Pixelworks Reports Third Quarter 2008 Financial Results

Higher Gross Profit, Lower Spending Drive Fourth Consecutive
Quarter of Positive Cash Flow from Operations
TUALATIN, Ore.--(Business Wire)--
Pixelworks, Inc. (NASDAQ:PXLW), an innovative provider of powerful
video and pixel processing technology, today announced financial
results for the third quarter ended September 30, 2008.

Third quarter 2008 revenue was $21.5 million, at the high end of
management guidance of $20 million to $22 million. Revenue for the
third quarter was up 3% sequentially from $20.8 million in the second
quarter of 2008 and was down 24% from $28.1 million in the third
quarter of 2007.

Third quarter 2008 GAAP gross profit margin was 53.3 percent, up
from 50.5 percent in the second quarter of 2008 and up 10.3 percentage
points from 43.0 percent in the third quarter of 2007. Third quarter
2008 non-GAAP gross profit margin was 56.6 percent, up from 54.0
percent in the second quarter of 2008 and up 10.9 percentage points
from 45.7 percent in the third quarter of 2007. Higher GAAP and
non-GAAP gross profit margin in the third quarter of 2008 resulted
primarily from continuing improvements in inventory management and
lower product costs, as well as a more favorable mix of products sold
in the third quarter of 2008.

Third quarter 2008 GAAP operating expenses were $11.0 million,
down 5% from $11.6 million in the second quarter of 2008 and down 33%
from $16.4 million in the third quarter of 2007. Third quarter 2008
GAAP operating expenses included $0.1 million in restructuring charges
and $0.4 million in stock-based compensation expense; second quarter
2008 GAAP operating expenses included restructuring charges and
non-cash expenses of $0.7 million; and third quarter 2007 GAAP
operating expenses included $3.0 million in restructuring charges and
non-cash expenses.

Non-GAAP operating expenses of $10.5 million in the third quarter
of 2008 were down 4% from $10.9 million in the second quarter of 2008
and down 22% from $13.4 million in the third quarter of 2007. The
significant year-over-year decreases in GAAP and non-GAAP operating
expenses were a direct result of the Company's restructuring actions.

Third quarter 2008 GAAP net income was $8.2 million, or $0.56 per
diluted share, compared to net loss of $(1.3) million, or $(0.09) per
share in the second quarter of 2008 and net loss of $(4.4) million, or
$(0.27) per share in the third quarter of 2007. On a non-GAAP basis,
the Company recorded net income of $0.7 million, or $0.05 per diluted
share in the third quarter of 2008, compared to net loss of $(0.1)
million, or $(0.00) per share in the second quarter of 2008 and net
loss of $(0.9) million, or $(0.05) per share in the third quarter of
2007. Income and loss per share amounts in prior periods have been
adjusted to reflect the Company's June 4, 2008 reverse stock split.

Non-GAAP net income in the third quarter of 2008 excludes a net
gain of $8.1 million realized on the repurchase of $29.1 million of
the Company's convertible subordinated debentures during the quarter.
As a result of this repurchase and effective balance sheet management,
the Company's total cash and marketable securities balance exceeded
its long-term debt balance by $2.2 million at September 30, 2008. The
third quarter of 2008 is the first quarter end that the Company's cash
and marketable securities balances have exceeded its long-term debt
balance since the first quarter of 2005.

Under its previously announced stock repurchase program, the
Company repurchased approximately 424,000 shares of its common stock
during the third quarter of 2008.

"Our third quarter financial performance was at the high end of
expectations, as we continued to drive further improvements in gross
margin, closely manage expenses and strengthen our balance sheet.
Strength in our financial metrics drove positive cash flow from
operations of $6.2 million and our sixth consecutive quarter of
positive EBITDA," said Bruce Walicek, President and CEO of Pixelworks.
"We secured key design wins for both new and current products with
leading electronics manufacturers, and made steady progress against
our new product roadmap. As we enter the fourth quarter, we are
encouraged by our progress to date and remain focused on tightly
managing our financial performance and executing against our
turnaround plan."

Business Outlook for Fourth Quarter 2008

The following statements are based on the Company's current
expectations. These statements are forward-looking, subject to risks
and uncertainties, and actual results may differ materially. These
statements do not include the potential impact of any investments
outside the ordinary course of business, mergers or acquisitions that
may be completed after September 30, 2008 or other future events.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
press release. The inclusion of any statement in this release does not
constitute a suggestion by the Company or any other person that the
events or circumstances described in such statements are material. The
Company does not undertake to publicly update or revise these
forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied in this
release will not be realized.

