efficiencies, however we are unable to predict the timing and extent of these improvements. Additionally, our acquired developed technology asset will be fully amortized by June 30, 2010 and amortization of acquired intangible assets recorded in cost of goods sold is expected to decrease from $2.3 million in 2009 to $1.1 million in 2010.
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2008 v. 2007
 
Total cost of revenue decreased to 50% of revenue in 2008 from 56% of revenue in 2007. The decrease was primarily attributable to a more favorable mix of products sold, lower pricing obtained from vendors, and increases in production yields. The net provision for obsolete inventory decreased to 1% of revenue in 2008 from 2% in 2007 as a result of our increased focus on inventory management.
 
Research and development
 
Research and development expense includes compensation and related costs for personnel, development-related expenses including non-recurring engineering and fees for outside services, depreciation and amortization, expensed equipment, facilities and information technology expense allocations and travel and related expenses.
 
As further described below, we reduced our research and development expense significantly during 2009 and 2008 as the result of restructuring plans initiated in November 2006 and December 2008. As part of these restructuring plans and other on-going initiatives, we also increased the efficiency of our research and development programs by more closely aligning our product development efforts with those of our customers and by implementing improved engineering design methodologies and practices. As a result of these changes, we have improved our ability to develop new and innovative products while reducing our related expenses.
 
Research and development expense was as follows (in thousands):

 	 	Year ended December 31,	 	2009 v. 2008	 	2008 v. 2007	
 	 	 	 	 	 	 	 	 	 	%
	 	 	 	%
	
 	 	2009	 	2008	 	2007	 	$ change	 	change	 	$ change	 	change	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	$	  20,075	 	 	$	  26,512	 	 	$	  38,792	 	 	$	  (6,437	)	 	 	(24	)%	 	$	  (12,280	)	 	 	(32	)%	
 
2009 v. 2008
 
Research and development expense decreased $6.4 million, or 24%, from 2008 to 2009. This decrease is primarily attributable to the restructuring efforts that we initiated in November 2006 and December 2008, and which were completed in the fourth quarter of 2008 and second quarter of 2009, respectively. These efforts resulted in the following reductions in research and development expenses:

•    	Depreciation and amortization expense, software maintenance expense and expensed equipment and software decreased $2.7 million. This decrease resulted from fewer engineering software tools due to changes in product development strategy as well as decreased amortization from certain licensed technology which became fully amortized during the first and second quarters of 2009.	
 	 	
•    	Compensation expense decreased $1.9 million as a result of:	

 	•    	a company-wide 10% salary reduction that was in effect during the second and third quarters of 2009;	
 	 	 	
 	•    	a reduced senior management bonus for 2009 compared to 2008; and	
 	 	 	
 	•    	continuous improvement in our engineering practices to lower costs and improve efficiency.	

•    	Stock-based compensation expense decreased $786,000 due to personnel reductions and reduced valuation of our stock options.	
 	 	
•    	Facilities and information technology expense allocations decreased $748,000, primarily due to reductions in rent and decreased depreciation of equipment and leasehold improvements.	

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2008 v. 2007
 
Research and development expense decreased $12.3 million, or 32%, from 2007 to 2008. This decrease is directly attributable to the restructuring efforts that we initiated in 2006 and completed in the fourth quarter of 2008. These efforts resulted in the following reductions in research and development expenses:

•    	Depreciation and amortization expense, software maintenance expense and expensed equipment and software decreased $6.4 million. This decrease is primarily due to the December 31, 2007 write-off of engineering software tools, which we are no longer using due to reductions in research and development personnel and changes in product development strategy.	
 	 	
•    	Compensation expense decreased $2.6 million. The decrease in compensation expense in 2008 is primarily due to headcount reductions that occurred in the second half of 2007.	
 	 	
•    	Facilities and information technology expense allocations decreased $1.7 million, primarily due to reductions in headcount, outsourced IT support, lower rent and decreased equipment depreciation.	
 	 	
•    	Stock-based compensation expense decreased $1.1 million due to personnel reductions and reduced valuation of our stock options.	
 	 	
•    	Travel and related expenses decreased $656,000.	
 
Selling, general and administrative
 
Selling, general and administrative expense includes compensation and related costs for personnel, sales commissions, allocations for facilities and information technology expenses, travel, outside services and other general expenses incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions. Selling, general and administrative expense was as follows (in thousands):

 	 	Year ended December 31,	 	2009 v. 2008	 	2008 v. 2007	
 	 	 	 	 	 	 	 	 	 	%
	 	 	 	%
	
 	 	2009	 	2008	 	2007	 	$ change	 	change	 	$ change	 	change	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative	 	$	  13,745	 	 	$	  17,945	 	 	$	  25,437	 	 	$	  (4,200	)	 	 	(23	)%	 	$	  (7,492	)	 	 	(29	)%	
 
2009 v. 2008
 
Selling, general and administrative expense decreased $4.2 million, or 23%, from 2008 to 2009. The decrease in selling, general and administrative expense from 2008 to 2009 is primarily attributable to the restructuring efforts that we initiated in November 2006 and December 2008, and which were completed in the fourth quarter of 2008 and second quarter of 2009, respectively. These efforts resulted in the following reductions in selling, general and administrative expenses:

•    	Compensation expense decreased $1.6 million as a result of:	

 	•    	a company-wide 10% salary reduction that was in effect during the second and third quarters of 2009;	
 	 	 	
 	•    	a reduced senior management bonus for 2009 compared to 2008; and	
 	 	 	
 	•    	headcount reductions during 2009.	

•    	Stock-based compensation expense decreased $658,000 due to personnel reductions and reduced valuation of our stock options.	
 	 	
•    	Facilities and information technology allocations decreased $525,000, primarily due to reductions in headcount, outsourced IT support, lower rent and decreased equipment depreciation.	
 	 	
•    	Sales commissions decreased $520,000 primarily due to lower sales volume.	

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2008 v. 2007
 
Selling, general and administrative expense decreased $7.5 million, or 29%, from 2007 to 2008. The decrease in selling, general and administrative expense from 2007 to 2008 is primarily attributable to the restructuring efforts that we initiated in 2006 and completed in the fourth quarter of 2008. These efforts resulted in the following reductions in selling, general and administrative expenses:

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

 	 	Year ended December 31, 2009	 	 	Year ended December 31, 2008	 	
 	 	Dec. 08
	 	 	Nov. 06
	 	 	 	 	 	Dec. 08
	 	 	Nov. 06
	 	 	 	 	
 	 	Plan	 	 	Plan	 	 	Total	 	 	Plan	 	 	Plan	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Termination and retention benefits  1	 	$	  118	 	 	$	  –	 	 	$	  118	 	 	$	  666	 	 	$	  506	 	 	$	  1,172	 	
Consolidation of leased space  2	 	 	–	 	 	 	160	 	 	 	160	 	 	 	–	 	 	 	508	 	 	 	508	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total restructuring expenses	 	$	118	 	 	$	160	 	 	$	278	 	 	$	666	 	 	$	1,014	 	 	$	1,680	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Included in cost of sales	 	$	43	 	 	$	–	 	 	$	43	 	 	$	91	 	 	$	–	 	 	$	91	 	
Included in operating expenses	 	 	75	 	 	 	160	 	 	 	235	 	 	 	575	 	 	 	1,014	 	 	 	1,589	 	

1	 	Includes severance payments for terminated employees in 2009 and 2008 and retention payments for certain continuing employees in 2008.	
 	 	 	
2	 	Expenses related to the consolidation of leased space included future non-cancelable rent payments due for vacated space (net of estimated sublease income) and moving expenses.	
 
In December 2008, we initiated a restructuring plan to reduce our operating expenses in response to decreases in current and forecasted revenue which resulted from global economic uncertainty. The plan reduced operations, research and development and administrative headcount in our San Jose, Taiwan and China offices, and was completed during the second quarter of 2009.
 
In November 2006, we initiated a restructuring plan that included consolidation of our operations in order to reduce compensation and rent expense, while at the same time making critical infrastructure investments in people, processes and information systems to improve our operating efficiency. During 2008, we incurred additional expenses for termination benefits and consolidation of leased space related to specific actions initiated in prior years and also incurred expenses related to the closure of our Toronto office. Although this plan was completed in the fourth quarter of 2008, lease termination costs were recorded in 2009 due to decreases in estimated future sublease income related to accruals made under the plan initiated in November 2006.
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Year Ended December 31, 2007
 
Restructuring expense was comprised of the following amounts (in thousands):

 	 	Nov. 06
	 	 	 	 	
 	 	Plan	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Termination and retention benefits 1	 	$	     5,420	 	 	 	 	 	
Net write-off of assets and reversal of related liabilities 2	 	 	3,905	 	 	 	 	 	
Contract termination fee 3	 	 	1,693	 	 	 	 	 	
Consolidation of leased space 4	 	 	1,524	 	 	 	 	 	
Payments, non-cancelable contracts 5	 	 	827	 	 	 	 	 	
Other	 	 	88	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Total restructuring expenses	 	$	13,457	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Included in cost of sales	 	$	172	 	 	 	 	 	
Included in operating expenses	 	 	13,285	 	 	 	 	 	

1	 	Termination and retention benefits included severance and retention payments for terminated employees and retention payments for certain continuing employees.	
 	 	 	
2	 	We wrote off assets with a net book value of $6.9 million as a result of our November 2006 restructuring plan. These assets consisted primarily of engineering software tools which we are no longer using due to the reductions in research and development personnel and changes in product development strategy. We also reversed accrued liabilities in the amount of $3.0 million related to the write-off of the engineering software tools.	
 	 	 	
3	 	We paid a contract termination fee of $1.7 million to cancel a software license agreement prior to its expiration.	
 	 	 	
4	 	Expenses related to the consolidation of leased space included future non-cancelable rent payments due for vacated space (net of estimated sublease income) and moving expenses.	
 	 	 	
5	 	Non-cancelable contract payments consist of amounts that we were obligated to pay, but for which we did not realize a benefit due to the restructuring plans.	
 
All of our 2007 restructuring expense was attributable to our November 2006 restructuring plan. In 2007, we closed our offices in Beijing and Shenzhen and significantly reduced research and development activities at our Toronto office. Additionally, during 2007 substantially all of the operations and research and development activities of our Tualatin location were transferred to our offices in San Jose, Shanghai and Hsin Chu. The consolidation and closure of these offices and reduction in headcount resulted in charges for non-cancelable leases and termination and retention benefits for effected employees. In connection with this restructuring we also narrowed and redefined our product development strategy which resulted in the write-off of IP assets, tooling, software development tools and charges for related non-cancelable contracts.
 
Amortization of acquired intangible assets
 
Amortization of acquired intangible assets was as follows (in thousands):

 	 	Year ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of acquired intangible assets	 	$	       –	 	 	$	     164	 	 	$	     359	 	
 
We recorded a customer relationship intangible asset in connection with the acquisition of Equator in June 2005. As of December 31, 2008, the customer relationship intangible asset was fully amortized.
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Interest and other income, net
 
Interest and other income, net consisted of the following (in thousands):

 	 	Year ended December 31,	 	 	$ change	 	
 	 	2009	 	 	2008	 	 	2007	 	 	2009 v. 2008	 	 	2008 v. 2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain on repurchase of long-term debt, net  1	 	$	  12,860	 	 	$	  19,670	 	 	$	      –	 	 	$	  (6,810	)	 	$	  19,670	 	
Other-than-temporary impairment of marketable security, net 2	 	 	–	 	 	 	(7,890	)	 	 	–	 	 	 	7,890	 	 	 	(7,890	)	
Interest income 3	 	 	242	 	 	 	2,102	 	 	 	5,786	 	 	 	(1,860	)	 	 	(3,684	)	
Interest expense 4	 	 	(640	)	 	 	(1,695	)	 	 	(2,642	)	 	 	1,055	 	 	 	947	 	
Amortization of debt issuance costs  5	 	 	(124	)	 	 	(426	)	 	 	(661	)	 	 	302	 	 	 	235	 	
Other income 6	 	 	–	 	 	 	218	 	 	 	–	 	 	 	(218	)	 	 	218	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total interest and other income, net	 	$	12,338	 	 	$	11,979	 	 	$	2,483	 	 	$	359	 	 	$	9,496	 	

 	 	 	
1	 	In February 2009, we repurchased and retired $27.1 million of our 1.75% convertible subordinated debentures for a net gain of $9.0 million. In May 2009, we repurchased and retired $17.8 million of the debentures for a net gain of $3.8 million. In 2008, we repurchased and retired $79.4 million of the debentures for a net gain of $19.7 million.	
 	 	 	
2	 	In the first quarter of 2008, we recognized an other-than-temporary impairment of $6.5 million on an investment in a publicly-traded equity security, due to the duration of time that the investment had been below cost, as well as decreased target price estimates, analyst downgrades and macroeconomic factors. In the fourth quarter of 2008, we recognized a second other-than-temporary impairment of $1.4 million on the same investment, based on the same factors considered in our March 31, 2008 analysis.	
 	 	 	
3	 	Interest income is earned on cash equivalents and short- and long-term marketable securities. The sequential decreases during the 2009 and 2008 periods are due to lower balances of marketable securities, which resulted from our repurchases of long-term debt and decreased yields on our invested funds.	
 	 	 	
4	 	Interest expense primarily relates to interest payable on our long-term debt. The sequential decreases during the 2009 and 2008 periods are due to the reduced outstanding principal balance which resulted from our repurchases of our long-term debt.	
 	 	 	
5	 	The fees associated with the issuance of our long-term debt have been capitalized and are being amortized over a period of seven years. The remaining amortization period is 17 months as of December 31, 2009. The sequential decreases during the 2009 and 2008 periods is due to the write-off of fees associated with the portions of long-term debt repurchased in 2009 and 2008.	
 	 	 	
6	 	In the second quarter of 2008, we recognized a gain of $218,000 on the sale of a non-marketable equity security.	
 
Provision (benefit) for income taxes
 
The provision (benefit) for income taxes was as follows (in thousands):

 	 	Year ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision (benefit) for income taxes	 	$	     (877	)	 	$	       (8	)	 	$	     2,237	 	
 
The income tax benefit recorded for the year ended December 31, 2009 is comprised of current and deferred tax expense in profitable foreign jurisdictions and accruals for tax contingencies in foreign jurisdictions, offset by a benefit of $1.8 million for the reversal of a previously recorded tax contingency due to the expiration of the applicable statute of limitations. The income tax benefit recorded for the year ended December 31, 2008 is comprised of current and deferred tax expense in profitable foreign jurisdictions and accruals for tax contingencies in foreign jurisdictions, offset by a benefit of $866,000 for refundable research and experimentation credits and a benefit of $559,000 for the reversal of a previously recorded tax contingency due to the expiration of the applicable statute of limitations. The income tax provision recorded for the year ended
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December 31, 2007 is comprised of current and deferred tax expense in profitable foreign jurisdictions and accruals for tax contingencies in foreign jurisdictions.
 
At December 31, 2009, we continued to provide a full valuation allowance against our U.S. and Canadian deferred tax assets as we do not believe that it is more likely than not that we will realize a benefit from those assets. We did not record a valuation allowance against our foreign deferred tax assets as we believe that it is more likely than not that we will realize a benefit from those assets.
 
As of December 31, 2009, we have generated deductible temporary differences and net operating loss and tax credit carryforwards. We have federal, state and foreign net operating loss carryforwards of approximately $167.1 million, $86.6 million and $1.2 million, respectively, and federal, state and foreign research and experimentation tax credit carryforwards of approximately $7.2 million, $2.9 million and $2.5 million, respectively. General foreign tax credits were $2.1 million at December 31, 2009.
 
Business Outlook
 
On January 28, 2010, we provided an outlook for the first quarter of 2010 in our earnings release, which was furnished on a current report on Form 8-K. The outlook provided the following anticipated financial results prepared in accordance with U.S. generally accepted accounting principles:

•    	First quarter revenue of $17.5 million to $19.5 million.	
 	 	
•    	Gross profit margin of approximately 44% to 49%.	
 	 	
•    	Operating expenses of $9.0 million to $10.0 million.	
 	 	
•    	A benefit for income tax of approximately $5.0 million to $5.5 million.	
 
Based on the above estimates, we expect to record net income per share in the first quarter of 2010 of $0.18 to $0.42.
 
Liquidity and Capital Resources
 
Cash and short- and long-term marketable securities
 
Our cash and cash equivalent and short- and long-term marketable securities were as follows (in thousands):

 	 	December 31,	 	 	$ Change	 	
 	 	2009	 	 	2008	 	 	2007	 	 	2009 v. 2008	 	 	2008 v. 2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	  17,797	 	 	$	  53,149	 	 	$	  74,572	 	 	$	  (35,352	)	 	$	  (21,423	)	
Short-term marketable securities	 	 	9,822	 	 	 	8,058	 	 	 	34,581	 	 	 	1,764	 	 	 	(26,523	)	
Long-term marketable securities	 	 	3,240	 	 	 	2,110	 	 	 	9,804	 	 	 	1,130	 	 	 	(7,694	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total cash and marketable securities	 	$	30,859	 	 	$	63,317	 	 	$	118,957	 	 	$	(32,458	)	 	$	(55,640	)	

Total cash and marketable securities decreased $32.5 million from 2008 to 2009. The decrease resulted primarily from $31.5 million used for the repurchase of long-term debt, $2.2 million in payments on property and equipment and other asset financing and $1.6 million used for purchases of property and equipment and other long-term assets. The decreases were partially offset by $2.0 million of positive cash flow from operations and a $1.1 million increase in the valuation of our long-term marketable security.
 
Total cash and marketable securities decreased $55.6 million from 2007 to 2008. The decrease resulted primarily from $58.6 million used for the repurchase of long-term debt, $4.6 million in payments on property and equipment and other asset financing, $2.6 million used for the repurchase of our common stock and $2.2 million used for purchases of property and equipment. The decreases were partially offset by $15.0 million of positive cash flow from operations.
 
At December 31, 2009, cash equivalents and short-term marketable securities included $17.1 million in money market funds and certificates of deposit, $6.3 million in U.S. government agencies debt securities, $3.0 million in commercial paper, and $543,000 in corporate debt securities. At December 31, 2009, we also held a
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$3.2 million long-term strategic equity investment in a publicly traded corporation. All of our investments were denominated in U.S. dollars, and our portfolio did not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral.
 
The quality of our short-term investment portfolio remains high during this difficult credit environment. Our investment policy requires that at least 25% of our portfolio matures within 90 days. Additionally, no maturities can extend beyond 24 months and concentrations with individual securities are limited. Investments must be rated at least A-1 / P-1 by Standard & Poor’s / Moody’s, and our investment policy is reviewed at least annually by our Audit Committee.
 
The valuations of our short-term marketable securities are affected by a variety of factors, including changes in interest rates and the actual or perceived financial stability of the issuer. However, due to the high quality of our investments and their short-term nature, there has not been, and we do not expect there to be, a significant fluctuation in the valuation of these investments. Accordingly, we do not expect a materially negative impact on our financial condition from fluctuations in the value of our short-term investments. As of December 31, 2009, we had a total unrealized loss of $2,000 on these investments.
 
The valuation of our long-term equity investment has fluctuated significantly, and could continue to fluctuate significantly, due to a variety of factors including changes in the global economy and changes in the actual or expected performance of the issuing company. We recorded other-than-temporary impairments related to this investment of $7.9 million. Although the valuation of our investment has increased $1.1 million since we recorded our last other-than-temporary impairment in December 2008, we may record additional impairment charges in the future if we determine that any future declines in value are other-than-temporary. Such an impairment would negatively impact our results of operations, but would not materially impact our financial condition.
 
When available, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our cash equivalents and marketable securities. If quoted prices in active markets for identical assets or liabilities are not available, we use quoted prices for similar assets or liabilities, or use observable inputs other than the quoted prices, to determine fair value. We have no investments which are fair valued based on unobservable inputs.
 
We anticipate that our existing cash and investment balances will be adequate to fund our operating and investing needs for the next twelve months. From time to time, we may evaluate acquisitions of businesses, products or technologies that complement our business. We may also repurchase additional amounts of our long-term debt and common stock, as we did during the first quarter of 2009, and as described below under “capital resources.” Any further transactions, if consummated, may consume a material portion of our working capital or require the issuance of equity securities that may result in dilution to existing shareholders.
 
Accounts receivable, net
 
Accounts receivable, net decreased to $5.6 million at December 31, 2009 from $6.1 million at December 31, 2008. Average number of days sales outstanding decreased to 26 days at December 31, 2009 from 29 days at December 31, 2008.
 
Inventories, net
 
Inventories, net increased to $6.2 million at December 31, 2009 from $5.0 million at December 31, 2008. Inventory turnover on an annualized basis was 7.0 at both December 31, 2009 and December 31, 2008, which represents approximately eight weeks of inventory on hand.
 
Capital resources
 
In 2004, we issued $150.0 million of 1.75% convertible subordinated debentures (the “debentures”) due 2024. In 2006, we repurchased and retired $10.0 million principal amount of the debentures. In 2008, we repurchased and retired $79.4 million principal amount of the debentures for $58.6 million in cash. In 2009,
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we repurchased and retired $44.9 million principal amount of the debentures for $31.5 million in cash, reducing the balance of our outstanding debentures to $15.8 million.
 
We may redeem some or all of the outstanding debentures for cash on or after May 15, 2011 at a price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest. The holders of the debentures have the right to require us to purchase all or a portion of the debentures outstanding at each of the following dates: May 15, 2011, May 15, 2014, and May 15, 2019, at a purchase price equal to 100% of the principal amount plus accrued and unpaid interest. The debentures are unsecured obligations and are subordinated in right of payment to all of our existing and future senior debt.
 
In September 2007, the Board of Directors authorized the repurchase of up to $10.0 million of the Company’s common stock under a share repurchase program that expired in September 2009. We repurchased 228,600 shares for $167,000 in the first quarter of 2009 and no shares were repurchased during the remainder of 2009. Total cumulative repurchases under the plan were $7.1 million.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the amounts reported. On an ongoing basis, we evaluate our estimates, including those related to product returns, warranty obligations, bad debts, inventories, property and equipment, intangible assets, impairment of long-lived assets, valuation of investments, amortization of prepaid royalties, valuation of share-based payments, income taxes, litigation and other contingencies. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
 
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable, and collection is reasonably assured. We require customers to provide purchase orders prior to shipment and we consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. These conditions are generally satisfied upon shipment of the underlying product.
 
Sales Returns and Allowances. Our customers do not have a stated right to return product except for replacement of defective products under our warranty program discussed below. However, we have accepted customer returns on a case-by-case basis as customer accommodations in the past. As a result, we provide for these returns in our reserve for sales returns and allowances. At the end of each reporting period, we estimate the reserve for returns based on historical experience and knowledge of any applicable events or transactions.
 
