1040161--3/13/2006--PIXELWORKS

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Goodwill represents a significant portion of our total assets. The year ended December 31, 2004 was our first year of annual profitability since inception and we may be unable to achieve profitability in future periods. Fluctuations in our quarterly operating results make it difficult to predict our future performance and may result in volatility in the market price of our common stock. Our products are characterized by average selling prices that decline over relatively short time periods, which will negatively affect financial results unless we are able to reduce our product costs or introduce new products with higher average selling prices. Our highly integrated products and high-speed mixed signal products are difficult to manufacture without defects and the existence of defects could result in an increase in our costs and delays in the availability of our products. If we do not achieve additional design wins in the future, our ability to grow would be seriously limited. Because of the complex nature of our semiconductor designs and of the associated manufacturing process and the rapid evolution of our customers product designs, we may not be able to develop new products or product enhancements in a timely manner, which could decrease customer demand for our products and reduce our revenues. Integration of software in our products adds complexity and cost that may affect our ability to achieve design wins and may affect our profitability. A significant amount of our revenue comes from a few customers and distributors. Any decrease in revenues from, or loss of, any of these customers or distributors could significantly reduce our total revenues. The concentration of our accounts receivable with a limited number of customers exposes us to increased credit risk and could harm our operating results and cash flows. International sales account for almost all of our revenue, and if we do not successfully address the risks associated with our international operations, our revenue could decrease. Our growing presence and investment within the Peoples Republic of China subjects us to risks of economic and political instability in the area, which could adversely impact our results of operations. Our dependence on selling through distributors and integrators increases the complexity of managing our supply chain and may result in excess inventory or inventory shortages. Dependence on a limited number of sole-source, third-party manufacturers for our products exposes us to shortages based on capacity allocation or low manufacturing yield, errors in manufacturing, price increases with little notice, volatile inventory levels and delays in product delivery, which could result in delays in satisfying customer demand, increased costs and loss of revenues. The concentration of our manufacturers and customers in the same geographic region increases our risk that a natural disaster, labor strike or political unrest could disrupt our operations. We use a COT, or customer owned tooling, process for manufacturing some of our products which exposes us to the possibility of poor yields and unacceptably high product costs. We are dependent on our foundries to implement complex semiconductor technologies, which could adversely affect our operations if those technologies are unavailable, delayed or inefficiently implemented. Manufacturers of our semiconductor products periodically discontinue manufacturing processes, which could make our products unavailable from our current suppliers. If we have to qualify a new contract manufacturer or foundry for any of our products, we may experience delays that result in lost revenues and damaged customer relationships. Our future success depends upon the continued services of key personnel, many of whom would be difficult to replace and the loss of one or more of these employees could seriously harm our business by delaying product development. Because we do not have long-term commitments from our customers, and plan purchases based on estimates of customer demand which may be inaccurate, we must contract for the manufacture of our products based on those potentially inaccurate estimates. Development projects may cause us to incur substantial operating expenses without the guarantee of any associated revenue or far in advance of revenue. Because of our long product development process and sales cycle, we may incur substantial expenses before we earn associated revenues and may not ultimately sell as many units of our products as we forecasted. Shortages of other key components for our customers products could delay our ability to sell our products. Shortages of materials used in the manufacturing of our products may increase our costs or limit our revenues and impair our ability to ship our products on time. Our products could become obsolete if necessary licenses of third-party technology are not available to us or are only available on terms that are not commercially viable. We may not be able to respond to the rapid technological changes in the markets in which we compete, or we may not be able to comply with industry standards in the future making our products less desirable or obsolete. Our software development tools may be incompatible with industry standards and challenging to implement, which could slow product development or cause us to lose customers and design wins. Our integrated circuits and software could contain defects, which could reduce sales of those products or result in claims against us. Others may bring infringement actions against us that could be time consuming and expensive to defend. Our limited ability to protect our intellectual property and proprietary rights could harm our competitive position by allowing our competitors to access our proprietary technology and to introduce similar products. We have incurred substantial indebtedness as a result of the sale of convertible debentures. Failure to manage our expansion effectively could adversely affect our ability to increase our business and our results of operations. Risks Related to Our Industry Failure of consumer demand for advanced displays and other digital display technologies to increase would impede our growth and adversely affect our business. If products incorporating our semiconductors are not compatible with computer display protocols, video standards and other devices, the market for our products will be reduced and our business prospects could be significantly limited. Intense competition in our markets may reduce sales of our products, reduce our market share, decrease our gross profit and result in large losses. The cyclical nature of the semiconductor industry may lead to significant variances in the demand for our products and could harm our operations. The anti-takeover provisions of Oregon law and in our articles of incorporation could adversely affect the rights of the holders of our common stock by preventing a sale or takeover of us at a price or prices favorable to the holders of our common stock. Our principal shareholders have significant voting power and may take actions that may make it more difficult to sell our shares at a premium to take over candidates. The price of our common stock has and may continue to fluctuate substantially.

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1040161--3/13/2006--PIXELWORKS_INC