The Company expects to record GAAP net loss per share in the
fourth quarter of 2008 of ($0.13) to $(0.32) and to record non-GAAP
net income (loss) per share of $0.03 to $(0.16), based on the
following estimates:

-- The Company anticipates fourth quarter revenue of $18.5
million to $20.5 million. Revenue is highly dependent on a
number of factors including, but not limited to, consumer
confidence and spending, seasonality in the consumer
electronics market, general economic conditions, the Company's
ability to secure additional design wins, timely customer
transition to new product designs, new product introductions,
production yields, growth rates in the advanced television,
multimedia projector, advanced media processor, and LCD
monitor and panel markets, levels of inventory at distributors
and customers, and supply of products from third party
foundries.

-- GAAP gross profit margin of approximately 45 to 48 percent.
Non-GAAP gross profit margin of approximately 49 to 52
percent. Gross profit margin may be higher or lower than
expected due to many factors including, but not limited to,
competitive pricing actions, changes in estimated product
costs, revenue levels and product mix, new product yields, and
inventory and warranty reserve changes.

-- GAAP operating expenses of $11.0 million to $12.0 million and
non-GAAP operating expenses of $10.0 million to $11.0 million.

-- Nominal interest and other income, net on both a GAAP and
non-GAAP basis.

-- A tax provision of $750,000 on a GAAP basis and $250,000 on a
non-GAAP basis.

Conference Call Information

Pixelworks will host a conference call today at 2 p.m. Pacific
Time, which can be accessed by calling 617-213-8893 and using passcode
96153749. A Web broadcast of the call can be accessed by visiting the
Company's investor page at www.pixelworks.com. For those unable to
listen to the live Web broadcast, it will be archived for 30 days. A
replay of the conference call will also be available through midnight
on October 28, 2008, and can be accessed by calling 617-801-6888 and
using passcode 58117784.

About Pixelworks, Inc.

Pixelworks, headquartered in Tualatin, Oregon, is an innovative
designer, developer and marketer of video and pixel processing
technology semiconductors and software for high-end digital video
applications. At design centers in Shanghai and San Jose, Pixelworks
engineers push pixel performance to new levels for leading
manufacturers of consumer electronics and professional displays
worldwide.

For more information, please visit the Company's Web site at
www.pixelworks.com.

Note: Pixelworks(R) and the Pixelworks logo(R) are trademarks of
Pixelworks, Inc. All other trademarks are the property of their
respective owners.

Non-GAAP Financial Measures

This press release makes reference to non-GAAP gross profit
margins, operating expenses and net income (loss) which exclude gains
on the repurchase of long-term debt, an other-than-temporary
impairment of a marketable security, other income, restructuring
charges, acquisition-related items and stock-based compensation
expense, all of which are required under GAAP. The Company believes
these non-GAAP measures provide a meaningful perspective on its
underlying cash flow dynamics, but cautions investors to consider
these measures in addition to, not as a substitute for, its
consolidated financial results as presented in accordance with GAAP. A
reconciliation between GAAP and non-GAAP financial measures is
included in this earnings release which is available in the investor
relations section of the Company's website.

Safe Harbor Statement

This release contains statements, including the statements in
Bruce Walicek's quote and the "Business Outlook for Fourth Quarter
2008" section above, that are forward-looking statements within the
meaning of the "Safe Harbor" provisions of the federal Securities
Litigation Reform Act of 1995. Such statements are based on current
expectations, estimates and projections about the Company's business.
These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to
predict. Actual results could vary materially from the description
contained herein due to many factors including those described above
and the following: changes in growth in the multimedia projector,
advanced television, advanced media processor, and LCD panel and
monitor markets; competitive factors, such as rival chip
architectures, introduction or traction by competing designs, or
pricing pressures; changes in customer ordering patterns or lead
times; seasonality in the consumer electronics market; new product
yield rates; supply of products from third party foundries; the
success of our products in expanded markets; our efforts to maintain
profitability and a positive EBITDA; insufficient, excess or obsolete
inventory and variations in inventory valuation; changes in the
recoverability of intangible assets and long lived assets; and other
risk factors listed from time to time in the Company's Securities and
Exchange Commission filings.