Certain of our distributors have stock rotation provisions in their distributor agreements, which allow them to return 5-10% of the products purchased in the prior six months in exchange for products of equal value. We analyze historical stock rotations at the end of each reporting period. To date, returns under the stock rotation provisions have been nominal.
 
Certain distributors also have price protection provisions in their distributor agreements with us. Under the price protection provisions, we grant distributors credit if they purchased product for a specific end customer and we subsequently lower the price to the end customer such that the distributor can no longer earn its negotiated margin on in-stock inventory. At the end of each reporting period, we estimate a reserve for price protection credits based on historical experience and knowledge of any applicable events or transactions. The reserve for price protection, if required, is included in our reserve for sales returns and allowances.
 
Product Warranties. We warrant that our products will be free from defects in materials and workmanship for a period of twelve months from delivery. Warranty repairs are guaranteed for the remainder of the original warranty period. Our warranty is limited to repairing or replacing products, or refunding the purchase price.
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At the end of each reporting period, we estimate a reserve for warranty returns based on historical experience and knowledge of any applicable events or transactions. While we engage in extensive product quality programs and processes, which include actively monitoring and evaluating the quality of our suppliers, should actual product failure rates or product replacement costs differ from our estimates, revisions to the estimated warranty liability may be required.
 
Allowance for Doubtful Accounts. We offer credit to customers after careful examination of their creditworthiness. We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. At the end of each reporting period, we estimate the allowance for doubtful accounts based on our account-by-account risk analysis of outstanding receivable balances. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
Inventory Valuation. We record a reserve against our inventory for estimated obsolete, unmarketable, and otherwise impaired products by calculating the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. We review our inventory at the end of each reporting period for valuation issues. If actual market conditions are less favorable than those we projected at the time the reserve was recorded, additional inventory write-downs may be required.
 
Useful Lives and Recoverability of Equipment and Other Long-Lived Assets. We evaluate the remaining useful life and recoverability of equipment and other assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If there is an indicator of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of each asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. While we have concluded that the carrying value of our long-lived assets is recoverable as of December 31, 2009, our analysis is dependent upon our estimates of future cash flows, and our actual results may vary.
 
Valuation of Investments. We apply judgment in determining whether our marketable securities are other-than-temporarily impaired. When performing our evaluation, we consider the duration of the decline, future prospects of the issuer and our ability and intent to hold the security to recovery.
 
Stock-Based Compensation. We estimate the fair value of share-based payments using the Black-Scholes option pricing model, which requires certain estimates, including an expected forfeiture rate and expected term of options granted. We also make decisions regarding the method of calculating expected volatilities and the risk-free interest rate used in the option-pricing model. The resulting calculated fair value of share-based payments is recognized as compensation expense over the requisite service period, which is generally the vesting period. When there are changes to the assumptions used in the option-pricing model, including fluctuations in the market price of our common stock, there will be variations in the calculated fair value of the share-based payments, which results in variation in the compensation cost recognized.
 
Income Taxes. We record deferred income taxes for temporary differences between the amount of assets and liabilities for financial and tax reporting purposes and we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We also regularly conduct a comprehensive review of our uncertain tax positions. In this regard, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, we do not recognize the tax benefits resulting from such positions and report the tax effects as a liability for uncertain tax positions in our consolidated balance sheet.
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Contractual Payment Obligations
 
A summary of our contractual obligations as of December 31, 2009 is as follows:

 	 	Payments Due By Period	 	
 	 	 	 	 	Less than
	 	 	 	 	 	 	 	 	More than 5
	 	
Contractual Obligation	 	Total	 	 	1 year	 	 	1-3 years	 	 	3-5 years	 	 	years	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt 1	 	$	  15,779	 	 	$	       –	 	 	$	15,779	 	 	$	       –	 	 	$	       –	 	
Interest on long-term debt	 	 	414	 	 	 	276	 	 	 	138	 	 	 	–	 	 	 	–	 	
Operating leases 2	 	 	5,694	 	 	 	2,182	 	 	 	2,911	 	 	 	601	 	 	 	–	 	
Payments on accrued balances related to asset purchases	 	 	2,620	 	 	 	2,067	 	 	 	553	 	 	 	–	 	 	 	–	 	
Estimated Q1 2010 purchase commitments to contract manufacturers	 	 	7,195	 	 	 	7,195	 	 	 	–	 	 	 	–	 	 	 	–	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total 3	 	$	31,702	 	 	$	11,720	 	 	$	19,381	 	 	$	601	 	 	$	–	 	

 	 	 	
1	 	The earliest date on which the holders of our 1.75% convertible subordinated debentures due 2024 have the right to require us to purchase all or a portion of the outstanding debentures is May 15, 2011. We expect holders of the debentures to require us to purchase all of the outstanding debentures on that date.	
 	 	 	
2	 	The operating lease payments above are net of sublease rental income of $193,000 and $48,000 for the years ended December 31, 2010 and 2011, respectively.	
 	 	 	
3	 	We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, $9.5 million of income taxes payable has been excluded from the table above.	
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Recent Accounting Pronouncements and Accounting Changes
 
See “Note 2: Summary of Significant Accounting Policies” in Part II, Item 8 of this Form 10-K for a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements.

Item 7A.    	Quantitative and Qualitative Disclosures about Market Risk.	
 
Interest Rate Risk
 
Interest rate fluctuations impact the interest income that we earn on our investment portfolio and the value of our investments. Factors that could cause interest rates to fluctuate include volatility in the credit and equity markets, such as the current uncertainty in global economic conditions; changes in the monetary policies of the United States and other countries and inflation. We mitigate risks associated with such fluctuations, as well as the risk of loss of principal, by investing in high-credit quality securities and limiting concentrations of issuers and maturity dates. Derivative financial instruments are not part of our investment portfolio.
 
During 2009 and as of December 31, 2009, a significant majority of our cash and investments were held as cash or in money market funds with yields approaching zero, accordingly, a hypothetical decrease in interest rates would not have a significant impact on our results of operations or financial position.
 
As of December 31, 2009, we had convertible subordinated debentures of $15.8 million outstanding with a fixed interest rate of 1.75%. Interest rate changes affect the fair value of the debentures, but do not affect our earnings or cash flow.
 
All of our sales and inventory purchases are denominated in U.S. dollars and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to our sales or cost of goods sold. We have
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employees located in offices in Japan, Taiwan, Korea and the People’s Republic of China and as such, a portion of our operating expenses as well as foreign income taxes payable are denominated in foreign currencies. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies. Any future strengthening of those currencies against the U.S. dollar could negatively impact our operating results by increasing our operating expenses as measured in U.S. dollars. We cannot reasonably estimate the effect that an immediate change in foreign currency exchange rates would have on our operating results or cash flows. Currently, we do not hedge against foreign currency rate fluctuations.

Item 8.    	Financial Statements and Supplementary Data.	
 
The following financial statements and reports are included in Item 8:

Report of Independent Registered Public Accounting Firm	 	 	41	 	
Consolidated Balance Sheets as of December 31, 2009 and 2008	 	 	42	 	
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007	 	 	43	 	
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	 	 	44	 	
Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007	 	 	45	 	
Notes to Consolidated Financial Statements	 	 	46	 	

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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Pixelworks, Inc.:
 
We have audited the accompanying consolidated balance sheets of Pixelworks, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 7 to the consolidated financial statements, the Company changed their method of accounting for uncertain tax positions effective January 1, 2007.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pixelworks, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pixelworks, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in  Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP
 
Portland, Oregon
March 10, 2010
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PIXELWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
ASSETS	
Current assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	17,797	 	 	$	53,149	 	
Short-term marketable securities	 	 	9,822	 	 	 	8,058	 	
Accounts receivable, net	 	 	5,619	 	 	 	6,149	 	
Inventories, net	 	 	6,158	 	 	 	4,981	 	
Prepaid expenses and other current assets	 	 	2,265	 	 	 	3,381	 	
 	 	 	 	 	 	 	 	 	
Total current assets	 	 	41,661	 	 	 	75,718	 	
Long-term marketable security	 	 	3,240	 	 	 	2,110	 	
Property and equipment, net	 	 	5,121	 	 	 	5,187	 	
Other assets, net	 	 	5,006	 	 	 	5,331	 	
Acquired intangible assets, net	 	 	1,050	 	 	 	3,386	 	
 	 	 	 	 	 	 	 	 	
Total assets	 	$	56,078	 	 	$	91,732	 	

LIABILITIES AND SHAREHOLDERS’ EQUITY	
Current liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	7,680	 	 	$	4,215	 	
Accrued liabilities and current portion of long-term liabilities	 	 	8,513	 	 	 	9,419	 	
Current portion of income taxes payable	 	 	109	 	 	 	137	 	
 	 	 	 	 	 	 	 	 	
Total current liabilities	 	 	16,302	 	 	 	13,771	 	
Long-term liabilities, net of current portion	 	 	1,462	 	 	 	2,035	 	
Income taxes payable, net of current portion	 	 	9,462	 	 	 	10,581	 	
Long-term debt	 	 	15,779	 	 	 	60,634	 	
 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	43,005	 	 	 	87,021	 	
Commitments and contingencies (Note 8)	 	 	 	 	 	 	 	 	
Shareholders’ equity:	 	 	 	 	 	 	 	 	
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued	 	 	–	 	 	 	–	 	
Common stock, $0.001 par value; 250,000,000 shares authorized, 13,403,057 and 13,508,127 shares issued and outstanding as of December 31, 2009 and 2008, respectively	 	 	334,849	 	 	 	333,974	 	
Accumulated other comprehensive income	 	 	1,087	 	 	 	55	 	
Accumulated deficit	 	 	(322,863	)	 	 	(329,318	)	
 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	13,073	 	 	 	4,711	 	
 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	56,078	 	 	$	91,732	 	

See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue, net	 	$	   61,093	 	 	$	   85,164	 	 	$	105,980	 	
Cost of revenue (1)	 	 	33,798	 	 	 	42,963	 	 	 	59,273	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	 	 	27,295	 	 	 	42,201	 	 	 	46,707	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development (2)	 	 	20,075	 	 	 	26,512	 	 	 	38,792	 	
Selling, general and administrative (3)	 	 	13,745	 	 	 	17,945	 	 	 	25,437	 	
Restructuring	 	 	235	 	 	 	1,589	 	 	 	13,285	 	
Amortization of acquired intangible assets	 	 	–	 	 	 	164	 	 	 	359	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	34,055	 	 	 	46,210	 	 	 	77,873	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from operations	 	 	(6,760	)	 	 	(4,009	)	 	 	(31,166	)	
Gain on repurchase of long-term debt, net	 	 	12,860	 	 	 	19,670	 	 	 	–	 	
Interest income	 	 	242	 	 	 	2,102	 	 	 	5,786	 	
Interest expense	 	 	(640	)	 	 	(1,695	)	 	 	(2,642	)	
Amortization of debt issuance costs	 	 	(124	)	 	 	(426	)	 	 	(661	)	
Other-than-temporary impairment of marketable security	 	 	–	 	 	 	(7,890	)	 	 	–	 	
Other income	 	 	–	 	 	 	218	 	 	 	–	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and other income, net	 	 	12,338	 	 	 	11,979	 	 	 	2,483	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	 	5,578	 	 	 	7,970	 	 	 	(28,683	)	
Provision (benefit) for income taxes	 	 	(877	)	 	 	(8	)	 	 	2,237	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	6,455	 	 	$	7,978	 	 	$	(30,920	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) per share	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.48	 	 	$	0.55	 	 	$	(1.92	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	0.47	 	 	$	0.55	 	 	$	(1.92	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	13,318	 	 	 	14,399	 	 	 	16,069	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	13,687	 	 	 	14,410	 	 	 	16,069	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	
(1) Includes:	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of acquired developed technology	 	$	2,336	 	 	$	2,820	 	 	$	2,820	 	
Additional amortization of non-cancelable prepaid royalty	 	 	251	 	 	 	144	 	 	 	–	 	
Restructuring	 	 	43	 	 	 	91	 	 	 	172	 	
Stock-based compensation	 	 	20	 	 	 	58	 	 	 	98	 	
(2) Includes stock-based compensation	 	 	464	 	 	 	1,250	 	 	 	2,320	 	
(3) Includes stock-based compensation	 	 	540	 	 	 	1,198	 	 	 	3,527	 	
 
See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	6,455	 	 	$	7,978	 	 	$	(30,920	)	
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Gain on repurchase of long-term debt, net	 	 	(12,860	)	 	 	(19,670	)	 	 	–	 	
Other-than-temporary impairment of marketable security	 	 	–	 	 	 	7,890	 	 	 	–	 	
Depreciation and amortization	 	 	4,607	 	 	 	6,700	 	 	 	13,999	 	
Amortization of acquired intangible assets	 	 	2,336	 	 	 	2,984	 	 	 	3,179	 	
Stock-based compensation	 	 	1,024	 	 	 	2,506	 	 	 	5,945	 	
Amortization of debt issuance costs	 	 	124	 	 	 	426	 	 	 	661	 	
Deferred income tax expense	 	 	68	 	 	 	291	 	 	 	512	 	
Amortization (accretion) on short- and long-term marketable securities	 	 	24	 	 	 	(345	)	 	 	(583	)	
Loss on asset disposals	 	 	4	 	 	 	180	 	 	 	210	 	
Write-off of assets to restructuring	 	 	–	 	 	 	14	 	 	 	3,905	 	
Other	 	 	55	 	 	 	55	 	 	 	55	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Accounts receivable, net	 	 	530	 	 	 	74	 	 	 	3,092	 	
Inventories, net	 	 	(1,177	)	 	 	6,284	 	 	 	2,544	 	
Prepaid expenses and other current and long-term assets, net	 	 	931	 	 	 	974	 	 	 	3,300	 	
Accounts payable	 	 	3,389	 	 	 	223	 	 	 	(4,101	)	
Accrued current and long-term liabilities	 	 	(2,377	)	 	 	(1,454	)	 	 	(2,995	)	
Income taxes payable	 	 	(1,147	)	 	 	(149	)	 	 	(130	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) operating activities	 	 	1,986	 	 	 	14,961	 	 	 	(1,327	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from investing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Proceeds from sales and maturities of available-for-sale marketable securities	 	 	13,195	 	 	 	54,532	 	 	 	79,482	 	
Purchases of marketable securities	 	 	(15,110	)	 	 	(22,999	)	 	 	(52,885	)	
Purchases of property and equipment	 	 	(1,481	)	 	 	(2,158	)	 	 	(2,886	)	
Purchases of licensed technology	 	 	(102	)	 	 	–	 	 	 	–	 	
Proceeds from sales of property and equipment	 	 	2	 	 	 	20	 	 	 	26	 	
Purchases of other assets	 	 	–	 	 	 	–	 	 	 	(308	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	 	 	(3,496	)	 	 	29,395	 	 	 	23,434	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Repurchase of long-term debt	 	 	(31,532	)	 	 	(58,554	)	 	 	–	 	
Payments on asset financings	 	 	(2,161	)	 	 	(4,646	)	 	 	(6,715	)	
Repurchase of common stock	 	 	(167	)	 	 	(2,626	)	 	 	(4,269	)	
Proceeds from issuances of common stock	 	 	18	 	 	 	47	 	 	 	354	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	(33,842	)	 	 	(65,779	)	 	 	(10,630	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net change in cash and cash equivalents	 	 	(35,352	)	 	 	(21,423	)	 	 	11,477	 	
Cash and cash equivalents, beginning of period	 	 	53,149	 	 	 	74,572	 	 	 	63,095	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	17,797	 	 	$	53,149	 	 	$	74,572	 	

See accompanying notes to consolidated financial statements.
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PIXELWORKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)

 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated
	 	 	 	 	 	 	 	 	Total
	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Other
	 	 	 	 	 	 	 	 	Shareholders’
	 	
 	 	Common Stock	 	 	Exchangeable Shares	 	 	Comprehensive
	 	 	Comprehensive
	 	 	Accumulated
	 	 	Equity
	 	
 	 	Shares	 	 	Amount	 	 	Shares	 	 	Amount	 	 	Income (Loss)	 	 	Income (loss)	 	 	Deficit	 	 	(Deficit)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2006	 	 	16,204,514	 	 	$	331,567	 	 	 	15,878	 	 	$	450	 	 	$	(3,693	)	 	 	 	 	 	$	(306,376	)	 	$	21,948	 	
Stock issued under stock option and stock purchase plans	 	 	149,376	 	 	 	354	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	354	 	
Repurchase 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	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	5,945	 	
Net 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	 	 	 	–	 	 	 	5	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive 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	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	47	 	
Repurchase 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	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	2,506	 	
Net income	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	$	7,978	 	 	 	7,978	 	 	 	7,978	 	
Reclassification 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	 	 	 	–	 	 	 	4,810	 	
Unrealized gain on available-for-sale securities, net of tax of $0	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	50	 	 	 	50	 	 	 	–	 	 	 	50	 	
Pension 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	 	
Stock issued under stock option and stock purchase plans	 	 	123,530	 	 	 	18	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	18	 	
Repurchase of common stock	 	 	(228,600	)	 	 	(167	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	(167	)	
Stock-based compensation expense	 	 	–	 	 	 	1,024	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	 	 	 	 	–	 	 	 	1,024	 	
Net income	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	$	6,455	 	 	 	6,455	 	 	 	6,455	 	
Unrealized gain on available-for-sale securities, net of tax of $0	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	1,003	 	 	 	1,003	 	 	 	–	 	 	 	1,003	 	
Pension adjustment, net of tax of $11	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	29	 	 	 	29	 	 	 	–	 	 	 	29	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	7,487	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2009	 	 	13,403,057	 	 	$	334,849	 	 	 	–	 	 	$	–	 	 	$	1,087	 	 	 	 	 	 	$	(322,863	)	 	$	13,073	 	

See accompanying notes to consolidated financial statements.
 
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PIXELWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
 
NOTE 1.    BASIS OF PRESENTATION
 
Nature of Business
 
We are an innovative designer, developer and marketer of video and pixel processing semiconductors and software for high-end digital video applications and hold 119 patents related to the visual display of digital image data. Our solutions enable manufacturers of digital display and projection devices, such as large-screen flat panel displays and digital front projectors, to differentiate their products with a consistently high level of video quality, regardless of the content’s source or format. Our core technology leverages unique proprietary techniques for intelligently processing video signals from a variety of sources to ensure that all resulting images are optimized. Additionally, our products help our customers reduce costs and differentiate their display and projection devices, an important factor in industries that experience rapid innovation. Pixelworks was founded in 1997 and is incorporated under the laws of the state of Oregon.
 
Consolidated Financial Statements
 
Our consolidated financial statements include the accounts of Pixelworks and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. All foreign subsidiaries use the U.S. dollar as the functional currency, and as a result, transaction gains and losses are included in the statement of operations. Transaction gains (losses) were $(69), $(121) and $578 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
The Company has performed an evaluation of subsequent events through March 10, 2010, which is the date the financial statements were issued and no such events were identified.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect amounts reported in the financial statements and accompanying notes. Our significant estimates and judgments include those related to product returns, warranty obligations, bad debts, inventories, property and equipment, intangible assets, impairment of long-lived assets, valuation of investments, amortization of prepaid royalties, valuation of share-based payments, income taxes, litigation and other contingencies. The actual results experienced could differ materially from our estimates.
 
Reclassifications
 
Certain reclassifications have been made to the 2007 consolidated financial statements to conform with the 2009 and 2008 presentation, including the reclassification of payments on asset financing as financing activities in the consolidated statements of cash flow.

NOTE 2.    	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	
 
Cash and Cash Equivalents
 
We classify all highly liquid investments with original maturities of three months or less at the date of purchase as cash and cash equivalents. Cash equivalents totaled $17,073 and $34,213 at December 31, 2009 and 2008, respectively.
 
Marketable Securities
 
Our investments in marketable securities are classified as available-for-sale. Available-for-sale securities are stated at fair value based on quoted market prices with unrealized holding gains or losses, net of tax, included
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in accumulated other comprehensive income, a component of shareholders’ equity. The cost of securities sold is based on the specific identification method.
 
We periodically evaluate whether declines in fair values of our investments below their cost are other-than-temporary. This evaluation includes qualitative and quantitative factors regarding the severity and duration of the unrealized loss, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and our ability and intent to hold the investment for a period of time to allow for an anticipated recovery in market value.
 
Short-term marketable debt securities have remaining maturities of twelve months or less.
 
Accounts Receivable
 
Accounts receivable are recorded at invoiced amount and do not bear interest when recorded or accrue interest when past due. We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. At the end of each reporting period, we estimate the allowance for doubtful accounts based on an account-by-account risk analysis of outstanding receivable balances. The determination to write-off specific accounts receivable balances is made based on likelihood of collection and past due status. Past due status is based on invoice date and terms specific to each customer.
 
Inventories
 
Inventories consist of finished goods and work-in-process, and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market (net realizable value), net of a reserve for slow-moving and obsolete items.
 
Property and Equipment
 
Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows:

Software	 	Lesser of 3 years or contractual license term	
Equipment, furniture and fixtures	 	2 years	
Tooling	 	2 years	
Leasehold improvements	 	Lesser of lease term or estimated useful life	
 
Reviews for potential impairment of these assets are performed whenever events or circumstances indicate that their carrying amount may not be recoverable, or that their useful lives may be shorter than originally estimated. Impairment is assessed by comparing the projected undiscounted net cash flows associated with the assets over their remaining useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of the assets.
 
The cost of property and equipment repairs and maintenance is expensed as incurred.
 
Acquired Intangible Assets
 
Intangible assets are amortized on a straight-line basis over their estimated useful lives. Reviews for potential impairment of these assets are performed whenever events or circumstances indicate that their carrying amount may not be recoverable, or that their useful lives may be shorter than originally estimated. Impairment is assessed by comparing the projected undiscounted net cash flows associated with the assets over their remaining useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of the assets.
 
Licensed Technology
 
We have capitalized licensed technology assets in other long-term assets. These assets are stated at cost and are amortized on a straight-line basis over the term of the license or the estimated life of the asset, if the license is not contractually limited, which is generally three to five years. Reviews for potential impairment of
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these assets are performed whenever events or circumstances indicate that their carrying amount may not be recoverable, or that their useful lives may be shorter than originally estimated. Impairment is assessed by comparing the projected undiscounted net cash flows associated with the assets over their remaining useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of the assets.
 
Revenue Recognition
 
We recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable, and collection is reasonably assured. We require customers to provide purchase orders prior to shipment and we consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. These conditions are generally satisfied upon shipment of the underlying product.
 
There are no customer acceptance provisions associated with our products, and except for replacement of defective products under our warranty program discussed below, we have no obligation to accept product returns from end customers. However, we have accepted returns on a case-by-case basis as customer accommodations in the past. As a result, we provide for estimated reductions to gross profit for these sales returns in our reserve for sales returns and allowances. At the end of each reporting period, we estimate the reserve based on historical experience and knowledge of any applicable events or transactions. The reserve is included in accrued liabilities in our consolidated balance sheet.
 
A portion of our sales are made to distributors under agreements that grant the distributor limited stock rotation rights and price protection on in-stock inventory. The stock rotation rights allow these distributors to exchange a limited amount of their in-stock inventory for other Pixelworks product. We analyze historical stock rotations at the end of each reporting period. To date, returns under the stock rotation provision have been nominal, and as a result, we have not recorded a reserve for stock rotations.
 
Under the price protection provisions, we grant distributors credit if they purchased product for a specific end customer and we subsequently lower the price to the end customer such that the distributor can no longer earn its negotiated margin on in-stock inventory. At the end of each reporting period, we estimate a reserve for price protection credits based on historical experience and knowledge of any applicable events or transactions. The reserve for price protection, if required, is included in our reserve for sales returns and allowances, which is included in accrued liabilities in our consolidated balance sheet.
 
Warranty Program
 
We warrant that our products will be free from defects in material and workmanship for a period of twelve months from delivery. Warranty repairs are guaranteed for the remainder of the original warranty period. Our warranty is limited to repairing or replacing products, or refunding the purchase price. At the end of each reporting period, we estimate a reserve for warranty returns based on historical experience and knowledge of any applicable events or transactions. The reserve for warranty returns is included in accrued liabilities in our consolidated balance sheet.
 
Stock-Based Compensation
 
We currently sponsor a stock incentive plan that allows for issuance of employee stock options and restricted stock awards. We recognize expense for share-based awards using the fair value of the awards on the grant date.
 
The fair values of our stock option grants are estimated as of the grant date using the Black-Scholes option valuation model which is affected by our estimates of the risk free interest rate, our expected dividend yield, the expected term of the awards and the expected share price volatility of our common shares over the term of the awards. The fair values of our restricted stock awards are based on the market value of our stock on the date of grant, adjusted for the effect of estimated forfeitures.
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As a result of, and subsequent to, the May 2009 amendment of our 2006 Stock Incentive Plan, which shortened the contractual life of newly issued stock options from ten to six years, we have elected to use the “simplified method” to estimate the expected term used in the valuation of stock options granted. The simplified method is used since we do not have sufficient historical share option exercise experience for options granted with a six year contractual life. We will continue to use the simplified method until we have sufficient historical share option exercise experience to develop a more refined estimate of expected term.
 
The fair value of share-based payment awards is expensed straight-line over the requisite service period, which is generally the vesting period, for the entire award.
 
Research and Development
 
Costs associated with research and development activities are expensed as incurred, except for materials with alternate future uses which are capitalized and depreciated over their estimated useful life.
 
Income Taxes
 
We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial statement carrying amounts and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We establish a valuation allowance to reduce deferred tax assets to the amount expected “more likely than not” to be realized in future tax returns.
 
We conduct a comprehensive review of our uncertain tax positions regularly. In this regard, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, we do not recognize the tax benefits resulting from such positions and report the tax effects as a liability for uncertain tax positions in our consolidated balance sheet.
 
Accumulated Other Comprehensive Income
 
Accumulated other comprehensive income, net of tax, consists of the following:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Accumulated net unrealized holding gain on
available-for-sale and long-term marketable security	 	$	  1,128	 	 	$	     125	 	
Accumulated transition pension obligation	 	 	(48	)	 	 	(48	)	
Actuarial gain (loss) on pension obligation	 	 	7	 	 	 	(22	)	
 	 	 	 	 	 	 	 	 	
Accumulated other comprehensive income	 	$	1,087	 	 	$	55	 	

Leases
 
Our various office space and equipment leases are classified as operating leases. Certain of our leases for office space contain provisions under which monthly rent escalates over time and certain leases also contain provisions for reimbursement of a specified amount of leasehold improvements. When lease agreements contain escalating rent clauses, we recognize rent expense on a straight-line basis over the term of the lease. When lease agreements provide allowances for leasehold improvements, we capitalize the leasehold improvement assets and amortize them on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset, and reduce rent expense on a straight-line basis over the term of the lease by the amount of the asset capitalized.
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Fair Value of Financial Instruments
 
See Note 4 for information regarding accounting policies related to the fair value of our financial instruments.
 
Risks and Uncertainties
 
Concentration of Suppliers
 
We do not own or operate a semiconductor fabrication facility and do not have the resources to manufacture our products internally. We rely on three third-party foundries to produce all of our wafers and three assembly and test vendors for completion of finished products. We do not have long-term agreements with any of these suppliers. In light of these dependencies, it is reasonably possible that failure to perform by one of these suppliers could have a severe impact on our results of operations.
 
Risk of Technological Change
 
The markets in which we compete, or seek to compete, are subject to rapid technological change, frequent new product introductions, changing customer requirements for new products and features, and evolving industry standards. The introduction of new technologies and the emergence of new industry standards could render our products less desirable or obsolete, which could harm our business.
 
Concentrations of Credit Risk
 
Financial instruments that potentially subject us to concentrations of credit risk consist of cash equivalents, short-and long-term marketable securities and accounts receivable. We limit our exposure to credit risk associated with cash equivalent and marketable security balances by placing our funds in various high-quality securities and limiting concentrations of issuers and maturity dates. We limit our exposure to credit risk associated with accounts receivable by carefully evaluating creditworthiness before offering terms to customers.
 
Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 168,  “The FASB Accounting Standards Codification TM  and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”  (“SFAS 168”), which establishes the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with U.S. GAAP. SFAS 168 explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. SFAS 168 was subsequently incorporated into ASC Topic 105 , “Generally Accepted Accounting Principles”  and was adopted by the Company during the current year. The adoption did not have a material impact on our consolidated financial position or results of operations but will impact our financial reporting by eliminating all references to pre-codification standards.

NOTE 3.    	BALANCE SHEET COMPONENTS	
 
Marketable Securities – See Note 4
 
Accounts Receivable, Net
 
Accounts receivable consists of the following:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Accounts receivable, gross	 	$	 6,047	 	 	$	 6,691	 	
Allowance for doubtful accounts	 	 	(428	)	 	 	(542	)	
 	 	 	 	 	 	 	 	 	
Accounts receivable, net	 	$	5,619	 	 	$	6,149	 	

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The following is a summary of the change in our allowance for doubtful accounts:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	     542	 	 	$	     542	 	 	$	     200	 	
Additions charged (reductions credited)	 	 	(75	)	 	 	–	 	 	 	483	 	
Accounts written-off, net of recoveries	 	 	(39	)	 	 	–	 	 	 	(141	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	$	428	 	 	$	542	 	 	$	542	 	

Inventories, Net
 
Inventories consist of the following:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Finished goods	 	$	2,888	 	 	$	4,617	 	
Work-in-process	 	 	5,410	 	 	 	5,358	 	
 	 	 	 	 	 	 	 	 	
 	 	 	8,298	 	 	 	9,975	 	
Reserve for slow-moving and obsolete items	 	 	(2,140	)	 	 	(4,994	)	
 	 	 	 	 	 	 	 	 	
Inventories, net	 	$	6,158	 	 	$	4,981	 	

The following is a summary of the change in our reserve for slow-moving and obsolete items:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of period	 	$	4,994	 	 	$	5,950	 	 	$	5,950	 	
New provision	 	 	1,225	 	 	 	1,496	 	 	 	4,365	 	
Sales of previously reserved inventory	 	 	(707	)	 	 	(1,008	)	 	 	(1,989	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net provision for obsolete inventory	 	 	518	 	 	 	488	 	 	 	2,376	 	
Final scrap of previously reserved inventory	 	 	(3,372	)	 	 	(1,444	)	 	 	(2,376	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of period	 	$	2,140	 	 	$	4,994	 	 	$	5,950	 	

Based upon our forecast and backlog we do not currently expect to be able to sell or otherwise use the reserved inventory we have on hand at December 31, 2009. However, it is possible that a customer will decide in the future to purchase a portion of the reserved inventory. During the years ended December 31, 2009, 2008, and 2007, sales of previously reserved inventory were primarily due to unanticipated demand for products nearing end-of-life. It is not possible for us to predict if or when this may happen again, or how much we may sell. If such sales occur, we do not expect that they will have a material impact on our gross profit margin.
 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consist of current prepaid expenses, deposits, income taxes receivable, other receivables and deferred tax assets.
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Property and Equipment, Net
 
Property and equipment consists of the following:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Software	 	$	6,712	 	 	$	9,141	 	
Equipment, furniture and fixtures	 	 	7,289	 	 	 	6,668	 	
Tooling	 	 	1,837	 	 	 	1,244	 	
Leasehold improvements	 	 	2,634	 	 	 	3,174	 	
 	 	 	 	 	 	 	 	 	
 	 	 	18,472	 	 	 	20,227	 	
Accumulated depreciation and amortization	 	 	(13,351	)	 	 	(15,040	)	
 	 	 	 	 	 	 	 	 	
Property and equipment, net	 	$	5,121	 	 	$	5,187	 	

Software amortization was $1,973, $2,634 and $8,374 for the years ended December 31, 2009, 2008 and 2007, respectively. Depreciation and amortization expense for equipment, furniture, fixtures, tooling and leasehold improvements was $1,723, $2,392 and $3,762 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Other Assets, Net
 
Other assets, net consist primarily of licensed technology as of December 31, 2009 and 2008. Amortization of licensed technology was $911, $1,674 and $1,863 for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Acquired Intangible Assets, Net
 
Acquired intangible assets consist of the following developed technology:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Gross carrying amount	 	$	19,170	 	 	$	19,170	 	
Less: accumulated amortization	 	 	(18,120	)	 	 	(15,784	)	
 	 	 	 	 	 	 	 	 	
Acquired intangible assets, net	 	$	1,050	 	 	$	3,386	 	

Amortization expense was $2,336, $2,984 and $3,179 for the years ended December 31, 2009, 2008, and 2007, respectively. Estimated future amortization expense for the year ending December 31, 2010 is $1,050.
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Accrued Liabilities and Current Portion of Long-Term Liabilities
 
Accrued liabilities and current portion of long-term liabilities consist of the following:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Accrued payroll and related liabilities	 	$	  2,279	 	 	$	  3,749	 	
Current portion of accrued liabilities for asset financings	 	 	2,068	 	 	 	1,116	 	
Accrued commissions and royalties	 	 	853	 	 	 	728	 	
Reserve for warranty returns	 	 	304	 	 	 	593	 	
Accrued interest payable	 	 	257	 	 	 	236	 	
Accrued costs related to restructuring	 	 	190	 	 	 	940	 	
Reserve for sales returns and allowances	 	 	55	 	 	 	100	 	
Other	 	 	2,507	 	 	 	1,957	 	
 	 	 	 	 	 	 	 	 	
 	 	$	8,513	 	 	$	9,419	 	

The following is a summary of the changes in our reserves for warranty returns and sales returns and allowances:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Reserve for warranty returns:	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	     593	 	 	$	     932	 	 	$	662	 	
Provision (benefit)	 	 	269	 	 	 	(203	)	 	 	1,418	 	
Charge-offs	 	 	(558	)	 	 	(136	)	 	 	(1,148	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	$	304	 	 	$	593	 	 	$	932	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Reserve for sales returns and allowances:	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	100	 	 	$	175	 	 	$	479	 	
Provision	 	 	9	 	 	 	25	 	 	 	123	 	
Charge-offs	 	 	(54	)	 	 	(100	)	 	 	(427	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	$	55	 	 	$	100	 	 	$	175	 	

Long-Term Liabilities, Net of Current Portion
 
Long-term liabilities, net of current portion consist of the following:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Accrued liabilities for asset financings	 	$	     553	 	 	$	     699	 	
Deferred rent	 	 	494	 	 	 	617	 	
Accrued costs related to restructuring	 	 	218	 	 	 	262	 	
Payroll and related liabilities	 	 	136	 	 	 	182	 	
Other	 	 	61	 	 	 	275	 	
 	 	 	 	 	 	 	 	 	
 	 	$	 1,462	 	 	$	 2,035	 	

Long-Term Debt and Debt Issuance Costs
 
In 2004, we issued $150,000 of 1.75% convertible subordinated debentures (the “debentures”) due 2024. In 2006, we repurchased and retired $10,000 principal amount of the debentures. In 2008, we repurchased and
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retired $79,366 principal amount of the debentures for $58,554 in cash. We recognized a net gain of $19,670 on the repurchase, which included a $21,567 discount, offset by legal and professional fees of $755 and a write-off of debt issuance costs of $1,142. In 2009, we repurchased and retired $44,855 principal amount of the debentures for $31,532 in cash. We recognized a net gain on the repurchase of $12,860, which included a $13,357 discount, offset by a write-off of debt issuance costs of $463 and other fees of $34. Gains on the repurchase of our long-term debt are included in other income in our statement of operations.
 
As of December 31, 2009, $15,779 of the debentures are outstanding. The remaining debentures are convertible, under certain circumstances, into our common stock at a conversion rate of 13.6876 shares of common stock per $1 principal amount of debentures for a total of 215,977 shares. This is equivalent to a conversion price of approximately $73.06 per share. The debentures are convertible if (a) our stock trades above 130% of the conversion price for 20 out of 30 consecutive trading days during any calendar quarter, (b) the debentures trade at an amount less than or equal to 98% of the if-converted value of the debentures for five consecutive trading days, (c) a call for redemption occurs, or (d) in the event of certain other specified corporate transactions. If our debentures are converted into common stock, they cannot be settled in cash or other assets. We may redeem some or all of the debentures for cash on or after May 15, 2011 at a price equal to 100% of the principal amount of the debentures plus accrued and unpaid interest. The holders of the debentures have the right to require us to purchase all or a portion of their debentures on May 15, 2011, May 15, 2014 and May 15, 2019 at a price equal to 100% of the principal amount plus accrued and unpaid interest.
 
The debentures are unsecured obligations and are subordinated in right of payment to all our existing and future senior debt, and are effectively subordinated to all existing and future debt of our subsidiaries. At December 31, 2009, we had no senior debt outstanding and our subsidiaries had approximately $2,299 of liabilities to which the debentures were effectively subordinated.
 
We have evaluated each of the put, call and conversion features of the debentures and concluded that none of these features constitute embedded derivatives that must be bifurcated from the host contract and accounted for as derivatives.
 
The fees associated with the issuance of the convertible debentures included $4,500 withheld from the proceeds and $462 paid in cash. These debt issuance costs have been capitalized and are included in long-term assets in the consolidated balance sheets. The debt issuance costs are being amortized over seven years on a straight-line basis, which approximates the effective interest rate method. Debt issuance costs at December 31, 2009 and 2008 were $105 and $692, respectively.
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NOTE 4.    	MARKETABLE SECURTIES AND FAIR VALUE MEASUREMENTS	
 
At December 31, 2009 and 2008, all of our marketable securities are classified as available-for-sale and consist of the following:

 	 	 	 	 	Unrealized
	 	 	Fair
	 	
 	 	Cost	 	 	Gain (Loss)	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Short-term marketable securities:	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2009:	 	 	 	 	 	 	 	 	 	 	 	 	
US government agencies debt securities	 	$	 6,286	 	 	$	 (3	)	 	$	 6,283	 	
Commercial paper	 	 	2,996	 	 	 	–	 	 	 	2,996	 	
Corporate debt security	 	 	542	 	 	 	1	 	 	 	543	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	9,824	 	 	$	(2	)	 	$	9,822	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	
US government agencies debt securities	 	$	3,487	 	 	$	105	 	 	$	3,592	 	
Commercial paper	 	 	3,486	 	 	 	2	 	 	 	3,488	 	
Corporate debt securities	 	 	960	 	 	 	18	 	 	 	978	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	7,933	 	 	$	125	 	 	$	8,058	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term marketable security:	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2009:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity security	 	$	 2,110	 	 	$	 1,130	 	 	$	 3,240	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2008:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity security	 	$	2,110	 	 	$	–	 	 	$	2,110	 	
 
Unrealized holding gains and losses are recorded in accumulated other comprehensive income, a component of shareholders’ equity, in the consolidated balance sheets. During the year ended December 31, 2009, we sold an available-for-sale short-term marketable security for gross proceeds of $1,798 and a gross realized gain of $3.
 
During the year ended December 31, 2008, we recorded two other-than-temporary impairments of our long-term equity investment after reviewing the investment’s rapid decline in value, the extended duration of time which the fair value of the investment had been below our cost, as well as decreased target price estimates, analyst downgrades and macroeconomic factors. The total other-than-temporary impairment recorded in our statement of operations during the year ended December 31, 2008 was $7,890 and decreased our cost basis from $10,000 to $2,110 as of December 31, 2008.
 
Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value:
 
Level 1:  Valuations based on quoted prices in active markets for identical assets and liabilities.

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

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The following tables present information about our assets measured at fair value on a recurring basis in the consolidated balance sheets at December 31, 2009 and 2008:

 	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As of December 31, 2009	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash equivalents	 	$	 17,073	 	 	$	 –	 	 	$	     –	 	 	$	 17,073	 	
Short-term marketable securities	 	 	–	 	 	 	9,822	 	 	 	–	 	 	 	9,822	 	
Long-term marketable security	 	 	3,240	 	 	 	–	 	 	 	–	 	 	 	3,240	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	20,313	 	 	$	9,822	 	 	$	–	 	 	$	30,135	 	

As of December 31, 2008	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash equivalents	 	$	34,213	 	 	$	–	 	 	$	–	 	 	$	34,213	 	
Short-term marketable securities	 	 	–	 	 	 	8,058	 	 	 	–	 	 	 	8,058	 	
Long-term marketable security	 	 	2,110	 	 	 	–	 	 	 	–	 	 	 	2,110	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	36,323	 	 	$	 8,058	 	 	$	  –	 	 	$	44,381	 	

Level 1 assets consist primarily of money market funds and a long-term equity security. Level two assets include commercial paper, corporate debt securities and U.S. government agencies debt securities. We primarily use the market approach to determine the fair value of our financial assets.
 
The fair value of our current assets and liabilities, including accounts receivable and accounts payable, approximates the carrying value due to the short-term nature of these balances. As of December 31, 2009, the value of our long-term debt is $14,779 based on the most recent sale of our debt. The carrying value of our long-term debt at December 31, 2009 is $15,779. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with GAAP.

NOTE 5.    	EARNINGS PER SHARE	
 
Basic earnings per share amounts are computed based on the weighted average number of common shares outstanding, and include exchangeable shares. The exchangeable shares, which were issued on September 6, 2002 by Jaldi Semiconductor Corporation (“Jaldi”), our Canadian subsidiary, to its shareholders in connection with the Jaldi asset acquisition, had characteristics essentially equivalent to Pixelworks’ common stock. As of January 31, 2008 all exchangeable shares had been exchanged for shares of Pixelworks common stock. Basic and diluted weighted average shares outstanding have been calculated to reflect the June 4, 2008 one-for three reverse stock split in all periods presented.
 
Diluted weighted average shares outstanding includes the increased number of common shares that would be outstanding assuming the exercise of certain outstanding stock options, when such exercise would have the effect of reducing earnings per share, and the conversion of our debentures, using the if-converted method, when such conversion is dilutive.
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The following schedule reconciles the computation of basic net income (loss) per share and diluted net income (loss) per share (in thousands, except per share data):

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	 6,455	 	 	$	 7,978	 	 	$	 (30,920	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic weighted average shares outstanding	 	 	13,318	 	 	 	14,399	 	 	 	16,069	 	
Common share equivalents:	 	 	 	 	 	 	 	 	 	 	 	 	
Dilutive effect of stock options and awards	 	 	369	 	 	 	11	 	 	 	–	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted weighted average shares outstanding	 	 	13,687	 	 	 	14,410	 	 	 	16,069	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) per common share – basic	 	$	0.48	 	 	$	0.55	 	 	$	(1.92	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) per common share – diluted	 	$	0.47	 	 	$	0.55	 	 	$	(1.92	)	

The following weighted average shares were excluded from the calculation of diluted weighted average shares outstanding as their effect would have been anti-dilutive:

 	 	Year Ended December 31,	
 	 	2009	 	2008	 	2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock options	 	 	1,500,767	 	 	 	1,793,187	 	 	 	1,962,893	 	
Conversion of debentures	 	 	356,309	 	 	 	1,191,026	 	 	 	1,916,259	 	

NOTE 6.    	RESTRUCTURINGS	
 
In December 2008, we initiated a restructuring plan to reduce our operating expenses in response to decreases in current and forecasted revenue which resulted primarily from the global economic crisis. This plan reduced operations, research and development and administrative headcount in our San Jose, Taiwan and China offices and was completed during the second quarter of 2009.
 
In November 2006, we initiated a restructuring plan to reduce operating expenses. This plan included consolidation of our operations in order to reduce compensation and rent expense. As part of this plan we also narrowed and redefined our product development strategy which resulted in the write-off of intellectual property assets, tooling, software development tools and charges for related non-cancelable contracts. This plan was completed in the fourth quarter of 2008.
 
Total restructuring expense included in our consolidated statements of operations is comprised of the following:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenue – restructuring:	 	 	 	 	 	 	 	 	 	 	 	 	
Termination and retention benefits	 	$	 43	 	 	$	 91	 	 	$	 172	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses – restructuring:	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidation of leased space	 	 	160	 	 	 	508	 	 	 	1,524	 	
Termination and retention benefits	 	 	75	 	 	 	1,081	 	 	 	5,248	 	
Net write-off of assets and reversal of related liabilities	 	 	–	 	 	 	–	 	 	 	3,905	 	
Contract termination fee	 	 	–	 	 	 	–	 	 	 	1,693	 	
Payments, non-cancelable contracts	 	 	–	 	 	 	–	 	 	 	827	 	
Other	 	 	–	 	 	 	–	 	 	 	88	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	235	 	 	 	1,589	 	 	 	13,285	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total restructuring expense	 	$	  278	 	 	$	 1,680	 	 	$	 13,457	 	

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Termination and retention benefits included severance and retention payments for terminated employees and retention payments for certain continuing employees. 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.
 
The net write-off of assets and reversal of related liabilities recorded during the year ended December 31, 2007 included the write-off of assets with a net book value of $6,905 and the reversal of an accrued liability of $3,000. The assets written-off and the liability reversed related primarily to engineering software tools which we are no longer using due to restructuring-related reductions in research and development personnel and changes in product development strategy. During the year ended December 31, 2007 we also paid a contract termination fee of $1,693 to cancel one of the engineering software licenses prior to its expiration, and made non-cancelable contract payments for amounts that we were obligated to pay, but for which we did not realize a benefit due to the restructuring plans.
 