The forward-looking statements we make today, speak as of today,
and we do not undertake any obligation to update any such statements
to reflect events or circumstances occurring after today. Please refer
to our Annual Report on Form 10-K for the year ended December 31, 2007
and subsequent SEC filings for a description of factors that could
cause actual results to differ materially from the preliminary results
announced.

- Financial Tables Follow -

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PIXELWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

Three Months Ended Nine Months Ended
---------------------------- --------------------
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2008 2008 2007 2008 2007
--------- -------- --------- --------------------

Revenue, net $ 21,479 $20,793 $ 28,133 $ 66,248 $ 79,010
Cost of revenue (1) 10,028 10,295 16,025 32,628 45,447
--------- -------- --------- ---------- ---------
Gross profit 11,451 10,498 12,108 33,620 33,563

Operating expenses:
Research and
development (2) 6,476 7,193 8,962 20,391 30,612
Selling, general
and
administrative
(3) 4,413 4,491 5,697 13,590 20,235
Restructuring 121 (158) 1,645 971 7,048
Amortization of
acquired
intangible
assets - 74 89 164 269
--------- -------- --------- ---------- ---------
Total
operating
expenses 11,010 11,600 16,393 35,116 58,164
--------- -------- --------- ---------- ---------
Income (loss)
from
operations 441 (1,102) (4,285) (1,496) (24,601)

Gain on repurchase
of long-term debt,
net 8,113 - - 19,670 -
Interest income 405 553 1,454 1,941 4,425
Interest expense (343) (419) (658) (1,335) (2,003)
Amortization of
debt issuance
costs (83) (125) (165) (354) (496)
Other income - 218 - 218 -
Other-than-
temporary
impairment of
marketable
security - - - (6,490) -
--------- -------- --------- ---------- ---------
Interest and
other income,
net 8,092 227 631 13,650 1,926
--------- -------- --------- ---------- ---------
Income (loss)
before income
taxes 8,533 (875) (3,654) 12,154 (22,675)

Provision (benefit)
for income taxes 314 375 775 (948) 1,796
--------- -------- --------- ---------- ---------

Net income
(loss) $ 8,219 $(1,250) $ (4,429) $ 13,102 $(24,471)
========= ======== ========= ========== =========

Net income (loss)
per share:
Basic $ 0.57 $ (0.09) $ (0.27) $ 0.90 $ (1.50)
========= ======== ========= ========== =========
Diluted $ 0.56 $ (0.09) $ (0.27) $ 0.89 $ (1.50)
========= ======== ========= ========== =========

Weighted average
shares
outstanding:
Basic 14,383 14,577 16,307 14,629 16,284
========= ======== ========= ========== =========
Diluted 15,399 14,577 16,307 14,640 16,284
========= ======== ========= ========== =========

-------------------
(1) Includes:
Amortization of
acquired
developed
technology $ 705 $ 705 $ 705 $ 2,115 $ 2,115
Stock-based
compensation 8 20 22 46 70
Restructuring - - 11 - 147
(2)Includes stock-
based
compensation 177 449 538 1,075 1,718
(3)Includes stock-
based
compensation 227 313 684 965 2,633
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PIXELWORKS, INC.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION (1)
(In thousands, except per share data)
(Unaudited)

Three Months Ended Nine Months Ended
------------------------------ --------------------
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2008 2008 2007 2008 2007
------------------------------ --------------------
Reconciliation of
GAAP and non-
GAAP gross
profit

GAAP gross profit $ 11,451 $ 10,498 $ 12,108 $ 33,620 $ 33,563

Amortization of
acquired
developed
technology 705 705 705 2,115 2,115
Stock-based
compensation 8 20 22 46 70
Restructuring - - 11 - 147
---------- --------- ---------- ---------- ---------
Total
reconciling
items included
in cost of
revenue 713 725 738 2,161 2,332
---------- --------- ---------- ---------- ---------
Non-GAAP gross
profit $ 12,164 $ 11,223 $ 12,846 $ 35,781 $ 35,895
========== ========= ========== ========== =========

Non-GAAP gross
profit margin 56.6% 54.0% 45.7% 54.0% 45.4%
========== ========= ========== ========== =========