Total cumulative restructuring expense recorded in our statement of operations related to the restructuring plans initiated in November 2006 and December 2008 is comprised of net write-off of assets and reversal of related liabilities of $15,296, termination and retention benefits of $8,133, consolidation of leased space of $2,192, a contract termination fee of $1,693, payments on non-cancelable contracts of $827, and other expenses of $88.
 
Accrued expenses related to the restructuring plans are included in current and non-current accrued liabilities in the consolidated balance sheets. The following is a roll-forward of the accrued liabilities related to the restructuring plans for the years ended December 31, 2009 and 2008:

 	 	Balance as of
	 	 	 	 	 	 	 	 	Balance as of
	 	
 	 	December 31,
	 	 	 	 	 	 	 	 	December 31,
	 	
 	 	2008	 	 	Expensed	 	 	Payments	 	 	2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Termination and retention benefits	 	$	       737	 	 	$	       118	 	 	$	      (855	)	 	$	          –	 	
Lease termination costs	 	 	465	 	 	 	160	 	 	 	(217	)	 	 	408	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	1,202	 	 	$	278	 	 	$	(1,072	)	 	$	408	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance as of
	 	 	 	 	 	 	 	 	Balance as of
	 	
 	 	December 31,
	 	 	 	 	 	 	 	 	December 31,
	 	
 	 	2007	 	 	Expensed	 	 	Payments	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Termination and retention benefits	 	$	     1,758	 	 	$	     1,172	 	 	$	     (2,193	)	 	$	       737	 	
Lease termination costs	 	 	999	 	 	 	508	 	 	 	(1,042	)	 	 	465	 	
Contract termination and other costs	 	 	514	 	 	 	–	 	 	 	(514	)	 	 	–	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	3,271	 	 	$	1,680	 	 	$	(3,749	)	 	$	1,202	 	

 	 	
NOTE 7.    	INCOME TAXES	
 
Current and Deferred Income Tax Expense (Benefit)
 
Domestic and foreign pre-tax income (loss) is as follows:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Domestic	 	$	  4,376	 	 	$	  6,141	 	 	$	  (31,614	)	
Foreign	 	 	1,202	 	 	 	1,829	 	 	 	2,931	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	5,578	 	 	$	7,970	 	 	$	(28,683	)	

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Income tax expense (benefit) attributable to continuing operations is comprised of the following:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Current:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	     55	 	 	$	     55	 	 	$	     55	 	
State	 	 	20	 	 	 	142	 	 	 	6	 	
Foreign	 	 	(1,020	)	 	 	(496	)	 	 	1,664	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total current	 	 	(945	)	 	 	(299	)	 	 	1,725	 	
Deferred:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	 	–	 	 	 	–	 	 	 	–	 	
State	 	 	–	 	 	 	–	 	 	 	–	 	
Foreign	 	 	68	 	 	 	291	 	 	 	512	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total deferred	 	 	68	 	 	 	291	 	 	 	512	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax expense (benefit)	 	$	(877	)	 	$	(8	)	 	$	2,237	 	

The significant differences between the U.S. federal statutory tax rate and our effective tax rate for financial statement purposes are as follows:

 	 	Year Ended December 31,	
 	 	2009	 	2008	 	2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Expected income tax rate	 	 	          34%	 	 	 	          35%	 	 	 	          35%	 	
Decrease resulting from:	 	 	 	 	 	 	 	 	 	 	 	 	
Change in valuation allowance	 	 	(30)	 	 	 	(67)	 	 	 	(40)	 	
Tax contingencies, net of reversals	 	 	(20)	 	 	 	–	 	 	 	–	 	
Impact of foreign earnings	 	 	(4)	 	 	 	26	 	 	 	–	 	
State income taxes, net of federal tax benefit	 	 	4	 	 	 	2	 	 	 	–	 	
Stock compensation	 	 	1	 	 	 	3	 	 	 	–	 	
Research and experimentation credit	 	 	–	 	 	 	–	 	 	 	1	 	
Decrease in deferred tax rates	 	 	–	 	 	 	–	 	 	 	(1)	 	
Other	 	 	(1)	 	 	 	1	 	 	 	(3)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Actual tax expense (benefit)	 	 	(16)%	 	 	 	–%	 	 	 	(8)%	 	

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Deferred Tax Assets, Liabilities and Valuation Allowance
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:

 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Deferred tax assets:	 	 	 	 	 	 	 	 	
Net operating loss carryforwards	 	$	     65,666	 	 	$	     73,861	 	
Research and experimentation credit carryforwards	 	 	12,471	 	 	 	12,951	 	
Foreign tax credit carryforwards	 	 	8,717	 	 	 	9,073	 	
Other-than-temporary impairment of marketable security	 	 	2,873	 	 	 	2,983	 	
Deferred stock compensation	 	 	2,705	 	 	 	3,372	 	
Depreciation	 	 	2,304	 	 	 	2,613	 	
Reserves and accrued expenses	 	 	1,103	 	 	 	2,651	 	
Accrued vacation	 	 	213	 	 	 	338	 	
Other	 	 	2,208	 	 	 	2,256	 	
 	 	 	 	 	 	 	 	 	
Total gross deferred tax assets	 	 	98,260	 	 	 	110,098	 	
Deferred tax liabilities:	 	 	 	 	 	 	 	 	
Amortization	 	 	(382	)	 	 	(1,225	)	
Foreign earnings	 	 	(129	)	 	 	(3,983	)	
Other	 	 	(275	)	 	 	(230	)	
 	 	 	 	 	 	 	 	 	
 	 	 	(786	)	 	 	(5,438	)	
Less valuation allowance	 	 	(96,767	)	 	 	(104,090	)	
 	 	 	 	 	 	 	 	 	
Net deferred tax assets	 	$	707	 	 	$	570	 	

The current portion of the net deferred tax asset balance is $155 and $158 as of December 31, 2009 and 2008, respectively. The current portion is included in prepaid expenses and other current assets in the consolidated balance sheets. The non-current portion of the net deferred tax asset balance is $608 and $642 as of December 31, 2009 and 2008, respectively. The non-current portion is included in other assets, net in the consolidated balance sheets, and is partially offset by a contingency reserve of $406, which is included in income taxes payable. Long-term deferred tax liabilities were $56 and $230 as of December 31, 2009 and 2008, respectively, and are included in long-term liabilities, net of current portion in the consolidated balance sheets. As of December 31, 2009 we have a current tax receivable of $301 consisting of refundable foreign research and development credits and payments in excess of estimated current tax expense. This amount is included in prepaid expenses and other current assets in the consolidated balance sheets.
 
We continue to record a full valuation allowance against our U.S. and Canadian net deferred tax assets at December 31, 2009 and 2008 as it is not more likely than not that we will realize a benefit from these assets in a future period. We have not provided a valuation allowance against any of our other foreign net deferred tax assets as we have concluded it is more likely than not that we will realize a benefit from these assets in a future period because our subsidiaries in these jurisdictions are cost-plus taxpayers. The net valuation allowance decreased $7,323 and $8,246 for the years ended December 31, 2009 and 2008, respectively, and increased $7,427 for the year ended December 31, 2007.
 
As of December 31, 2009, we have federal, state and foreign net operating loss carryforwards of approximately $167,126, $86,599 and $1,151, respectively, which will expire between 2010 and 2027. As of December 31, 2009, we have available federal, state and foreign research and experimentation tax credit carryforwards of approximately $7,179, $2,931 and $2,521, respectively, which begin expiring in 2010. We have a general foreign tax credit of $2,087 which will begin expiring in 2017.
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Our net operating loss and credit carryforwards are reported net of an annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. An ownership change subject to these provisions occurred for nDSP in 2002 and Equator in 2005 when we acquired these entities.
 
We had undistributed earnings of foreign subsidiaries of approximately $3,707 as of December 31, 2009, for which deferred taxes have not been provided. These earnings are considered indefinitely invested outside of the United States. If repatriated, some of these earnings could generate foreign tax credits that may reduce the federal tax liability associated with any future foreign dividend. We have determined that undistributed earnings and profits of our Canadian subsidiary are no longer indefinitely reinvested offshore due to the consolidation of our North American offices and we recorded a deferred tax liability as of December 31, 2009 related to repatriation of the subsidiary’s earnings.
 
During the year ended December 31, 2007 our Chinese subsidiary achieved designation as an integrated circuit design company, allowing us to benefit from a tax holiday in 2007 and 2008 and a 50% reduction to the applicable corporate rate in 2009, 2010 and 2011. The change in enacted tax rate resulted in the reversal of previously recorded deferred tax assets of $307 during the year ended December 31, 2007. This expense was recorded in the statement of operations and the impact on net loss per share was not significant.
 
Uncertain Tax Positions
 
We have recorded tax reserves to address potential exposures involving positions that could be challenged by taxing authorities. As of December 31, 2009 and December 31, 2008, the amount of our uncertain tax positions was a liability of $9,462 and $10,581, respectively.
 
The following is a summary of the change in our liability for uncertain tax positions and interest and penalties for the years ended December 31, 2009 and 2008:

 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	
Uncertain tax positions:	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	     8,257	 	 	$	     8,539	 	
Accrual for positions taken in a prior year	 	 	150	 	 	 	(49	)	
Accrual for positions taken in current year	 	 	159	 	 	 	91	 	
Reversals due to lapse of statute of limitations	 	 	(1,380	)	 	 	(324	)	
 	 	 	 	 	 	 	 	 	
Balance at end of year	 	$	7,186	 	 	$	8,257	 	
 	 	 	 	 	 	 	 	 	
Interest and penalties:	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	2,324	 	 	$	2,096	 	
Accrual for positions taken in prior year	 	 	391	 	 	 	463	 	
Reversals due to lapse of statute of limitations	 	 	(439	)	 	 	(235	)	
 	 	 	 	 	 	 	 	 	
Balance at end of year	 	$	2,276	 	 	$	2,324	 	

We recognize interest and penalties related to uncertain tax positions in income tax expense in our consolidated statements of operations.
 
We file income tax returns in the U.S. and various foreign jurisdictions. A number of years may elapse before an uncertain tax position is resolved by settlement or statute of limitations. Settlement of any particular position could require the use of cash. If the uncertain tax positions we have accrued for are sustained by the taxing authorities in our favor, the reduction of the liability will reduce our effective tax rate. We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $5,908 within the next twelve months due to the expiration of statutes of limitations in foreign jurisdictions.
 
We are no longer subject to U.S. federal examinations for years before 2005. We are subject to potential tax examinations in foreign locations for years 2003 through 2009. We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations.
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We were not subject to, nor had we received any notice of, income tax examinations as of December 31, 2009.

NOTE 8.    	COMMITMENTS AND CONTINGENCIES	
 
Royalties
 
We license technology from third parties and have agreed to pay certain suppliers a royalty based on the number of chips sold or manufactured, the net sales price of the chips containing the licensed technology or a fixed non-cancelable fee. Royalty expense is recognized based on our estimated average unit cost for royalty contracts with non-cancelable prepayments and the stated contractual per unit rate for all other agreements. Royalty expense was $1,119, $1,378 and $2,073 for the years ended December 31, 2009, 2008 and 2007, respectively, which is included in cost of revenue in the consolidated statements of operations.
 
We have ceased payment and accrual of certain amounts due under an executory contract, as we believe the other party has not fulfilled their contractual obligation, and therefore it is not probable that we will make the specified payments. Unaccrued payments are $750 as of December 31, 2009 and will increase by $250 in each of the following two quarters. It is reasonably possible that a change could occur in the near term related to this matter. Should such a change occur, we believe our estimated liability would not exceed the specified payment amounts. See “Legal Proceedings” in Part I, Item 3 of this form 10-K for additional information regarding this matter.
 
401(k) Plan
 
We sponsor a 401(k) plan for eligible employees. Participants may defer a percentage of their annual compensation on a pre-tax basis, not to exceed the dollar limit that is set by law. A discretionary matching contribution by the Company is allowed and is equal to a uniform percentage of the amount of salary reduction elected to be deferred, which percentage will be determined each year by the Company. The Company made no contributions to the 401(k) plan during the years ended December 31, 2009, 2008 or 2007.
 
Leases
 
At December 31, 2009, future minimum payments under operating leases are as follows:

Year Ending December 31:	 	 	 	 	
2010	 	$	  2,182	 	
2011	 	 	1,839	 	
2012	 	 	1,072	 	
2013	 	 	601	 	
2014	 	 	—	 	
 	 	 	 	 	
 	 	$	5,694	 	

Minimum lease payments above are net of sublease rentals of $193 and $48 for the years ending December 31, 2010 and 2011, respectively. Rent expense for the years ended December 31, 2009, 2008 and 2007 was $2,014, $2,421 and $2,747, respectively.
 
Contract Manufacturers
 
In the normal course of business, we commit to purchase products from our contract manufacturers to be delivered within the next 90 days. In certain situations, should we cancel an order, we could be required to pay cancellation fees. Such obligations could impact our immediate results of operations but would not materially affect our business.
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Indemnifications
 
Certain of our agreements include limited indemnification provisions for claims from third-parties relating to our intellectual property. It is not possible for us to predict the maximum potential amount of future payments or indemnification costs under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. We have not made any payments under these agreements in the past, and as of December 31, 2009, we have not incurred any material liabilities arising from these indemnification obligations. In the future, however, such obligations could immediately impact our results of operations but are not expected to materially affect our business.
 
Legal Proceedings
 
In addition to the specific issue described above, we are subject to legal matters that arise from time to time in the ordinary course of our business. Although we currently believe that resolving such matters, individually or in the aggregate, will not have a material adverse effect on our financial position, our results of operations, or our cash flows, these matters are subject to inherent uncertainties and our view of these matters may change in the future.

NOTE 9.    	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION	
 
Supplemental disclosure of cash flow information is as follows:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash paid during the year for:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest	 	$	       620	 	 	$	     1,882	 	 	$	     2,618	 	
Income taxes, net of refunds received	 	 	196	 	 	 	218	 	 	 	101	 	
Non-cash investing and financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Acquisitions of property and equipment and other assets under extended payment terms	 	$	2,966	 	 	$	1,815	 	 	$	1,818	 	
Unrealized gain (loss) on available-for-sale securities	 	 	1,003	 	 	 	50	 	 	 	(1,090	)	
Increase in leasehold improvements and deferred rent related to tenant improvement allowances received	 	 	–	 	 	 	140	 	 	 	–	 	

NOTE 10.    	SHAREHOLDERS’ EQUITY	
 
Preferred Stock
 
The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001 per share. The Board of Directors is authorized to fix or alter the rights, preferences, privileges and restrictions granted to, or imposed on, each series of preferred stock. There are no shares of preferred stock issued as of December 31, 2009 and 2008.
 
Common Stock
 
The Company is authorized to issue 250,000,000 shares of common stock with a par value of $0.001 per share. Shareholders of common stock have unlimited voting rights and are entitled to receive the net assets of the Company upon dissolution, subject to the rights of the preferred shareholders.
 
Exchangeable Shares
 
In connection with the Jaldi asset acquisition, Jaldi issued 577,033 exchangeable shares to its shareholders. These exchangeable shares were the economic equivalent of Pixelworks’ common shares, and were exchangeable at any time for Pixelworks common stock on a one-for-one basis. As of January 31, 2008 all exchangeable shares had been exchanged for shares of Pixelworks common stock.
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Reverse Stock Split
 
On June 4, 2008, we effected a one-for-three reverse split of our common stock. The exercise price and number of shares of common stock issuable under our stock incentive plans, as well as the conversion price and number of shares issuable upon conversion of our long-term debt, were proportionately adjusted to reflect the reverse stock split. Basic and diluted weighted average shares outstanding and earnings per share have been calculated to reflect the reverse stock split in all periods presented, as have all disclosures that include a reference to the number of shares of our common stock or a related calculation.
 
Stock Incentive Plans
 
On May 23, 2006, our shareholders approved the adoption of the Pixelworks, Inc. 2006 Stock Incentive Plan (the “2006 Plan”), under which 1,333,333 shares of our common stock could be issued. On May 20, 2008 our shareholders approved an increase to the total number of authorized shares to 2,333,333. On May 19, 2009 our shareholders approved an increase to the total number of authorized shares to 3,483,333. The 2006 Plan replaced our previously existing stock incentive plans including our 1997 Stock Incentive Plan, as amended, our 2001 Nonqualified Stock Option Plan, the Equator Technologies, Inc. 1996 Stock Incentive Plan, as amended, and Equator Technologies, Inc. stand-alone option plans (collectively, “Old Stock Incentive Plans”). Upon adoption of the 2006 Plan, no additional options could be issued under the Old Stock Incentive Plans, although awards previously granted under the Old Stock Incentive Plans remain outstanding according to their original terms. As of December 31, 2009, 1,294,527 shares were available for grant under the 2006 Plan.
 
Stock Options
 
Options granted must generally be exercised while the individual is an employee. In May 2009, the 2006 Plan was modified to reduce the contractual life of newly issued stock awards from ten to six years. Our new hire vesting schedule provides that each option becomes exercisable at a rate of 25% on the first anniversary date of the grant and 2.083% on the last day of every month thereafter for a total of 36 additional increments. Our merit vesting schedule provides that merit-type awards become exercisable monthly over a period of three years.
 
The following is a summary of stock option activity:

 	 	 	 	 	Weighted
	 	
 	 	 	 	 	average
	 	
 	 	Number
	 	 	exercise
	 	
 	 	of shares	 	 	price	 	
 	 	 	 	 	 	 	 	 	
Options outstanding as of December 31, 2008	 	 	1,954,696	 	 	$	  14.66	 	
Granted	 	 	1,139,959	 	 	 	1.40	 	
Exercised	 	 	(6,198	)	 	 	1.48	 	
Forfeited	 	 	(112,656	)	 	 	6.27	 	
Expired	 	 	(487,965	)	 	 	25.92	 	
 	 	 	 	 	 	 	 	 	
Options outstanding as of December 31, 2009	 	 	2,487,836	 	 	$	6.79	 	

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The following table summarizes information about options outstanding as of December 31, 2009:

 	 	Options Outstanding	 	 	Options Exercisable	 	
 	 	 	 	 	Weighted
	 	 	 	 	 	 	 	 	 	 	
 	 	Number
	 	 	average
	 	 	Weighted
	 	 	Number
	 	 	Weighted
	 	
 	 	outstanding as of
	 	 	remaining
	 	 	average
	 	 	exercisable as of
	 	 	average
	 	
Range of
	 	December 31,
	 	 	contractual
	 	 	exercise
	 	 	December 31,
	 	 	exercise
	 	
Exercise prices	 	2009	 	 	life	 	 	price	 	 	2009	 	 	price	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
$ 0.21 - $ 0.80	 	 	798,042	 	 	 	9.14	 	 	$	          0.62	 	 	 	161,113	 	 	$	       0.59	 	
  0.81 -     4.00	 	 	869,624	 	 	 	6.94	 	 	 	2.49	 	 	 	276,551	 	 	 	2.12	 	
  4.01 -     7.00	 	 	201,014	 	 	 	7.14	 	 	 	5.25	 	 	 	152,442	 	 	 	5.35	 	
  7.01 -    10.00	 	 	168,777	 	 	 	5.62	 	 	 	7.46	 	 	 	167,855	 	 	 	7.46	 	
 10.01 -    16.00	 	 	92,734	 	 	 	5.91	 	 	 	14.69	 	 	 	87,264	 	 	 	14.70	 	
 16.01 -    57.00	 	 	357,645	 	 	 	3.89	 	 	 	29.51	 	 	 	357,624	 	 	 	29.51	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
$ 0.21 - $57.00	 	 	2,487,836	 	 	 	7.10	 	 	$	6.79	 	 	 	1,202,849	 	 	$	12.13	 	

During the years ended December 31, 2009, 2008 and 2007 the total intrinsic value of options exercised was $10, $2 and $82, respectively, for which no income tax benefit has been recorded because a full valuation allowance has been provided for our deferred tax assets. As of December 31, 2009, options outstanding had a total intrinsic value of $2,501.
 
Options outstanding that have vested and are expected to vest as of December 31, 2009 are as follows:

 	 	 	 	 	 	 	 	Weighted
	 	 	 	 	
 	 	 	 	 	 	 	 	average
	 	 	 	 	
 	 	 	 	 	Weighted
	 	 	remaining
	 	 	 	 	
 	 	Number of
	 	 	average
	 	 	contractual
	 	 	Aggregate
	 	
 	 	shares	 	 	exercise price	 	 	term	 	 	intrinsic value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Vested	 	 	     1,202,849	 	 	$	       12.13	 	 	 	6.12	 	 	$	653,830	 	
Expected to vest	 	 	1,029,387	 	 	 	1.77	 	 	 	8.07	 	 	 	1,500,286	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,232,236	 	 	$	7.35	 	 	 	7.02	 	 	$	  2,154,116	 	

The fair value of options vested in each of the years ended December 31, 2009, 2008 and 2007 approximates total stock-based compensation expense recorded in our statement of operations during each of the respective years.
 
Restricted Stock Awards
 
During the year ended December 31, 2007 we granted one restricted stock award for 50,000 shares with a fair value of $4.26 per share, no restricted stock awards were granted during the year ended December 31, 2008. During the year ended December 31, 2009 we granted a restricted stock award for 100,000 shares with a fair value of $0.60 per share. As of December 31, 2009 there were 74,999 unvested shares outstanding.
 
Employee Stock Purchase Plan
 
A total of 740,000 shares of common stock have been reserved for issuance under the Employee Stock Purchase Plan (“ESPP”). The number of shares available for issuance under the ESPP increases each year in an amount equal to the lesser of (i) the number of shares of common stock issued pursuant to the ESPP during the immediately preceding fiscal year, (ii) two percent of the outstanding shares of common stock on the first day of the year for which the increase is being made or (iii) a lesser amount determined by the Board of Directors. During the years ended December 31, 2009, 2008 and 2007, we issued 18,326, 23,553, and 75,145 shares, respectively, under the ESPP for proceeds of $11, $45 and $317, respectively. As of December 31, 2009, there were 220,735 shares available for issuance under the ESPP.
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Stock-Based Compensation Expense
 
The fair value of stock-based compensation was determined using the Black-Scholes option pricing model and the following weighted average assumptions:

 	 	Year Ended December 31,	
 	 	2009	 	2008	 	2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock Option Plans:	 	 	 	 	 	 	 	 	 	 	 	 	
Risk free interest rate	 	 	2.24	%	 	 	2.71	%	 	 	4.65	%	
Expected dividend yield	 	 	0	%	 	 	0	%	 	 	0	%	
Expected life (in years)	 	 	5.0	 	 	 	4.8	 	 	 	5.2	 	
Volatility	 	 	84	%	 	 	68	%	 	 	70	%	
Employee Stock Purchase Plan:	 	 	 	 	 	 	 	 	 	 	 	 	
Risk free interest rate	 	 	0.33	%	 	 	2.05	%	 	 	5.09	%	
Expected dividend yield	 	 	0	%	 	 	0	%	 	 	0	%	
Expected life (in years)	 	 	0.5	 	 	 	0.5	 	 	 	0.5	 	
Volatility	 	 	137	%	 	 	85	%	 	 	55	%	
 
The weighted average fair value of options granted during the years ended December 31, 2009, 2008 and 2007 was $0.95, $1.13 and $3.06, respectively. The risk free interest rate is estimated using an average of treasury bill interest rates. The expected dividend yield is zero as we have not paid any dividends to date and do not expect to pay dividends in the future. Expected volatility is estimated based on the historical volatility of our common stock over the expected life of the options as this represents our best estimate of future volatility. For the years ended December 31, 2008 and 2007 and from January 2009 to April 2009, expected term was estimated using expected and historical exercise behavior. Subsequent to the May 2009 amendment of our 2006 Stock Incentive Plan, which shortened the contractual life of newly issued stock options from ten to six years, we have elected to use the “simplified method” to estimate expected term. Under the simplified method, an option’s expected term is calculated as the average of its vesting period and original contractual life.
 
As of December 31, 2009, unrecognized stock-based compensation cost is $1,445, which is expected to be recognized as compensation expense over a weighted average period of 2.6 years.
 
Share Repurchase
 
In September 2007, the Board of Directors authorized the repurchase of up to $10,000 of the Company’s common stock under a share repurchase program that expired in September 2009. We repurchased 228,600 shares for $167 in the first quarter of 2009 and no shares were repurchased during the remainder of 2009. Total cumulative repurchases under the plan were $7,063.
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NOTE 11.    	SEGMENT INFORMATION	
 
We have identified a single operating segment: the design and development of integrated circuits for use in electronic display devices. Substantially all of our assets are located in the U.S.
 
Geographic Information
 
Revenue by geographic region, attributed to countries based on the domicile of the bill-to customer, was as follows:

 	 	Year Ended December 31,	 	
 	 	2009	 	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Japan	 	$	    34,030	 	 	$	    50,408	 	 	$	    60,135	 	
Taiwan	 	 	13,399	 	 	 	10,582	 	 	 	12,053	 	
Korea	 	 	3,182	 	 	 	5,583	 	 	 	8,338	 	
Europe	 	 	3,012	 	 	 	6,639	 	 	 	6,734	 	
China	 	 	2,809	 	 	 	1,734	 	 	 	6,253	 	
U.S.	 	 	2,047	 	 	 	3,872	 	 	 	4,627	 	
Other	 	 	2,614	 	 	 	6,346	 	 	 	7,840	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	61,093	 	 	$	85,164	 	 	$	105,980	 	

Significant Customers
 
The percentage of revenue attributable to our distributors, top five end customers, and individual distributors or end customers that represented more than 10% of revenue in at least one of the periods presented, is as follows:

 	 	Year Ended December 31,	
 	 	2009	 	2008	 	2007	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Distributors:	 	 	 	 	 	 	 	 	 	 	 	 	
All distributors	 	 	51	%	 	 	53	%	 	 	57	%	
Distributor A	 	 	35	%	 	 	32	%	 	 	33	%	
End Customers:(1)	 	 	 	 	 	 	 	 	 	 	 	 	
Top five end customers	 	 	56	%	 	 	55	%	 	 	47	%	
End customer A	 	 	21	%	 	 	24	%	 	 	21	%	
End customer B	 	 	11	%	 	 	9	%	 	 	6	%	

 	 	 	
(1)	 	End customers include customers who purchase directly from us, as well as customers who purchase our products indirectly through distributors.	
 
Each of the following accounts represented 10% or more of total accounts receivable:

 	 	December 31,	
 	 	2009	 	2008	
 	 	 	 	 	 	 	 	 	
Account A	 	 	34	%	 	 	20	%	
Account B	 	 	22	%	 	 	32	%	
Account C	 	 	11	%	 	 	4	%	
Account D	 	 	0	%	 	 	15	%	

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NOTE 12.    	QUARTERLY FINANCIAL DATA (UNAUDITED)	

 	 	Quarterly Period Ended	 	
 	 	March 31	 	 	June 30	 	 	September 30	 	 	December 31	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2009	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue, net	 	$	     10,780	 	 	$	     14,213	 	 	$	     16,732	 	 	$	     19,368	 	
Gross profit	 	 	4,156	 	 	 	6,773	 	 	 	7,341	 	 	 	9,025	 	
Loss from operations	 	 	(4,530	)	 	 	(1,163	)	 	 	(644	)	 	 	(423	)	
Income (loss) before income taxes	 	 	4,280	 	 	 	2,577	 	 	 	(734	)	 	 	(545	)	
Net income (loss)	 	 	5,897	 	 	 	2,219	 	 	 	(890	)	 	 	(771	)	
Net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	0.44	 	 	 	0.17	 	 	 	(0.07	)	 	 	(0.06	)	
Diluted	 	 	0.44	 	 	 	0.16	 	 	 	(0.07	)	 	 	(0.06	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue, net	 	$	     23,976	 	 	$	     20,793	 	 	$	21,479	 	 	$	18,916	 	
Gross profit	 	 	11,671	 	 	 	10,498	 	 	 	11,451	 	 	 	8,581	 	
Income (loss) from operations	 	 	(835	)	 	 	(1,102	)	 	 	441	 	 	 	(2,513	)	
Income (loss) before income taxes	 	 	4,496	 	 	 	(875	)	 	 	8,533	 	 	 	(4,184	)	
Net income (loss)	 	 	6,133	 	 	 	(1,250	)	 	 	8,219	 	 	 	(5,124	)	
Net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	0.41	 	 	 	(0.09	)	 	 	0.57	 	 	 	(0.37	)	
Diluted	 	 	0.41	 	 	 	(0.09	)	 	 	0.56	 	 	 	(0.37	)	

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Item 9.    	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	
 
None.

Item 9A.    	Controls and Procedures.	
 
Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
 
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. Disclosure controls and procedures, no matter how well designed, operated and managed, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Because of the inherent limitations of disclosure controls and procedures, no evaluation of such disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations.
 
We conducted an assessment of the effectiveness of our system of internal control over financial reporting as of December 31, 2009, the last day of our fiscal year. This assessment was based on criteria established in the framework  Internal Control – Integrated Framework,  issued by the Committee of Sponsoring Organizations of the Treadway Commission and included an evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
 
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in their report, which is presented below.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Pixelworks, Inc.:
 
We have audited Pixelworks, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in  Internal Control – Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pixelworks, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Pixelworks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in  Internal Control — Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pixelworks Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 10, 2010 expressed an unqualified opinion on those consolidated financial statements.
 
/s/  KPMG LLP
 
Portland, Oregon
March 10, 2010
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Item 9B.    	Other Information.	
 
Not applicable.
 
PART III

Item 10.    	Directors, Executive Officers and Corporate Governance.	
 
Information concerning the directors, executive officers and corporate governance of the Company is set forth in the Company’s Proxy Statement for its 2010 Annual Meeting of Shareholders (the “2010 Proxy Statement”) to be filed pursuant to Regulation 14A and is incorporated herein by reference.

Item 11.    	Executive Compensation.	
 
Information concerning executive compensation is included in our 2010 Proxy Statement and is incorporated herein by reference.

Item 12.    	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	
 
Information concerning security ownership of certain beneficial owners and management and related stockholder matters is included in our 2010 Proxy Statement and is incorporated herein by reference.

Item 13.    	Certain Relationships and Related Transactions, and Director Independence.	
 
Information concerning certain relationships and related transactions and director independence is included in our 2010 Proxy Statement and is incorporated herein by reference.

Item 14.    	Principal Accounting Fees and Services.	
 
Information concerning principal accounting fees and services is set forth in our 2010 Proxy Statement and is incorporated herein by reference.
 
PART IV

Item 15.    	Exhibits, Financial Statement Schedules.	
 
(a) 1.    Financial Statements.
 
The following financial statements are included in Item 8. Financial Statements and Supplementary Data:

Report of Independent Registered Public Accounting Firm	
Consolidated Balance Sheets as of December 31, 2009 and 2008	
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007	
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	
Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007	
Notes to Consolidated Financial Statements	
 
(a) 2.    Financial Statement Schedules.
 
All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
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(a)	3.    Exhibits.	
 
The exhibits are either filed with this report or incorporated by reference into this report.

Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	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	 	Third Amendment to Sixth Amended and Restated Articles of Incorporation of Pixelworks, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008).	
 	3	.3	 	Second Amended and Restated Bylaws of Pixelworks, Inc.	
 	4	.1	 	Reference is made to Exhibit 3.1 above (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000).	
 	4	.2	 	Third Amended Registration Rights Agreement dated February 22, 2000 (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000).	
 	4	.3	 	Indenture dated May 18, 2004 between Pixelworks, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004).	
 	4	.4	 	Form of 1.75% Convertible Subordinated Debentures due 2024 dated May 18, 2004 (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004).	
 	4	.5	 	Registration Rights Agreement, dated May 18, 2004 among Pixelworks, Inc., Citigroup Global Markets Inc. and D.A. Davidson & Co. (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004).	
 	4	.6	 	Purchase Agreement, dated May 12, 2004 among Pixelworks, Inc. and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q filed on August 9, 2004).	
 	10	.1	 	Form of Indemnity Agreement between Pixelworks, Inc. and each of its Officers and Directors (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000).+	
 	10	.2	 	Pixelworks, Inc. 1997 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed on June 21, 2005).+	
 	10	.3	 	Pixelworks, Inc. 2000 Employee Stock Purchase Plan, As Amended (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8 filed on March 23, 2005).+	
 	10	.4	 	Pixelworks, Inc. 2001 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed on May 31, 2001).+	
 	10	.5	 	Equator Technologies, Inc. 1996 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed on June 17, 2005).+	
 	10	.6	 	Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 6, 2009).+	
 	10	.7	 	Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan, Terms and Conditions of Restricted Stock Awards (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2009).+	
 	10	.8	 	Pixelworks, Inc. Amended and Restated 2006 Stock Incentive Plan, Terms and Conditions of Option Grants (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2009).+	
 	10	.9	 	Summary of Pixelworks Non-Employee Director Compensation.+	
 	10	.10	 	Chair and Board Service Agreement dated and effective December 12, 2006, by and between Allen Alley and Pixelworks, Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed on March 12, 2007).+	

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Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	10	.11	 	CEO Transition Agreement dated and effective December 12, 2006, by and between Allen Alley and Pixelworks, Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed on March 12, 2007).+	
 	10	.12	 	Executive Employment Agreement dated and effective March 31, 2008, by and between Bruce Walicek and Pixelworks, Inc (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2008).+	
 	10	.13	 	2009 Executive Employment Agreement dated May 11, 2009 and effective April 1, 2009, by and between Bruce Walicek and Pixelworks, Inc.+	
 	10	.14	 	Pixelworks, Inc. 2008 Senior Management Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 11, 2008).+	
 	10	.15	 	Form of Pixelworks, Inc. Senior Management Bonus Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed December 31, 2009).+	
 	10	.16	 	Offer letter dated June 22, 2007 between Pixelworks, Inc. and Steven L. Moore (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007).+	
 	10	.17	 	Change of Control Severance Agreement dated November 20, 2008, by and between Pixelworks, Inc. and Steven L. Moore (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed November 20, 2008).+	
 	10	.18	 	Change of Control Severance Agreement dated May 11, 2009 and effective April 1, 2009, by and between Pixelworks, Inc. and Steven L. Moore.+	
 	10	.19	 	Change of Control Severance Agreement dated November 20, 2008, by and between Pixelworks, Inc. and Hongmin (Bob) Zhang (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed November 20, 2008).+	
 	10	.20	 	Separation Agreement dated and effective February 11, 2009, by and between Anthony Simon and Pixelworks, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2009).+	
 	10	.21	 	Change of Control Severance Agreement dated November 22, 2008, by and between Pixelworks, Inc. and Tzoyao (T) Chan.+	
 	10	.22	 	Intellectual Property Sublicense Agreement dated March 30, 1999 between VAutomation Incorporated and Pixelworks, Inc. (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000).	
 	10	.23	 	License Agreement dated February 22, 2000 between Pixelworks, Inc. and InFocus Systems, Inc. (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 declared effective May 19, 2000).	
 	10	.24	 	Office Lease dated June 20, 2005 and commencing March 1, 2006, by and between Pixelworks, Inc. and Union Bank of California as Trustee for Quest Group Trust VI (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed March 12, 2007).	
 	10	.25	 	Office Lease dated October 2, 2007 and commencing November 1, 2007 by and between Pixelworks, Inc. and Union Bank of California as Trustee for Quest Group Trust VI (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed March 12, 2008).	
 	10	.26	 	Amendment to Office Lease dated October 2, 2007 and commencing November 1, 2007 by and between Pixelworks, Inc. and Union Bank of California as Trustee for Quest Group Trust IV (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2008).	
 	10	.27	 	Office Lease Agreement dated December 2005, by and between CA-The Concourse Limited Partnership and Pixelworks, Inc. (incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed March 13, 2006).	
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Exhibit
	 	 	
Number	 	Description	
 	 	 	 	 	
 	10	.28	 	Office Lease dated April 12, 2001, by and between Equator Technologies, Inc. and Pike Street Delaware, Inc. (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed August 9, 2005).	
 	10	.29	 	Amendment No. 1 to Office Lease dated July 7, 2005, by and between Equator Technologies, Inc. and 520 Pike Street, Inc. (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q filed November 7, 2005).	
 	10	.30	 	Office Lease Agreement dated September 10, 2008 and commencing December 1, 2008 by and between Pixelworks, Inc. and Durham Plaza, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2008).	
 	21	 	 	Subsidiaries of Pixelworks, Inc.	
 	23	 	 	Consent of KPMG LLP.	
 	31	.1	 	Certification of Chief Executive Officer.	
 	31	.2	 	Certification of Chief Financial Officer.	
 	32	.1*	 	Certification of Chief Executive Officer.	
 	32	.2*	 	Certification of Chief Financial Officer.	

 	 	 	
+	 	Indicates a management contract or compensation arrangement.	
 	 	 	
*	 	Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise stated in such filing.	
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Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
PIXELWORKS, INC.

 	By: 	/s/  Bruce A. Walicek	
Bruce A. Walicek
President and
Chief Executive Officer
 
Dated: March 10, 2010
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	 	Title	 	Date	

/s/  Bruce A. Walicek

Bruce A. Walicek	 	President and
Chief Executive Officer	 	March 10, 2010	
 	 	 	 	 	
/s/  Steven L. Moore

Steven L. Moore	 	Vice President, Chief Financial
Officer, Secretary and Treasurer	 	March 10, 2010	
 	 	 	 	 	
/s/  Allen H. Alley

Allen H. Alley	 	Chairman of the Board	 	March 10, 2010	
 	 	 	 	 	
/s/  Mark A. Christensen

Mark A. Christensen	 	Director	 	March 10, 2010	
 	 	 	 	 	
/s/  James R. Fiebiger

James R. Fiebiger	 	Director	 	March 10, 2010	
 	 	 	 	 	
/s/  C. Scott Gibson

C. Scott Gibson	 	Director	 	March 10, 2010	
 	 	 	 	 	
/s/  Daniel J. Heneghan

Daniel J. Heneghan	 	Director	 	March 10, 2010	
 	 	 	 	 	
/s/  Richard L. Sanquini

Richard L. Sanquini	 	Director	 	March 10, 2010	
 	 	 	 	 	
/s/  Bruce A. Walicek

Bruce A. Walicek	 	Director	 	March 10, 2010	

Exhibit 3.3
SECOND AMENDED AND RESTATED BYLAWS
OF
PIXELWORKS, INC.
ARTICLE I
OFFICES
     1.1 Principal Office. The location of the principal office of the Corporation shall be as designated by the Board of Directors. The Corporation may have such other offices as the Board of Directors may designate or as the business of the Corporation may from time to time require.
     1.2 Registered Office. The registered office of the Corporation required by the Oregon Business Corporation Act to be maintained in the State of Oregon may be, but need not be, identical with the principal office in the State of Oregon, and the address of the registered office may be changed from time to time by the Board of Directors.
ARTICLE II
SHAREHOLDERS
     2.1 Annual Meeting. The annual meeting of the shareholders shall be held in May or June of each year, unless a different date and time are fixed by the Board of Directors and stated in the notice of the meeting, beginning with the year 2000. The failure to hold an annual meeting at the time stated herein shall not affect the validity of any corporate action.
     2.2 Special Meeting. Special meetings of the shareholders may be called by the President or by the Board of Directors and shall be called by the President (or in the event of absence, incapacity, or refusal of the President, by the Secretary or any other officer) at the request of the holders of not less than one-tenth of all the outstanding shares of the Corporation entitled to vote at the meeting. The requesting shareholders shall sign, date, and deliver to the Secretary a written demand describing the purpose or purposes for holding the special meeting.
     2.3 Place of Meetings. Meetings of the shareholders shall be held at the principal business office of the Corporation or at such other place, within or without the State of Oregon, as may be determined by the Board of Directors.
     2.4 Notice of Meetings. Written notice stating the date, time, and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be mailed to each shareholder entitled to vote at the meeting at the shareholder’s address shown in the Corporation’s current record of shareholders, with postage thereon prepaid, not less than 10 nor more than 60 days before the date of the meeting.
     2.5 Waiver of Notice. A shareholder may at any time waive any notice required by law, the Articles of Incorporation or these Bylaws. The waiver must be in writing, be signed by the

 
shareholder entitled to the notice, and be delivered to the Corporation for inclusion in the minutes for filing with the corporate records. A shareholder’s attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. The shareholder’s attendance also waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.
     2.6 Record Date
          (a) For the purpose of determining shareholders entitled to notice of a shareholders’’ meeting, to demand a special meeting, or to vote or to take any other action, the Board of Directors may fix a future date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days before the meeting or action requiring a determination of shareholders. The record date shall be the same for all voting groups.
          (b) A determination of shareholders entitled to notice of or to vote at a shareholders’’ meeting is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.
          (c) If a court orders a meeting adjourned to a date more than 120 days after the date fixed for the original meeting, it may provide that the original record date continue in effect or it may fix a new record date.
     2.7 Shareholders List for Meeting. After the record date for a shareholders’ meeting is fixed by the Board of Directors, the Secretary of the Corporation shall prepare an alphabetical list of the names of all its shareholders entitled to notice of the shareholders’ meeting. The list must be arranged by voting group and within each voting group by class or series of shares and show the address of and number of shares held by each shareholder. The shareholders’ list must be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the Corporation’s principal office or at a place identified in the meeting notice in the city where the meeting will be held. The Corporation shall make the shareholders’ list available at the meeting, and any shareholder or the shareholder’s agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Refusal or failure to prepare or make available the shareholders’ list does not affect the validity of action taken at the meeting.
     2.8 Quorum; Adjournment. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action in that matter. A majority of shares represented at the meeting, although less than a quorum, may adjourn the meeting from time to time to a different time and place without further notice to any shareholder of any adjournment. At such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at

 
the meeting originally held. Once a share is represented for any purpose at a meeting, it shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting; unless a new record date is set for the adjourned meeting.
     2.9 Voting Requirements: Action Without Meeting. Unless otherwise provided in the Articles of Incorporation, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. If a quorum exists, action on a matter, other than the election of directors, is approved if the votes cast by the shares entitled to vote favoring the action exceed the votes cast opposing the action, unless a greater number of affirmative votes is required by law or the Articles of Incorporation. If a quorum exists, directors are elected by a plurality of the votes cast by the shares entitled to vote unless otherwise provided in the Articles of Incorporation. No cumulative voting for directors shall be permitted unless the Articles of Incorporation so provide. Action required or permitted by law to be taken at a shareholders’ meeting may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by all the shareholders entitled to vote on the action and delivered to the Corporation for inclusion in the minutes for filing with the corporate records. Action taken under this section is effective when the last shareholder signs the consent, unless the consent specifies an earlier or later effective date. If the law requires that notice of proposed action be given to nonvoting shareholders and the action is to be taken by unanimous consent of the voting shareholders, the Corporation must give its nonvoting shareholders written notice of the proposed action at least 10 days before the action is taken. The notice must contain or be accompanied by the same material that, under the Oregon Business Corporation Act, would have been required to be sent to nonvoting shareholders in a notice of meeting at which the proposed action would have been submitted to the shareholders for action.
     2.10 Proxies.
          (a) A shareholder may vote shares in person or by proxy by signing an appointment, either personally or by the shareholder’s attorney-in-fact. An appointment of a proxy shall be effective when received by the Secretary or other officer of the Corporation authorized to tabulate votes. An appointment is valid for 11 months unless a longer period is provided in the appointment form. An appointment is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest that has not been extinguished.
          (b) The death or incapacity of a shareholder appointing a proxy shall not affect the right of the Corporation to accept the proxy’s authority unless notice of the death or incapacity is received by the Secretary or other officer authorized to tabulate votes before the proxy exercises the proxy’s authority under the appointment.
     2.11 Corporation’s Acceptance of Votes.
          (a) If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to

 
accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder.
          (b) If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of a shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if:
               (i) The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity;
               (ii) The name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
               (iii) The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;
               (iv) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory’s authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; or
               (v) Two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners.
          (c) The Corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory’s authority to sign for the shareholder.
          (d) The shares of a corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation; provided, however, a corporation may vote any shares, including its own shares, held by it in a fiduciary capacity.
          (e) The Corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this provision shall not be liable in damages to the shareholder for the consequences of the acceptance or rejection. Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this provision is valid unless a court of competent jurisdiction determines otherwise.