Reconciliation of
GAAP and non-
GAAP operating
expenses

GAAP operating
expenses $ 11,010 $ 11,600 $ 16,393 $ 35,116 $ 58,164

Reconciling item
included in
research and
development:
Stock-based
compensation 177 449 538 1,075 1,718
Reconciling item
included in
selling, general
and
administrative:
Stock-based
compensation 227 313 684 965 2,633
Restructuring 121 (158) 1,645 971 7,048
Amortization of
acquired
intangible
assets - 74 89 164 269
---------- --------- ---------- ---------- ---------
Total
reconciling
items included
in operating
expenses 525 678 2,956 3,175 11,668
---------- --------- ---------- ---------- ---------
Non-GAAP
operating
expenses $ 10,485 $ 10,922 $ 13,437 $ 31,941 $ 46,496
========== ========= ========== ========== =========

Reconciliation of
GAAP and non-
GAAP net income
(loss)

GAAP net income
(loss) $ 8,219 $ (1,250) $ (4,429) $ 13,102 $(24,471)

Reconciling items
included in cost
of revenue 713 725 738 2,161 2,332
Reconciling items
included in
operating
expenses 525 678 2,956 3,175 11,668
Gain on
repurchase of
long-term debt,
net (8,113) - - (19,670) -
Other income - (218) - (218) -
Other than
temporary
impairment of
marketable
security - - - 6,490 -
Tax effect of
non-GAAP
adjustments (596) - (134) (596) (123)
---------- --------- ---------- ---------- ---------

Non-GAAP net
income (loss) $ 748 $ (65) $ (869) $ 4,444 $(10,594)
========== ========= ========== ========== =========

Non-GAAP net
income (loss)
per share -
basic and
diluted $ 0.05 $ (0.00) $ (0.05) $ 0.30 $ (0.65)
========== ========= ========== ========== =========

Non-GAAP weighted
average shares
outstanding
Basic 14,383 14,577 16,307 14,629 16,284
========== ========= ========== ========== =========
Diluted 14,392 14,577 16,307 14,640 16,284
========== ========= ========== ========== =========

----------------------------------------------------------------------
(1) Our non-GAAP gross profit, non-GAAP operating expenses, non-GAAP
net income (loss) and non-GAAP net income (loss) per share differs
from GAAP gross profit, GAAP operating expenses, GAAP net income
(loss) and GAAP net income (loss) per share due to the exclusion of
gains on the repurchase of long-term debt, an other-than-temporary
impairment of a marketable security, other income, restructuring
charges, acquisition-related items and stock-based compensation
expense. Pixelworks' management believes the presentation of non-GAAP
gross profit, non-GAAP operating expenses, non-GAAP net income (loss)
and non-GAAP net income (loss) per share provides useful information
to investors regarding Pixelworks' results of operations by allowing
investors to better evaluate underlying cash flow dynamics.
Pixelworks' management also uses each of these non-GAAP measures
internally to better evaluate underlying cash flow dynamics.
Pixelworks, however, cautions investors to consider these non-GAAP
financial measures in addition to, and not as a substitute for, our
GAAP financial measures.
*T

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PIXELWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

September 30, December 31,
2008 2007
------------- -------------

ASSETS

Current assets:
Cash and cash equivalents $ 42,780 $ 74,572
Short-term marketable securities 18,560 34,581
Accounts receivable, net 5,948 6,223
Inventories, net 5,257 11,265
Prepaid expenses and other current
assets 3,771 3,791
------------- -------------
Total current assets 76,316 130,432

Long-term marketable securities 1,490 9,804
Property and equipment, net 4,839 6,148
Other assets, net 5,387 6,902
Debt issuance costs, net 764 2,260
Acquired intangible assets, net 4,091 6,370
------------- -------------
Total assets $ 92,887 $ 161,916
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 4,541 $ 3,992
Accrued liabilities and current portion
of long-term liabilities 7,396 13,848
Current portion of income taxes payable - 232
------------- -------------
Total current liabilities 11,937 18,072

Long-term liabilities, net of current
portion 1,501 1,236
Income taxes payable, net of current
portion 10,866 10,635
Long-term debt 60,634 140,000
------------- -------------
Total liabilities 84,938 169,943

Shareholders' equity (deficit) 7,949 (8,027)
------------- -------------
Total liabilities and shareholders'
equity $ 92,887 $ 161,916
============= =============
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Pixelworks, Inc.
Steven Moore, 408-200-9221
smoore@pixelworks.com

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