 
     2.12 Notice of Business to be Conducted at Meeting. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before an annual meeting by a shareholder.
     For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made.
     A shareholder’s notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business, (c) the class and number of shares of stock of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2.12.
     The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2.12 and if the Chairman should so determine, the Chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.
ARTICLE III
BOARD OF DIRECTORS
     3.1 Duties. All corporate powers shall be exercised by or under the authority of the Board of Directors and the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
     3.2 Number and Qualification. The number of directors of the Corporation shall be not less than three nor more than twelve, and within such limits, the exact number shall be fixed and increased or decreased from time to time by resolution of the Board of Directors. If the number of directors is fixed by the Board of Directors at seven or less, the directors shall hold office until

 
the next annual meeting of shareholders and until their successors have been elected and qualified. If the number of directors is fixed by the Board of Directors at eight or more, the directors shall be divided into three classes designated Class I, Class II and Class III, each class to be as nearly equal in number as possible. At the next annual meeting of shareholders following that designation (“First Meeting”), directors of all three classes shall be elected. The term of office of Class I directors shall expire at the first annual meeting of shareholders following their election. The terms of Class II directors shall expire at the second annual meeting of shareholders following their election. The terms of the Class III directors shall expire at the third annual meeting of shareholders following their election. At each annual meeting of shareholders after the First Meeting, each class of directors elected to succeed those directors whose terms expire shall be elected to serve for three-year terms and until their successors are elected and qualified, so that the term of one class of directors will expire each year. When the number of directors is changed within the limits provided herein, any newly created directorships, or any decrease in directorships, shall be so apportioned among the classes as to make all classes as nearly equal as possible, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent directors. Directors need not be residents of the State of Oregon or shareholders of the Corporation.
     3.3 Chairman of the Board of Directors. The directors may elect a director to serve as Chairman of the Board of Directors to preside at all meetings of the Board of Directors and to fulfill any other responsibilities delegated by the Board of Directors.
     3.4 Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this Section 3.4 immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Oregon, for the holding of additional regular meetings without other notice than the resolution.
     3.5 Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President or any director. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Oregon, as the place for holding any special meeting of the Board of Directors called by them.
     3.6 Notice. Notice of the date, time, and place of any special meeting of the Board of Directors shall be given at least three days prior to the meeting by any means provided by law. If mailed, notice shall be deemed to be given upon deposit in the United States mail addressed to the director at the director’s business address, with postage thereon prepaid. If by telegram, notice shall be deemed to be given when the telegram is delivered to the telegraph company. Notice by all other means shall be deemed to be given when received by the director or a person at the directors business or residential address whom the person giving notice reasonably believes will deliver or report the notice to the director within 24 hours. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

 
     3.7 Waiver of Notice. A director may at any time waive any notice required by law, the Articles of Incorporation, or these Bylaws. Unless a director attends or participates in a meeting, a waiver must be in writing, must be signed by the director entitled to notice, must specify the meeting for which notice is waived, and must be filed with the minutes or corporate records.
     3.8 Quorum. A majority of the number of directors fixed by Section 3.2 shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.
     3.9 Manner of Acting.
          (a) The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a different number is provided by law, the Articles of Incorporation, or these Bylaws.
          (b) Members of the Board of Directors may hold a board meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at the meeting.
          (c) Any action that is required or permitted to be taken by the directors at a meeting may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the directors entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier or later time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the directors, shall be filed with the minutes of the Corporation.
     3.10 Vacancies. Any vacancy, including a vacancy resulting from an increase in the number of directors, occurring on the Board of Directors may be filled by the shareholders, the Board of Directors, or the affirmative vote of a majority of the remaining directors if less than a quorum of the Board of Directors, or by a sole remaining director. If the vacant office is filled by the shareholders and was held by a director elected by a voting group of shareholders, then only the holders of shares of that voting group are entitled to vote to fill the vacancy. Any directorship not so filled by the directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of shareholders and until a successor shall be duly elected and qualified. A vacancy that will occur at a specific later date, by reason of a resignation or otherwise, may be filled before the vacancy occurs, and the new director shall take office when the vacancy occurs.
     3.11 Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

 
     3.12 Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors or a committee of the Board of Directors shall be presumed to have assented to the action taken (a) unless the director’s dissent to the action is entered in the minutes of the meeting, (b) unless a written dissent to the action is filed with the person acting as the secretary of the meeting before the adjournment thereof or forwarded by certified or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting or (c) unless the director objects at the meeting to the holding of the meeting or transacting business at the meeting. The right to dissent shall not apply to a director who voted in favor of the action.
     3.13 Director Conflict of Interest
          (a) A transaction in which a director of the Corporation has a direct or indirect interest shall be valid notwithstanding the director’s interest in the transaction if the material facts of the transaction and the director’s interest are disclosed or known to the Board of Directors or a committee thereof and it authorizes, approves, or ratifies the transaction by a vote or consent sufficient for the purpose without counting the votes or consents of directors with a direct or indirect interest in the transaction; or the material facts of the transaction and the director’s interest are disclosed or known to shareholders entitled to vote and they, voting as a single group, authorize, approve, or ratify the transaction by a majority vote; or the transaction is fair to the Corporation.
          (b) A conflict of interest transaction may be authorized, approved, or ratified if it receives the affirmative vote of a majority of directors on the Board of Directors or a committee thereof who have no direct or indirect interest in the transaction. If a majority of such directors vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action.
          (c) A conflict of interest transaction may be authorized, approved, or ratified by a majority vote of shareholders entitled to vote thereon. Shares owned by or voted under the 8 - control of a director or an entity controlled by a director who has a direct or indirect interest in the transaction are entitled to vote with respect to a conflict of interest transaction. A majority of the shares, whether or not present, that are entitled to be counted in a vote on the transaction constitutes a quorum for the purpose of authorizing, approving, or ratifying the transactions.
          (d) A director has an indirect interest in a transaction if (i) another entity in which the director has a material financial interest or in which the director is a general partner is a party to the transaction or (ii) another entity of which the director is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the Board of Directors.
     3.14 Removal. All or any number of the directors of the Corporation may be removed only for cause and at a meeting of shareholders called expressly for that purpose, by the vote of 75 percent of the votes then entitled to be cast for the election of directors. Cause for removal shall be deemed to exist only if the director whose removal is proposed has engaged in criminal conduct or has engaged in fraudulent or dishonest conduct or gross abuse of authority or discretion with respect to the Corporation. At any meeting of shareholders at which one or more directors are removed, a majority of votes then entitled to be cast for the election of directors

 
may fill any vacancy created by such removal. If any vacancy created by removal of a director is not filled by the shareholders at the meeting at which the removal is effected, such vacancy may be filled by a majority vote of the remaining directors.
     3.15 Resignation. Any director may resign by delivering written notice to the Board of Directors, its chairperson, or the Corporation. Such resignation shall be effective at the earliest of the following, unless the notice specifies a later effective date, (a) on receipt, (b) five days after its deposit in the United States mails, if mailed postpaid and correctly addressed, or (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by addressee. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the Board of Directors.
     3.16 Nominations for Election to Board of Directors. Only persons who are nominated in accordance with the procedures set forth in this Section 3.16 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.16.
     Such nominations, other than those made by or at the direction of the Board of Directors shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days’ notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made.
     Such shareholder’s notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice, (i) the name and address, as they appear on the Corporation’s books, of such shareholder, and (ii) the class and number of shares of stock of the Corporation which are beneficially owned by such shareholder.
     At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee.

 
     No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.16. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the Chairman should so determine, the Chairman shall so declare to the meeting and the defective nomination shall be disregarded.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
     4.1 Designation of Executive Committee. The Board of Directors may designate two or more directors to constitute an executive committee. The designation of an executive committee, and the delegation of authority to it, shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. No member of the executive committee shall continue to be a member thereof after ceasing to be a director of the Corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the executive committee, to fill vacancies thereon, to change any member thereof, and to change the functions or terminate the existence thereof. The creation of the executive committee and the appointment of members to it shall be approved by a majority of the directors in office when the action is taken, unless a greater number is required by the Articles of Incorporation or these Bylaws.
     4.2 Powers of Executive Committee. During the interval between meetings of the Board of Directors , and subject to such limitations as may be imposed by resolution of the Board of Directors, the executive committee may have and may exercise all the authority of the Board of Directors in the management of the Corporation, provided that the committee shall not have the authority of the Board of Directors with respect to the following matters: authorizing distributions; approving or proposing to the shareholders actions that are required to be approved by the shareholders under the Articles of Incorporation or these Bylaws or by law; filling vacancies on the Board of Directors or any committee thereof; amending the Articles of Incorporation; adopting, amending, or repealing bylaws; approving a plan of merger not requiring shareholder approval; authorizing or approving a reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; authorizing or approving the issuance or sale or contract for sale of shares or determining the designation and relative rights, preferences, and limitations of a class or series of shares except within limits specifically prescribed by the Board of Director.
     4.3 Procedures; Meetings; Quorum.
          (a) The Board of Directors shall appoint a chairperson from among the members of the executive committee and shall appoint a secretary who may, but need not, be a member of the executive committee. The chairperson shall preside at all meetings of the executive committee and the secretary of the executive committee shall keep a record of its acts and proceedings, which shall be filed with the minutes of the Corporation.

 
          (b) Regular meetings of the executive committee, of which no notice shall be necessary, shall be held on such days and at such places as shall be fixed by resolution adopted by the executive committee. Special meetings of the executive committee shall be called at the request of the President or of any member of the executive committee, and shall be held upon such notice as is required by these Bylaws for special meetings of the Board of Directors.
          (c) Attendance of any member of the executive committee at a meeting shall constitute a waiver of notice of the meeting. A majority of the executive committee, from time to time, shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the executive committee. Members of the executive committee may hold a meeting of such committee by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meeting shall constitute presence in person at the meeting.
          (d) Any action that is required or permitted to be taken at a meeting of in the executive committee may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all members of the executive committee entitled to vote on the matter. The action shall be effective on the date when the last signature is placed on the consent or at such earlier or later time as is set forth therein. Such consent, which shall have the same effect as a unanimous vote of the members of the executive committee, shall be filed with the minutes of the Corporation.
          (e) The Board of Directors may approve a reasonable fee for the members of the executive committee as compensation for attendance at meetings of the executive committee.
     4.4 Other Committees. By the approval of a majority of the directors when the action is taken (unless a greater number is required by the Articles of Incorporation), the Board of Directors, by resolution, may create one or more additional committees, appoint directors to serve on them, and define the duties of such committee or committees. Each such committee shall have two or more members, who shall serve at the pleasure of the Board of Directors. Such additional committee or committees, shall not have the powers proscribed in Section 4.2.
ARTICLE V

OFFICERS
     5.1 Number. The officers of the Corporation shall be a President and a Secretary. Such other officers and assistant officers as are deemed necessary or desirable may be appointed by the Board of Directors and shall have such powers and duties prescribed by the Board of Directors or the officer authorized by the Board of Directors to prescribe the duties of other officers. A duly appointed officer may appoint one or more officers or assistant officers if such appointment is authorized by the Board of Directors. Any two or more offices may be held by the same person.
     5.2 Appointment and Term of Office. The officers of the Corporation shall be appointed annually by the Board of Directors at the first meeting of the Board of Directors held after the

 
annual meeting of the shareholders. If the officers shall not be appointed at the meeting, a meeting shall be held as soon thereafter as is convenient for such appointment of officers. Each officer shall hold office until a successor shall have been duly appointed and qualified or until the officer’s death, resignation, or removal.
     5.3 Qualification. An officer need not be a director, shareholder, or a resident of the State of Oregon.
     5.4 Resignation and Removal. An officer may resign at any time by delivering notice of such resignation to the Corporation. A resignation is effective on receipt unless the notice specifies a later effective date. If the Corporation accepts a specified later effective date, the Board of Directors may fill the pending vacancy before the effective date, but the successor may not take office until the effective date. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the Board of Directors. Any officer appointed by the Board of Directors may be removed at any time with or without cause. Appointment of an officer shall not of itself create contract rights. Removal or resignation of an officer shall not affect the contract rights, if any, of the Corporation or the officer.
     5.5 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the Board of Directors for the unexpired portion of the term.
     5.6 President. The President shall be the chief executive officer of the Corporation and shall be in general charge of its business and affairs, subject to the control of the Board of Directors. The President shall preside at all meetings of shareholders and at all meetings of directors (unless there is an acting Chairman of the Board presiding at the meeting). The President may execute on behalf of the Corporation all contracts, agreements, stock certificates, and other instruments. The President shall from time to time report to the Board of Directors all matters within the President’s knowledge affecting the Corporation that should be brought to the attention of the Board of Directors. The President shall vote all shares of stock in other corporations owned by the Corporation and is empowered to execute proxies, waivers of notice, consents, and other instruments in the name of the Corporation with respect to such stock. The President shall perform other duties assigned by the Board of Directors.
     5.7 Vice Presidents. In the absence of the President or in the event of the President’s death or inability or refusal to act, the Vice President (or, in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election), if any, shall perform the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President shall perform other duties assigned by the President or by the Board of Directors.
     5.8 Secretary. The Secretary shall prepare the minutes of all meetings of the directors and shareholders, shall have custody of the minute books and other records pertaining to the corporate business, and shall be responsible for authenticating the records of the Corporation. The Secretary shall countersign all instruments requiring the seal of the Corporation and shall

 
perform other duties assigned by the Board of Directors. In the event no Vice President exists to succeed to the President under the circumstances set forth in Section 5.7 above, the Secretary shall make such succession.
     5.9 Assistant Secretaries. The Assistant Secretaries, when authorized by the Board of Directors or these Bylaws, may sign, with the President or Vice President, certificates for shares of the Corporation the issuance of which shall have been authorized by resolution of the Board of Directors. The Assistant Secretaries shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries shall, in general, perform such duties as shall be specifically assigned to them in writing by the President or the Board of Directors.
     5.10 Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary because the officer is also a director of the Corporation.
ARTICLE VI
ISSUANCE OF SHARES
     6.1 Certificates for Shares.
          (a) Certificates representing shares of the Corporation shall be in a form determined by the Board of Directors. Such certificates shall be signed, either manually or in facsimile, by two officers of the Corporation, at least one of whom shall be the President or a Vice President, and may be sealed with the seal of the Corporation or a facsimile thereof. All certificates for shares shall be consecutively numbered or otherwise identified.
          (b) Every certificate for shares of stock that are subject to any restriction on transfer pursuant to the Articles of Incorporation, these Bylaws, applicable securities laws, agreements among or between shareholders, or any agreement to which the Corporation is a party shall have conspicuously noted on the face or back of the certificate either (i) the full text of the restriction or (ii) a statement of the existence of such restriction and that the Corporation retains a copy of the restriction. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either (i) the full text of the designations, relative rights, preferences, and limitations of the shares of each class and series authorized to be issued and the authority of the Board of Directors to determine variations for future series or (ii) a statement of the existence of such designations, relative rights, preferences, and limitations and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge.
          (c) The name and mailing address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. Each shareholder shall have the duty to notify the Corporation of his or her mailing address. All certificates surrendered to the Corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for a like number of

 
shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors prescribes.
     6.2 Transfer of Shares. A transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by the holder’s legal representative, who shall furnish proper evidence of authority to transfer, or by the holder’s attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation. The person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes.
     6.3 Transfer Agent and Registrar. The Board of Directors may from time to time appoint one or more transfer agents and one or more registrars for the shares of the Corporation, with such powers and duties as the Board of Directors determines by resolution. The signatures of officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or by a registrar other than the Corporation itself or an employee of the Corporation.
     6.4 Officer Ceasing to Act. If the person who signed a share certificate, either manually or in facsimile, no longer holds office when the certificate is issued, the certificate is nevertheless valid.
ARTICLE VII
CONTRACTS, LOANS, CHECKS, AND OTHER INSTRUMENTS
     7.1 Contracts. The Board of Directors may authorize any officer or officers and agent or agents to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.
     7.2 Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances.
     7.3 Checks: Drafts. All checks, drafts, or other orders for the payment of money and notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers and agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.
     7.4 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may select.
ARTICLE VIII

MISCELLANEOUS PROVISIONS
     8.1 Seal. The Board of Directors from time to time may provide for a seal of the Corporation, which shall be circular in form and shall have inscribed thereon the name of the Corporation, the state of incorporation and the words “Corporate Seal.”

 
     8.2 Severability. Any determination that any provision of these Bylaws is for any reason inapplicable, invalid, illegal, or otherwise ineffective shall not affect or invalidate any other provision of these Bylaws.
ARTICLE IX
AMENDMENTS
These Bylaws may be altered, amended, or repealed and new bylaws may be adopted by the Board of Directors at any regular or special meeting, subject to repeal or change by action of the shareholders of the Corporation.
Adopted: July 29, 2009.

Exhibit 10.9
Summary of Pixelworks Non-Employee Director Compensation
Cash compensation:
 	 	 	 	 	
Board Member Retainer	 	 	$27,000 per year	 	
 	 	 	 	
Audit Committee Retainer	 	 	$8,000 per year, regular member
$16,000 per year, Chair	 	
 	 	 	 	
Compensation Committee Retainer	 	 	$5,000 per year, regular member
$10,000 per year, Chair	 	
 	 	 	 	
Nominating and Governance
Committee Retainer	 	 	$3,000 per year, regular member
$6,000 per year, Chair	
Cash compensation is paid in quarterly increments.
Stock Compensation Plan:
6,000 shares per year (measured from annual meeting to annual meeting), policy to begin with term in office beginning with the 2009 annual meeting. New non-employee Board members will receive an initial recruitment grant of 10,000 shares.
Other:
Mr. Alley’s director compensation is determined by the CEO Transition Agreement dated and effective December 12, 2006, by and between Allen Alley and Pixelworks, Inc. (Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed on March 12, 2007).

Exhibit 10.13
PIXELWORKS, INC.
2009 EXECUTIVE EMPLOYMENT AGREEMENT
     This Agreement (the “Agreement”) is made and entered into effective as of April 1, 2009 (the “Effective Date”), by and between Bruce Walicek (the “Executive”) and Pixelworks, Inc., an Oregon corporation (the “Company”).
     Executive has served as the Company’s CEO from January 1, 2008. This Agreement defines the terms of his employment from April 1, 2009.
AGREEMENT
     In consideration of the mutual covenants herein contained, the parties agree as follows:
     1. Employment. The Company employs Executive as Chief Executive Officer.
          (a) Compensation and Options. Company employs Executive at the base salary defined in Exhibit A, with the bonus plan defined in Exhibit A, and with the option award defined in Exhibit A. The Company shall pay all bonus payments to Executive no later than March 15 of the year following the year in which a bonus is earned.
          (b) At Will. Executive acknowledge that the Executive’s employment is and shall continue to be at-will, as defined under applicable law. Company or Executive may terminate this Agreement by notice pursuant to Section 3(b) hereof. If the Executive’s employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be established under the Company’s then existing employee benefit plans or policies at the time of termination, subject to Section 14(b) hereof.
          (c) Duties. Executive shall perform such officer level duties and have such officer level authority and responsibility as is usual and customary for a Chief Executive Officer, plus any additional officer level duties as may reasonably be assigned from time to time by the Board, including but not limited to providing services as an officer and/or as a member of the boards of directors to one or more of the Company’s subsidiaries or affiliates. Executive shall perform the duties and carry out the responsibilities assigned to Executive, to the best of his ability, in a trustworthy, businesslike and efficient manner for the purpose of advancing the business of the Company and shall comply with the Company’s policies and procedures, as generally in effect from time to time, in all material respects. Except as otherwise approved by the Board in writing, Executive shall devote substantially all of his business time to the performance of his duties under this Agreement.
     2. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings:
PAGE 1 – Employment Agreement

 
     1.
          (a) Cause. “Cause” shall mean Executive engaged in any one or more of the following: (i) a material act of dishonesty, fraud, misconduct , or willful violation of any material law, ethical rule or fiduciary duty that is in connection with Executive’s responsibilities as an Executive of the Company; (ii) acts constituting a felony or moral turpitude which the Board reasonably believes has had or will have a material detrimental effect on the Company’s reputation or business; or (iii) repeated willful failure to perform Executive’s duties as an employee of the Company and the failure to effect such cure within thirty (30) days after written notice of such violation or breach is given to Executive; or (iv) the willful violation of any material Company policy or procedure, or breach of any material provision of this Agreement or other agreement with the Company, and if such violation or breach is susceptible of cure, the failure to effect such cure within thirty (30) days after written notice of such violation or breach is given to Executive.
          (b) Change of Control. “Change of Control” shall mean the occurrence of any of the following events:
               (i) the approval by shareholders of the Company of a merger or consolidation of the Company with any other corporation, or of a subsidiary of the Company with any other corporation, other than a merger or consolidation which would result in effective voting control over the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;
               (ii) the approval by the shareholders of the Company of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets;
               (iii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities; or
               (iv) a change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors who are either identified in (A) or identified as their successors elected under this clause (B).
          (c) Good Reason Event. A “Good Reason Event” shall be any of the following: (i) without the Executive’s express written consent, a material diminution of the Executive’s duties, authority or responsibilities; (ii) without the Executive’s express written
PAGE 2 – Employment Agreement

 
consent, a reduction by the Company of the Executive’s base salary; (iii) without the Executive’s express written consent, the imposition of a requirement that Executive’s primary place of employment be at a facility or a location more than fifty (50) miles from the Executive’s current work location, provided that such requirement to relocate materially increases the Executive’s commute; or (iv) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 7 below.
          (d) Involuntary Termination. “Involuntary Termination” shall mean (i) any termination of the Executive’s employment by the Company which is not effected for valid Cause; or (ii) any termination by the Executive for Good Reason.
          (e) Termination Date. “Termination Date” shall mean the effective date of any notice of termination delivered by one party to the other hereunder.
     2. Term and Termination of Agreement.
          (a) Term. Mr. Walicek’s term in office, and measurement of any seniority-dependent benefits the Company may from time to time make available, shall be measured from January 1, 2008. This Agreement shall continue until terminated by either party as provided under this Section 3.
          (b) Notice of Termination; Effective Date.
               (i) By Company. Company may terminate Executive’s employment without Cause on thirty (30) days’ notice or, at its election, may pay Executive in lieu of any required notice. Company may terminate Executive’s employment immediately for Cause. If the Company claims Cause, the Company’s notice shall set forth the basis for the “Cause.”
               (ii) By Executive With Good Reason. Executive may terminate his employment for Good Reason by providing written notice of good reason termination within thirty (30) days after Executive has received Notice, or has actual knowledge, whichever is first, of the initial occurrence of the alleged Good Reason Event (“Notice of Good Reason Termination”). His Notice of Good Reason Termination must (x) identify the Good Reason Event and the date of its initial existence; (y) invite the Company to remedy the Good Reason Event, and (z) state the Executive’s intention to terminate his employment for Good Reason as of a Termination Date no more than ten (10) days following the expiration of the Company’s cure period described in the next sentence. Before a Termination for Good Reason shall be effective, the Company shall have a period of thirty (30) days from the date it receives Executive’s Notice of Good Reason Termination to remedy the conditions claimed to give rise to a Good Reason Event. If the Company fails to remedy the conditions claimed to give rise to a Good Reason Event by the end of the thirty (30) day cure period, Executive’s Termination for Good Reason will be effective on the Termination Date stated in the Notice of Good Reason Termination.
               (iii) By Executive, Other than for Good Reason. Executive may voluntarily terminate Executive’s employment without Good Reason upon notice of termination to Company, which notice identifies the Termination Date. A voluntary termination will be effective on the identified Termination Date.
PAGE 3 – Employment Agreement

 
     3. Termination Benefits on Involuntary Termination. If Executive’s employment has terminated as a result of an Involuntary Termination, and if Executive signs and does not revoke the release of claims with the Company (in a form acceptable to the Company) pursuant to Section 8 hereof (the “Release”), Executive shall be entitled to the following Involuntary Termination benefits as of the Termination Date:
          (a) Equity Acceleration within a Control Change Window. If the Termination Date is within a Control Change Window (as defined below), (i) fifty percent (50%) of the shares underlying the options that are unvested as of the Termination Date that were granted to Executive shall vest so that Executive will be treated as being vested in and able to exercise, pursuant to the terms thereof, fifty percent (50%) of the shares underlying such unvested options; and (ii) fifty percent (50%) of the restricted stock units that are unvested as of the Termination Date that were granted to Executive shall vest so that the Company’s right of repurchase shall lapse with respect to fifty (50%) of the shares underlying such unvested restricted stock units, as of the later of the Termination Date or the Change of Control. The particular fifty percent (50%) will be the fifty (50%) that, in the ordinary course absent any termination of Executive’s employment, would first have become vested. A “Control Change Window” is defined as the period between (x) the earlier of: (i) a Change of Control itself or (ii) the signing of a definitive agreement for a Change of Control that leads to the Change of Control contemplated in that agreement within twelve (12) months, and (y) twelve (12) months after the Change of Control. If Executive vests in his equity awards under this paragraph as of a Change of Control that occurs after the Termination Date, Executive shall have three (3) months from the date of the Change of Control to (i) exercise his newly-vested options, and (ii) buy back any restricted stock units that the Company repurchased, but otherwise would have vested, at the price the Company purchased them from Executive.
          (b) Severance Pay. The Company will pay the termination-base salary and the termination-base target bonus, each as defined on Exhibit A, and any bonus earned with respect to the prior year that has not yet then been paid, in a lump sum on or before the first regularly scheduled pay immediately following the Release Deadline (as defined below) pursuant to Section 8. All payments to Executive shall be reduced by such amounts as are required to be withheld by law.
          (c) COBRA Benefits. Provided Executive is eligible and properly elects coverage, the Company will pay all COBRA premiums to extend Executive’s group health insurance coverage for twelve (12) months following the Termination Date.
     4. Accrued Wages and Vacation, Expenses always payable. Without regard to the reason for, or the timing of, Executive’s termination of employment: (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay Executive all of Executive’s accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by Executive, the Company shall reimburse Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to the Termination Date. These payments shall be made promptly following termination and within the period of time mandated by law.
PAGE 4 – Employment Agreement

 
     5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute “parachute payments” within the meaning of Section 280G of the United States Internal Revenue Code (the “Code”), and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s benefits under this Agreement shall be either
          (a) delivered in full, or
          (b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code.
Any determination required under this section shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this section. All payments made under this Agreement shall be subject to reduction for all applicable federal, state, and local tax withholdings and any other required withholdings. Any reduction payments and/or benefits required by this Agreement shall occur in the following order: (1) reduction of cash payments; (2) reduction of vesting acceleration of equity awards; and (3) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of equity awards is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant for Executive’s equity awards. If two or more equity awards are granted on the same date, each award will be reduced on a pro-rata basis.
     6. Successors.
          (a) Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the Company’s obligations under this Agreement and agree expressly to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law.
PAGE 5 – Employment Agreement

 
          (b) Executive’s Successors. Without the written consent of the Company, Executive may not assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
     7. Execution of Release Agreement upon Termination. As a condition of receiving the benefits under Section 4 of this Agreement, Executive must sign and not revoke a Release, so that the Release is fully effective no later than sixty (60) days following Executive’s separation from service (the “Release Deadline”). No benefits under Section 4 will be paid or provided until the Release becomes effective. In the event the separation occurs at a time during the calendar year where it would be possible for the Release to become effective in the calendar year following the calendar year in which Executive’s separation occurs, any benefits that would otherwise be considered Deferred Payments (as defined in Section 10) will be paid or commence to be paid, as applicable, on the first regularly scheduled pay date immediately following the Release Deadline, subject to Section 10 below.
     8. Litigation/Audit Cooperation. Following the termination of Executive’s employment for any reason, Executive shall reasonably cooperate with the Company or any of its subsidiaries or affiliates (the “Company Group”) in connection with (a) any internal or governmental investigation or administrative, regulatory, arbitral or judicial proceeding involving any member of the Company Group with respect to matters relating to Executive’s employment with or service as a member of the board of directors of any member of the Company Group other than a third party proceeding in which Executive is a named party and Executive and the Company (or the applicable member(s) of the Company Group) have not entered into a mutually acceptable joint defense agreement (collectively, “Litigation”) or (b) for a two (2) year period following the Termination Date, any audit of the financial statements of any member of the Company Group with respect to the period of time when Executive was employed by any member of the Company Group (“Audit”). Executive acknowledges that such cooperation may include, but shall not be limited to, Executive making himself available to the Company or any other member of the Company Group (or their respective attorneys or auditors) upon reasonable notice for: (i) interviews, factual investigations, and providing declarations or affidavits that provide truthful information in connection with any Litigation or Audit; (ii) appearing at the request of the Company or any member of the Company Group to give testimony without requiring service of a subpoena or other legal process; (iii) volunteering to the Company or any member of the Company Group pertinent information related to any Litigation or Audit; (iv) providing information and legal representations to the auditors of the Company or any member or any member of the Company Group, in a form and within a timeframe requested by the Board, with respect to the Company’s or any member of the Company Group’s opening balance sheet valuation of intangibles and financial statements for the period in which Executive was employed by the Company or any member of the Company Group; and (v) turning over to the Company or any member of the Company Group any documents relevant to any Litigation or Audit that are or may come into Executive’s possession. The Company shall reimburse Executive for reasonable travel expenses incurred in connection with providing the services under this Section 9, including lodging and meals, upon Executive’s submission of receipts. The Company shall also compensate Executive for each hour that Executive provides cooperation in
PAGE 6 – Employment Agreement

 
connection with this Section 9 at an hourly rate equal to Executive’s termination-base salary plus his termination-base bonus, each as defined on Exhibit A, divided by 2080. Executive shall submit invoices for any month in which Executive performs services pursuant to this Section 9 that details the amount of time and a description of the services rendered for each separate day that Executive performed such services. Any reimbursement requests pursuant to this Section 9 must be submitted within sixty (60) days of the day Executive incurs such expenses. The Company shall reimburse Executive within fifteen (15) days of receiving a reimbursement request from Executive.
     9. 409A Savings Clause.
          (a) Notwithstanding anything to the contrary in this Agreement, no Deferred Payments (as defined below) or other severance benefits that otherwise are exempt from Section 409A (as defined below) pursuant to Treasury Regulation Section 1.409A-1(b)(9) shall become payable until Executive has a “separation from service” within the meaning of Section 409A.
          (b) Further, if Executive is a “specified employee” within the meaning of Section 409A at the time of his separation from service (other than due to death), and the severance payments and benefits payable to him, if any, pursuant to the Agreement, when considered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A (together, the “Deferred Payments”), such Deferred Payments that otherwise are payable within the first six (6) months following his separation from service will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of his separation from service. All subsequent Deferred Payments, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, in the event of Executive’s death following his separation from service but prior to the six (6) month anniversary of Executive’s separation from service (or any later delay date), then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Payments will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under the Agreement is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
          (c) Any severance payment that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations shall not constitute Deferred Payments for purposes of the Agreement. Any severance payment that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit shall not constitute Deferred Payments for purposes of the Agreement. For purposes of this Agreement, “Section 409A Limit” means the lesser of 2 times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during Executive’s taxable year preceding Executive’s taxable year of his termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Internal Revenue Code for the year in which your employment is terminated.
PAGE 7 – Employment Agreement

 
          (d) Any reimbursement payments made to Executive pursuant to Section 5 shall be paid to the Executive on or before the last day of Executive’s taxable year following the taxable year in which the related expense was incurred. The reimbursements pursuant to Section 5 are not subject to liquidation or exchange for another benefit, and the amount of such reimbursements that Executive receives in one taxable year shall not affect the amount of such reimbursements that Executive receives in any other taxable year.
          (e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided under the Agreement will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Executive and the Company agree to work together in good faith to consider amendments to the Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Employee under Section 409A.
     10. Notices. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to Executive at the home address which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.
     11. Arbitration.
          (a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Portland, Oregon in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the “Rules”). The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.
          (b) The arbitrator(s) shall apply Oregon law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in Oregon for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.
          (c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. Either Executive or the Company can terminate the employment relationship at any time, with or without Cause.
          (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT
PAGE 8 – Employment Agreement

 
SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
               (i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
               (ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL CONSTITUTION OR STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND THE CALIFORNIA LABOR CODE (except for claims for underlying workers’ compensation benefits); and
               (iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
     12. Proprietary Information and Inventions Assignment Agreement. Executive shall execute and comply with the terms of the Company’s standard Proprietary Information and Inventions Assignment Agreement.
     13. Miscellaneous Provisions.
          (a) Effect of Any Statutory Benefits. If any severance benefits are required to be paid to the Executive upon termination of employment with the Company as a result of any requirement of law or any governmental entity in any applicable jurisdiction, the aggregate amount payable pursuant to Section 4 hereof shall be reduced by such amount.
          (b) Effect of Standard Company Policy. To the extent that any severance benefits are required to be paid to the Executive upon termination of employment with the Company as a result of any standard Company policy, Executive shall be entitled to the greater of benefits available under such policy or under this Agreement, but not both.
          (c) Effect of Standing Severance Agreement. To the extent that any cash severance benefits are provided for the Executive under any agreement between Executive and the Company, those benefits will be paid in addition to the retention benefits payable hereunder.
PAGE 9 – Employment Agreement

 
          (d) No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that Executive may receive from any other source.
          (e) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.
          (f) Integration; Amendment. This Agreement and any agreements referenced herein represent the entire agreement and understanding between the parties as to the subject matter herein and collectively supersede all prior or contemporaneous agreements, whether written or oral, with respect to the same subject matter, including the employment agreement entered into between Executive and the Company, dated March 31, 2008. For clarification purposes and the avoidance of any doubt, this Agreement shall not affect any agreements between the Company and Executive regarding intellectual property matters or confidential information of the Company. This Agreement may be amended only by a written agreement, signed by the parties to be bound by the amendment that specifically references this Agreement.
          (g) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of Oregon.
          (h) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.
          (i) Employment Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes.
          (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together will constitute one and the same instrument.
     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
 	 	 	 	 	 	 	
Pixelworks, Inc.	 	 	 	Executive	 	 	
 	 	 	 	 	 	 	
By: /s/ Daniel Heneghan
  Daniel Heneghan, Board and Compensation Committee Member, for the Company	 	 	 	/s/ Bruce Walicek
  Bruce Walicek	 	 	
PAGE 10 – Employment Agreement

 
EXHIBIT A
Executive: Bruce Walicek
 	 	 	
Base Salary:	 	For 2009: $276,250 annually, payable on standard payroll schedules from April 1, 2009 on, to be reviewed periodically by the Compensation Committee of the Board of Directors.	
 	 	 	
2009 Bonus Plan:	 	To be established by the Compensation Committee.	
 	 	 	
Termination Base	 	Executive’s Termination-Base Salary and Termination-Base Target Bonus are as follows:	
 	 	 	
 	 	Termination-Base Salary: The higher of actual, annual base salary then in effect, or $325,000.	
 	 	 	
 	 	Termination-Base Target Bonus: The higher of Executive’s actual bonus target for the then-current year, or $325,000.	
 	 	 	
Equity Awards	 	Executive’s awards of equity or equity —based compensation shall be as determined from time to time by the Compensation Committee.	

Pixelworks, Inc.	 	 	 	Executive	 	 	
 	 	 	 	 	 	 	
By: /s/ Daniel Heneghan
  Daniel Heneghan, Board and Compensation Committee Member, for the Company	 	 	 	/s/ Bruce Walicek
  Bruce Walicek	 	 	

Exhibit 10.18
PIXELWORKS, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT
     This Change of Control Severance Agreement (the “Agreement”) is made and entered into effective as of April 1, 2009 (the “Effective Date”), by and between Steven Moore (the “Executive”) and Pixelworks, Inc., an Oregon corporation (the “Company”). Certain capitalized terms used in this Agreement are defined in Section 1 below.
R E C I T A L S
     The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue Executive’s employment following, and so to maximize the value of the Company upon, a Change of Control for the benefit of its shareholders. To do so, the Board believes it appropriate to provide the Executive with certain severance benefits upon the Executive’s termination of employment following a Change of Control.
AGREEMENT
     The parties therefore agree as follows:
     1. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings:
          (a) Cause. “Cause” shall mean Executive engaged in any one or more of the following: (i) a material act of dishonesty, fraud, misconduct, or willful violation of any material law, ethical rule or fiduciary duty that is in connection with Executive’s responsibilities as an executive of the Company; (ii) acts constituting a felony or moral turpitude which the Board reasonably believes has had or will have a material detrimental effect on the Company’s reputation or business; or (iii) repeated willful failure to perform Executive’s duties as an executive of the Company and the failure to effect such cure within 30 days after written notice of such violation or breach is given to Executive; or (iv) the willful violation of any material Company policy or procedure, or breach of any material provision of this Agreement or other agreement with the Company, and if such violation or breach is susceptible of cure, the failure to effect such cure within 30 days after written notice of such violation or breach is given to Executive.
          (b) Change of Control. “Change of Control” shall mean the occurrence of any of the following events:
               (i) the approval by shareholders of the Company of a merger or consolidation of the Company with any other corporation, or of a subsidiary of the Company with any other corporation, other than a merger or consolidation which would result in effective voting control over the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting

 
               (i) securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;
               (ii) the approval by the shareholders of the Company of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets;
               (iii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities; or
               (iv) a change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors who are either identified in (A) or identified as their successors elected under this clause (B).
          (c) Good Reason Event. A “Good Reason Event” shall be any of the following: (i) without the Executive’s express written consent, a material diminution of the Executive’s duties, authority or responsibilities; (ii) without the Executive’s express written consent, a reduction by the Company of the Executive’s base salary; (iii) without the Executive’s express written consent, the imposition of a requirement that Executive’s primary place of employment be at a facility or a location more than fifty (50) miles from the Executive’s current work location, provided that such requirement to relocate materially increases the Executive’s commute; or (iv) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 6 below.
          (d) Involuntary Termination. “Involuntary Termination” shall mean (i) any termination of the Executive’s employment by the Company which is not effected for valid Cause; or (ii) any termination by the Executive for Good Reason.
          (e) Termination Date. “Termination Date” shall mean the effective date of any notice of termination delivered by one party to the other hereunder.
     2. Term of Agreement. This Agreement shall terminate upon the earlier of two (2) years after a Change of Control, or (ii) the date that all obligations of the parties hereto under this Agreement have been satisfied.
     3. At-Will Employment. The Company and the Executive acknowledge that the Executive’s employment is and shall continue to be at-will, as defined under applicable law. If the Executive’s employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be established under the Company’s then existing employee benefit plans or policies at the time of termination.

 
     4. Severance Benefits.
          (a) Termination Following a Change of Control.
               (i) If Within Twelve Months Following a Change of Control. If the Executive’s employment with the Company terminates as a result of an Involuntary Termination at any time within twelve (12) months after a Change of Control, and the Executive signs the release of claims pursuant to Section 7 hereto, Executive shall be entitled to the following severance benefits:
                    (1) twelve (12) months of Executive’s base salary and the then current year’s target bonus as in effect as of the date of such termination or, if greater, as in effect immediately prior to the Change of Control, less applicable withholding, payable in a lump sum within thirty (30) days of the Involuntary Termination;
                    (2) all stock options granted by the Company to the Executive prior to the Change of Control shall accelerate and become vested and exercisable as to the number of shares that would have otherwise vested during the twelve (12) months following such termination as if the Executive had remained employed by the Company (or its successor) through such date under the applicable option agreements to the extent such stock options are outstanding and unexercisable at the time of such termination; and all stock subject to a right of repurchase by the Company (or its successor) that was purchased prior to the Change of Control shall have such right of repurchase lapse with respect to that number of shares which would have had such right of repurchase lapse under the applicable agreement within twelve (12) months of the date of the termination as if the Executive had remained employed through such date; and
                    (3) the same level of Company-paid health (i.e., medical, vision and dental) coverage and benefits for such coverage as in effect for the Executive (and any eligible dependents) on the day immediately preceding the Executive’s Termination Date;  provided ,  however , that (i) the Executive constitutes a qualified beneficiary, as defined in Section 4980B(g)(1) of the Internal Revenue Code of 1986, as amended; and (ii) Executive elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), within the time period prescribed pursuant to COBRA. The Company shall continue to provide Executive with such Company-paid coverage until the earlier of (i) the date Executive (and Executive’s eligible dependents) is no longer eligible to receive continuation coverage pursuant to COBRA, or (ii) twelve (12) months from the Termination Date.
               (ii) If Between Twelve Months and Twenty-Four Months Following Change of Control. If the Executive’s employment with the Company terminates as a result of an Involuntary Termination at any time during the period that is from twelve (12) months after a Change of Control to twenty-four (24) months after a Change of Control (such period being the “Second Year”), and the Executive signs the release of claims pursuant to Section 7 hereto, Executive shall be entitled to the following severance benefits:
                    (1) a lump sum cash amount payable within thirty (30) days of the Involuntary Termination representing a portion of the Executive’s base salary and then

 
current year’s target bonus, plus any applicable allowances, with such amount being the resulting product of: the number of months remaining in the Second Year as of the Termination Date,  multiplied by  the per-month portion of the Executive’s base salary, then-current year’s target bonus, and allowances as in effect as of the Termination Date or, if greater, as in effect immediately prior to the Change of Control, less applicable withholding. For purposes of this subsection (1), only entire months that remain in the Second Year shall be counted as “remaining,” and any fraction of a month that remains after the date of the termination shall not be counted hereunder;
                    (2) the health benefits set forth in Section 4(a)(i)(3) above, provided, however, that the twelve (12) month period shall be pro-rated to reflect that number of months remaining in the Second Year as of the date of termination. For purposes of this subsection (2), only entire months that remain in the Second Year shall be counted as “remaining,” and any fraction of a month that remains after the date of the termination shall not be counted hereunder; and
                    (3) the stock option acceleration benefits set forth in Section 4(a)(i)(2) above, provided, however, that the twelve (12) month period shall be pro-rated to reflect that number of months remaining in the Second Year as of the date of termination. For purposes of this subsection (2), only entire months that remain in the Second Year shall be counted as “remaining,” and any fraction of a month that remains after the date of the termination shall not be counted hereunder.
          (b) Termination Apart from a Change of Control. If the Executive’s employment with the Company terminates other than as a result of an Involuntary Termination within the twenty-four (24) months following a Change of Control, then the following provisions shall apply:
               (i) Involuntary Termination. If the termination is an Involuntary Termination, the Executive shall be entitled to the same benefits described in Section 4(a)(i), calculated as if the date of the change of control were the same as the effective date of the Involuntary Termination.
               (ii) For Cause or Voluntary Termination. If the termination is for Cause or is not otherwise an Involuntary Termination, then the Executive will not be entitled to receive severance or other benefits hereunder.
          (c) Accrued Wages and Vacation; Expenses. Without regard to the reason for, or the timing of, Executive’s termination of employment: (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive’s accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to the Termination Date. These payments shall be made promptly upon termination and within the period of time mandated by law.

 
     5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute “parachute payments” within the meaning of Section 280G of the United States Internal Revenue Code (the “Code”), and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s benefits under this Agreement shall be either
          (a) delivered in full, or
          (b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code.
     Any determination required under this section shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this section.
     6. Successors.
          (a) Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the Company’s obligations under this Agreement and agree expressly to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law.
          (b) Executive’s Successors. Without the written consent of the Company, Executive may not assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

 
     7. Execution of Release Agreement upon Termination. As a condition of receiving the benefits under Section 4 of this Agreement, Executive must sign and not revoke a Release, effective within sixty (60) days following Executive’s separation from service (the “Release Deadline”). No benefits under Section 4 will be paid or provided until the Release becomes effective. In the event the separation occurs at a time during the calendar year where it would be possible for the Release to become effective in the calendar year following the calendar year in which Executive’s separation occurs, any benefits that would be considered Deferred Payments (as defined in Section 9) will be paid or commence to be paid, as applicable, on the first regularly scheduled pay date immediately following the Release Deadline, subject to Section 9 below.
     8. Litigation/Audit Cooperation. Following the termination of Executive’s employment for any reason, Executive shall reasonably cooperate with the Company or any of its subsidiaries or affiliates (the “Company Group”) in connection with (a) any internal or governmental investigation or administrative, regulatory, arbitral or judicial proceeding involving any member of the Company Group with respect to matters relating to Executive’s employment with or service as a member of the board of directors of any member of the Company Group other than a third party proceeding in which Executive is a named party and Executive and the Company (or the applicable member(s) of the Company Group) have not entered into a mutually acceptable joint defense agreement (collectively, “Litigation”) or (b) for a two year period following the Termination Date, any audit of the financial statements of any member of the Company Group with respect to the period of time when Executive was employed by any member of the Company Group (“Audit”). Executive acknowledges that such cooperation may include, but shall not be limited to, Executive making himself available to the Company or any other member of the Company Group (or their respective attorneys or auditors) upon reasonable notice for: (i) interviews, factual investigations, and providing declarations or affidavits that provide truthful information in connection with any Litigation or Audit; (ii) appearing at the request of the Company or any member of the Company Group to give testimony without requiring service of a subpoena or other legal process; (iii) volunteering to the Company or any member of the Company Group pertinent information related to any Litigation or Audit; (iv) providing information and legal representations to the auditors of the Company or any member or any member of the Company Group, in a form and within a timeframe requested by the Board, with respect to the Company’s or any member of the Company Group’s opening balance sheet valuation of intangibles and financial statements for the period in which Executive was employed by the Company or any member of the Company Group; and (v) turning over to the Company or any member of the Company Group any documents relevant to any Litigation or Audit that are or may come into Executive’s possession. The Company shall reimburse Executive for reasonable travel expenses incurred in connection with providing the services under this Section 8, including lodging and meals, upon Executive’s submission of receipts. The Company shall also compensate Executive for each hour that Executive provides cooperation in connection with this Section 8 at an hourly rate equal to Executive’s base salary as of the Termination Date divided by 2080. Executive shall submit invoices for any month in which Executive performs services pursuant to this Section 8 that details the amount of time and a description of the services rendered for each separate day that Executive performed such services. The Company shall reimburse Executive for such services rendered within fifteen (15) days of receiving an invoice from Executive.

 
     9. 409A Savings Clause.
          (a) Notwithstanding anything to the contrary in this Agreement, no Deferred Payments (as defined below) or other severance benefits that otherwise are exempt from Section 409A (as defined below) pursuant to Treasury Regulation Section 1.409A-1(b)(9) shall become payable until Executive has a “separation from service” within the meaning of Section 409A.
          (b) Further, if Executive is a “specified employee” within the meaning of Section 409A at the time of his separation from service (other than due to death), and the severance payments and benefits payable to him, if any, pursuant to the Agreement, when considered together with any other severance payments or separation benefits, are considered deferred compensation under Section 409A (together, the “Deferred Payments”), such Deferred Payments that otherwise are payable within the first six (6) months following his separation from service will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of his separation from service. All subsequent Deferred Payments, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, in the event of Executive’s death following his separation from service but prior to the six (6) month anniversary of Executive’s separation from service (or any later delay date), then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Payments will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under the Agreement is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
          (c) Any severance payment that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations shall not constitute Deferred Payments for purposes of the Agreement. Any severance payment that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit shall not constitute Deferred Payments for purposes of the Agreement. For purposes of this Agreement, “Section 409A Limit” means the lesser of 2 times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during Executive’s taxable year preceding Executive’s taxable year of his termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Internal Revenue Code for the year in which your employment is terminated.
          (d) Any reimbursement payments made to Executive hereunder shall be paid to the Executive on or before the last day of Executive’s taxable year following the taxable year in which the related expense was incurred. The reimbursements hereunder are not subject to liquidation or exchange for another benefit, and the amount of such reimbursements that Executive receives in one taxable year shall not affect the amount of such reimbursements that Executive receives in any other taxable year.
          (e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided under the Agreement will be subject to the additional tax imposed under Section 409A, and any

 
ambiguities herein will be interpreted to so comply. Executive and the Company agree to work together in good faith to consider amendments to the Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Employee under Section 409A.
     10. Notices. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to Executive at the home address which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.
     11. Arbitration.
          (a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Portland, Oregon in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the “Rules”). The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.
          (b) The arbitrator(s) shall apply Oregon law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in Oregon for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.
          (c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. Either Executive or the Company can terminate the employment relationship at any time, with or without Cause.
          (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
               (i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH

 
OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
               (ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL CONSTITUTION OR STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND THE CALIFORNIA LABOR CODE (except for claims for underlying workers’ compensation benefits); and
               (iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
     12. Proprietary Information and Inventions Assignment Agreement. Executive shall execute and comply with the terms of the Company’s standard Proprietary Information and Inventions Assignment Agreement.
     13. Miscellaneous Provisions.
          (a) Effect of Any Statutory Benefits. If any severance benefits are required to be paid to the Executive upon termination of employment with the Company as a result of any requirement of law or any governmental entity in any applicable jurisdiction, the aggregate amount payable pursuant to Section 4 hereof shall be reduced by such amount.
          (b) Effect of Standard Company Policy or Other Agreements. To the extent that any severance benefits or payments are required to be paid to the Executive upon termination of employment with the Company as a result of any standard Company policy or other existing agreement(s), Executive shall be entitled to the most favorable of any given benefit (e.g., cash, option vesting, health benefits) available under any one such source, but shall not be entitled also to cumulate the same kind of benefit from multiple agreements or policies.
          (c) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.
          (d) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

 
          (e) Integration. This Agreement and any agreements referenced herein represent the entire agreement and understanding between the parties as to the subject matter herein and collectively supersede all prior or contemporaneous agreements, whether written or oral, with respect to the same subject matter,  provided that , for clarification purposes, this Agreement shall not affect any agreements between the Company and Executive regarding intellectual property matters or confidential information of the Company.
          (f) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of Oregon.
          (g) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.
          (h) Employment Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes.
          (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together will constitute one and the same instrument.
     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
 	 	 	 	 	 	 	
Pixelworks, Inc.	 	 	 	Executive	 	 	
 	 	 	 	 	 	 	
By: /s/ Bruce Walicek
               Bruce Walicek, CEO	 	 	 	/s/ Steven Moore
  Steven Moore	 	 	

Exhibit 10.21
PIXELWORKS, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
     This Change of Control Severance Agreement (the “Agreement”) is made and entered into effective as of November 22nd, 2008 (the “Effective Date”), by and between Tzoyao Chan (the “Executive”) and Pixelworks, Inc., an Oregon corporation (the “Company”). Certain capitalized terms used in this Agreement are defined in Section 1 below.
R E C I T A L S
     The Board believes that it is in the best interests of the Company and its shareholders to provide the Executive with an incentive to continue Executive’s employment following, and so to maximize the value of the Company upon, a Change of Control for the benefit of its shareholders. To do so, the Board believes it appropriate to provide the Executive with certain severance benefits upon the Executive’s termination of employment following a Change of Control.
AGREEMENT
     The parties therefore agree as follows:
     1. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings:
          (a) Cause. “Cause” shall mean Executive engaged in any one or more of the following: (i) a material act of dishonesty, fraud, misconduct, or willful violation of any material law, ethical rule or fiduciary duty that is in connection with Executive’s responsibilities as an executive of the Company; (ii) acts constituting a felony or moral turpitude which the Board reasonably believes has had or will have a material detrimental effect on the Company’s reputation or business; or (iii) repeated willful failure to perform Executive’s duties as an executive of the Company and the failure to effect such cure within 30 days after written notice of such violation or breach is given to Executive; or (iv) the willful violation of any material Company policy or procedure, or breach of any material provision of this Agreement or other agreement with the Company, and if such violation or breach is susceptible of cure, the failure to effect such cure within 30 days after written notice of such violation or breach is given to Executive.
          (b) Change of Control. “Change of Control” shall mean the occurrence of any of the following events:
               (i) the approval by shareholders of the Company of a merger or consolidation of the Company with any other corporation, or of a subsidiary of the Company with any other corporation, other than a merger or consolidation which would result in effective voting control over the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting
PAGE 1 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;
               (ii) the approval by the shareholders of the Company of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets;
               (iii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities; or
               (iv) a change in the composition of the Board, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors who are either identified in (A) or identified as their successors elected under this clause (B).
          (c) Good Reason Event. A “Good Reason Event” shall be any of the following: (i) without the Executive’s express written consent, a material diminution of the Executive’s duties, authority or responsibilities; (ii) without the Executive’s express written consent, a reduction by the Company of the Executive’s base salary; (iii) without the Executive’s express written consent, the imposition of a requirement that Executive’s primary place of employment be at a facility or a location more than fifty (50) miles from the Executive’s current work location, provided that such requirement to relocate materially increases the Executive’s commute; or (iv) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 7 below.
          (d) Involuntary Termination. “Involuntary Termination” shall mean (i) any termination of the Executive’s employment by the Company which is not effected for valid Cause; or (ii) any termination by the Executive for Good Reason.
          (e) Termination Date. “Termination Date” shall mean the effective date of any notice of termination delivered by one party to the other hereunder.
     2. Term of Agreement. This Agreement shall terminate upon the earlier of two (2) years after a Change of Control, or (ii) the date that all obligations of the parties hereto under this Agreement have been satisfied.
     3. At-Will Employment. The Company and the Executive acknowledge that the Executive’s employment is and shall continue to be at-will, as defined under applicable law. If the Executive’s employment terminates for any reason, the Executive shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be established under the Company’s then existing employee benefit plans or policies at the time of termination.
PAGE 2 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
     4. Severance Benefits.
          (a) Termination Following a Change of Control.
               (i) If Within Twelve Months Following a Change of Control. If the Executive’s employment with the Company terminates as a result of an Involuntary Termination at any time within twelve (12) months after a Change of Control, and the Executive signs the release of claims pursuant to Section 7 hereto, Executive shall be entitled to the following severance benefits:
                    (1) twelve (12) months of Executive’s base salary as in effect as of the date of such termination or, if greater, as in effect immediately prior to the Change of Control, less applicable withholding, payable in a lump sum within thirty (30) days of the Involuntary Termination;
                    (2) all stock options granted by the Company to the Executive prior to the Change of Control shall accelerate and become vested and exercisable as to the number of shares that would have otherwise vested during the twelve (12) months following such termination as if the Executive had remained employed by the Company (or its successor) through such date under the applicable option agreements to the extent such stock options are outstanding and unexercisable at the time of such termination; and all stock subject to a right of repurchase by the Company (or its successor) that was purchased prior to the Change of Control shall have such right of repurchase lapse with respect to that number of shares which would have had such right of repurchase lapse under the applicable agreement within twelve (12) months of the date of the termination as if the Executive had remained employed through such date; and
                    (3) the same level of Company-paid health (i.e., medical, vision and dental) coverage and benefits for such coverage as in effect for the Executive (and any eligible dependents) on the day immediately preceding the Executive’s Termination Date;  provided ,  however , that (i) the Executive constitutes a qualified beneficiary, as defined in Section 4980B(g)(1) of the Internal Revenue Code of 1986, as amended; and (ii) Executive elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), within the time period prescribed pursuant to COBRA. The Company shall continue to provide Executive with such Company-paid coverage until the earlier of (i) the date Executive (and Executive’s eligible dependents) is no longer eligible to receive continuation coverage pursuant to COBRA, or (ii) twelve (12) months from the Termination Date.
               (ii) If Between Twelve Months and Twenty-Four Months Following Change of Control. If the Executive’s employment with the Company terminates as a result of an Involuntary Termination at any time during the period that is from twelve (12) months after a Change of Control to twenty-four (24) months after a Change of Control (such period being the “Second Year”), and the Executive signs the release of claims pursuant to Section 7 hereto, Executive shall be entitled to the following severance benefits:
                    (1) a lump sum cash amount payable within thirty (30) days of the Involuntary Termination representing a portion of the Executive’s base salary and any
PAGE 3 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
applicable allowances, with such amount being the resulting product of: the number of months remaining in the Second Year as of the Termination Date,  multiplied by  the per-month portion of the Executive’s base salary and allowances as in effect as of the Termination Date or, if greater, as in effect immediately prior to the Change of Control, less applicable withholding. For purposes of this subsection (1), only entire months that remain in the Second Year shall be counted as “remaining,” and any fraction of a month that remains after the date of the termination shall not be counted hereunder;
                    (2) the health benefits set forth in Section 4(a)(i)(3) above, provided, however, that the twelve (12) month period shall be pro-rated to reflect that number of months remaining in the Second Year as of the date of termination. For purposes of this subsection (2), only entire months that remain in the Second Year shall be counted as “remaining,” and any fraction of a month that remains after the date of the termination shall not be counted hereunder; and
                    (3) the stock option acceleration benefits set forth in Section 4(a)(i)(2) above, provided, however, that the twelve (12) month period shall be pro-rated to reflect that number of months remaining in the Second Year as of the date of termination. For purposes of this subsection (2), only entire months that remain in the Second Year shall be counted as “remaining,” and any fraction of a month that remains after the date of the termination shall not be counted hereunder.
          (b) Termination Apart from a Change of Control. If the Executive’s employment with the Company terminates other than as a result of an Involuntary Termination within the twenty-four (24) months following a Change of Control, then the following provisions shall apply:
               (i) Involuntary Termination. If the termination is an Involuntary Termination, the Executive shall be entitled to the same benefits described in Section 4(a)(i), calculated as if the date of the change of control were the same as the effective date of the Involuntary Termination.
               (ii) For Cause or Voluntary Termination. If the termination is for Cause or is not otherwise an Involuntary Termination, then the Executive will not be entitled to receive severance or other benefits hereunder.
          (c) Accrued Wages and Vacation; Expenses. Without regard to the reason for, or the timing of, Executive’s termination of employment: (i) the Company shall pay the Executive any unpaid base salary due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive’s accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive, the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company prior to the Termination Date. These payments shall be made promptly upon termination and within the period of time mandated by law.
PAGE 4 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
     5. Limitation on Payments. In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Executive (i) constitute “parachute payments” within the meaning of Section 280G of the United States Internal Revenue Code (the “Code”), and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then Executive’s benefits under this Agreement shall be either
          (a) delivered in full, or
          (b) delivered as to such lesser extent which would result in no portion of such benefits being subject to the Excise Tax,
     whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code.
     Any determination required under this section shall be made in writing by the Company’s independent public accountants (the “Accountants”), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this section.
     6. Successors.
          (a) Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the Company’s obligations under this Agreement and agree expressly to perform the Company’s obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” shall include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law.
          (b) Executive’s Successors. Without the written consent of the Company, Executive may not assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity. Notwithstanding the foregoing, the terms of this Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
PAGE 5 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
     7. Execution of Release Agreement upon Termination. As a condition of receiving the benefits under Section 4 of this Agreement, the Executive shall within twenty five days after the Executive’s Termination Date, execute and not revoke a general release of claims against the Company in form satisfactory to the Company.
     8. Litigation/Audit Cooperation. Following the termination of Executive’s employment for any reason, Executive shall reasonably cooperate with the Company or any of its subsidiaries or affiliates (the “Company Group”) in connection with (a) any internal or governmental investigation or administrative, regulatory, arbitral or judicial proceeding involving any member of the Company Group with respect to matters relating to Executive’s employment with or service as a member of the board of directors of any member of the Company Group other than a third party proceeding in which Executive is a named party and Executive and the Company (or the applicable member(s) of the Company Group) have not entered into a mutually acceptable joint defense agreement (collectively, “Litigation”) or (b) for a two year period following the Termination Date, any audit of the financial statements of any member of the Company Group with respect to the period of time when Executive was employed by any member of the Company Group (“Audit”). Executive acknowledges that such cooperation may include, but shall not be limited to, Executive making himself available to the Company or any other member of the Company Group (or their respective attorneys or auditors) upon reasonable notice for: (i) interviews, factual investigations, and providing declarations or affidavits that provide truthful information in connection with any Litigation or Audit; (ii) appearing at the request of the Company or any member of the Company Group to give testimony without requiring service of a subpoena or other legal process; (iii) volunteering to the Company or any member of the Company Group pertinent information related to any Litigation or Audit; (iv) providing information and legal representations to the auditors of the Company or any member or any member of the Company Group, in a form and within a timeframe requested by the Board, with respect to the Company’s or any member of the Company Group’s opening balance sheet valuation of intangibles and financial statements for the period in which Executive was employed by the Company or any member of the Company Group; and (v) turning over to the Company or any member of the Company Group any documents relevant to any Litigation or Audit that are or may come into Executive’s possession. The Company shall reimburse Executive for reasonable travel expenses incurred in connection with providing the services under this Section 9, including lodging and meals, upon Executive’s submission of receipts. The Company shall also compensate Executive for each hour that Executive provides cooperation in connection with this Section 9 at an hourly rate equal to Executive’s base salary as of the Termination Date divided by 2080. Executive shall submit invoices for any month in which Executive performs services pursuant to this Section 9 that details the amount of time and a description of the services rendered for each separate day that Executive performed such services. The Company shall reimburse Executive for such services rendered within fifteen (15) days of receiving an invoice from Executive.
     9. 409A Savings Clause. If Executive is a “specified employee’ within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended by the rules and regulations issued thereunder by the Department of Treasury and the Internal Revenue Service (“409A”) as of the date of the Executive’s “separation from service” within the meaning of Section 409A, Executive shall not be entitled to any payment or benefit pursuant to Section 4 until the earlier of (i) the date which is six (6) months after his separation from service for any reason other than
PAGE 6 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
death, or (ii) the date of Executive’s death. The provisions of this Section 10 shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Section 409A. Any amounts otherwise payable to Executive upon or in the six (6) month period following the Executive’s separation from service that are not so paid by reason of this Section 10 shall be paid (without interest) as soon as practicable (and in all events within thirty (30) days) after the date that is six (6) months after the Executive’s separation from service (or, if earlier, as soon as practicable, and in all events within thirty (30) days, after the date of Executive’s death). To the extent that any benefits pursuant to Section 4 or reimbursements pursuant to Section 5 are taxable to the Executive, any reimbursement payment due to the Executive pursuant to any such provision shall be paid to the Executive on or before the last day of the Executive’s taxable year following the taxable year in which the related expense was incurred. The benefits and reimbursements pursuant to Section 4 are not subject to liquidation or exchange for another benefit and the amount of such benefits and reimbursements that the Executive receives in one taxable year shall not affect the amount of such benefits or reimbursements that the Executive receives in any other taxable year.
     10. Notices. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to Executive at the home address which Executive most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.
     11. Arbitration.
          (a) Any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be settled by binding arbitration to be held in Portland, Oregon in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the “Rules”). The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction.
          (b) The arbitrator(s) shall apply Oregon law to the merits of any dispute or claim, without reference to conflicts of law rules. The arbitration proceedings shall be governed by federal arbitration law and by the Rules, without reference to state arbitration law. Executive hereby consents to the personal jurisdiction of the state and federal courts located in Oregon for any action or proceeding arising from or relating to this Agreement or relating to any arbitration in which the parties are participants.
          (c) Executive understands that nothing in this Section modifies Executive’s at-will employment status. Either Executive or the Company can terminate the employment relationship at any time, with or without Cause.
PAGE 7 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
          (d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF EXECUTIVE’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EXECUTIVE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING CLAIMS:
               (i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
               (ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL CONSTITUTION OR STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND THE CALIFORNIA LABOR CODE (except for claims for underlying workers’ compensation benefits); and
               (iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
     12. Proprietary Information and Inventions Assignment Agreement. Executive shall execute and comply with the terms of the Company’s standard Proprietary Information and Inventions Assignment Agreement.
     13. Miscellaneous Provisions.
          (a) Effect of Any Statutory Benefits. If any severance benefits are required to be paid to the Executive upon termination of employment with the Company as a result of any requirement of law or any governmental entity in any applicable jurisdiction, the aggregate amount payable pursuant to Section 4 hereof shall be reduced by such amount.
          (b) Effect of Standard Company Policy or Other Agreements. To the extent that any severance benefits or payments are required to be paid to the Executive upon termination of employment with the Company as a result of any standard Company policy or other existing agreement(s), Executive shall be entitled to the most favorable of any given benefit (e.g., cash, option vesting, health benefits) available under any one such source, but shall not be entitled also to cumulate the same kind of benefit from multiple agreements or policies.
PAGE 8 – CHANGE OF CONTROL SEVERANCE AGREEMENT

 
          (c) No Duty to Mitigate. The Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.
          (d) Waiver. No provision of this Agreement may be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.
          (e) Integration. This Agreement and any agreements referenced herein represent the entire agreement and understanding between the parties as to the subject matter herein and collectively supersede all prior or contemporaneous agreements, whether written or oral, with respect to the same subject matter,  provided that , for clarification purposes, this Agreement shall not affect any agreements between the Company and Executive regarding intellectual property matters or confidential information of the Company.
          (f) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal substantive laws, but not the conflicts of law rules, of the State of Oregon.
          (g) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect.
          (h) Employment Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes.
          (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together will constitute one and the same instrument.
     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.
 	 	 	 	 	 	 	
Pixelworks, Inc.	 	 	 	Executive	 	 	
 	 	 	 	 	 	 	
By: /s/ Bruce Walicek
               Bruce Walicek, CEO	 	 	 	/s/ Tzoyao Chan
  Tzoyao Chan	 	 	
PAGE 9 – CHANGE OF CONTROL SEVERANCE AGREEMENT

Exhibit 21
Subsidiaries of Pixelworks, Inc.
Equator Technologies, Inc. — a Delaware corporation
Jaldi Semiconductor — an Ontario corporation
Pixelworks Japan Inc. — a Japan company
Pixelworks Ltd. — a Cayman Island company
Pixelworks Semiconductor Technology (Shanghai) Co. Ltd. — a China company
Pixelworks Semiconductor Technology (Taiwan) Inc. — a Taiwan company

Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Pixelworks, Inc.:
We consent to the incorporation by reference in the registration statement on Form S-8 (Nos. 333-161125, 333-152945, 333-136553, 333-126017, 333-125945, 333-123526, 333-121274, 333-89394, 333-62000, 333-41720, and 333-41722) and Form S-3 (Nos. 333-118100, 333-100548, and 333-67838) of Pixelworks, Inc. of our reports dated March 10, 2010, with respect to the consolidated balance sheets of Pixelworks, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009, and the effectiveness of internal control over financial reporting as of December 31, 2009, which reports appear in the December 31, 2009 annual report on Form 10-K of Pixelworks, Inc.
Our report on the consolidated financial statements refers to a change in the method of accounting for uncertain tax positions effective January 1, 2007.
/s/ KPMG LLP
Portland, Oregon
March 10, 2010

Exhibit 31.1
CERTIFICATION
I, Bruce A. Walicek, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Pixelworks, Inc.;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a.	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	 	
 	b.	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	 	
 	c.	 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	 	
 	d.	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

5.	 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a.	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	 	
 	b.	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date: March 10, 2010 	By:  	/s/ Bruce A. Walicek  	 	
 	 	Bruce A. Walicek 	 	
 	 	President and
Chief Executive Officer  	 	

 	 	 	 	 	
Exhibit 31.2
CERTIFICATION
I, Steven L. Moore, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Pixelworks, Inc.;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a.	 	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	 	 	 	
 	b.	 	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	 	 	 	
 	c.	 	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	 	 	 	
 	d.	 	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

5.	 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a.	 	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	 	 	 	
 	b.	 	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Date: March 10, 2010 	By:  	/s/ Steven L. Moore  	 	
 	 	Steven L. Moore 	 	
 	 	Vice President, Chief Financial Officer, Secretary and Treasurer  	 	

 	 	 	 	 	
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Pixelworks, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce A. Walicek, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 	1.	 	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 	 	 	 	
 	2.	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

 	By:  	/s/ Bruce A. Walicek  	 	
 	 	Bruce A. Walicek 	 	
 	 	President and Chief Executive Officer 	 	
Date: March 10, 2010

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Pixelworks, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven L. Moore, Vice President, Chief Financial Officer, Secretary and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 	1.	 	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 	 	 	 	
 	2.	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

 	By:  	/s/ Steven L. Moore  	 	
 	 	Steven L. Moore 	 	
 	 	Vice President, Chief Financial Officer Secretary and Treasurer  	 	
Date: March 10, 2010