PIXELWORKS INC, S-1/A, 2000-05-17

PIXELWORKS INC
S-1/A, 2000-05-17
SEMICONDUCTORS & RELATED DEVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000

REGISTRATION NO. 333-31134
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
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PIXELWORKS, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<C> <C> <S> <C>
OREGON 3674 91-1761992
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>

7700 SW MOHAWK
TUALATIN, OREGON 97062
(503) 612-6700
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)

ALLEN H. ALLEY
PRESIDENT
PIXELWORKS, INC.
7700 SW MOHAWK
TUALATIN, OREGON 97062
(503) 612-6700
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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COPIES TO:

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<S> <C>
WILLIAM C. CAMPBELL, ESQ. ERIC S. HAUETER, ESQ.
STEPHEN M. GOING, ESQ. MICHAEL F. TAYLOR, ESQ.
ATER WYNNE LLP BROWN & WOOD LLP
222 S.W. Columbia, Suite 1800 555 California Street, Suite 5000
Portland, OR 97201 San Francisco, CA 94104
(503) 226-1191 (415) 772-1200
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box: / /

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.

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SUBJECT TO COMPLETION, DATED MAY 17, 2000.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS

5,750,000 SHARES

[LOGO]

COMMON STOCK
$ PER SHARE

---------

We are selling 5,750,000 shares of common stock. The underwriters named in
this prospectus may purchase up to 862,500 additional shares of common stock
from us to cover over-allotments.

This is an initial public offering of our shares of common stock. We
currently expect the initial public offering price to be between $12.00 and
$14.00 per share. We have applied to have our shares of common stock included
for quotation on the Nasdaq National Market under the symbol "PXLW."

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INVESTING IN OUR SHARES OF COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Pixelworks (before expenses) $ $
</TABLE>

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 2000.

--------------

Salomon Smith Barney Deutsche Banc Alex. Brown

SG Cowen

E*OFFERING

, 2000
<PAGE>
[INSIDE FRONT COVER]

Description of Inside Cover Art

The graphic is entitled "Pixelworks System-on-a-Chip Semiconductors Enable the
Display of Broadband Content." A paragraph of text reads: "Pixelworks
system-on-a-chip semiconductors open up the last meter of the broadband pipe by
translating video, computer graphics and Web information for display on a wide
variety of products including flat panel computer monitors, televisions,
multimedia projectors and Internet appliances. We specialize in cost effective
system-on-a-chip semiconductors and software for high-speed digital, analog and
video signal processing."

The page uses a stylized illustration of a representation of a pipeline with
a representation of an ImageProcessor semiconductor linked to various display
devices. At the top is a representation of a human eye. At the bottom of the
illustration are representations of various forms of visual broadband content,
including three illustrated streams identified as PC Graphics, Video and Web
content. The pipe is drawn using perspective with the end at the bottom of the
page appearing to be distant with the pipe labeled "The Broadband Pipe." At the
opening at the top is an illustration of an ImageProcessor semiconductor with a
Pixelworks logo on the top of the chip. Four illustrations of display devices
surround the integrated circuit from left to right as follows: LCD monitor,
multimedia projector, wide-screen television, and an internet appliance.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THIS PROSPECTUS.

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TABLE OF CONTENTS

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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition 28
and Results of Operations.................................
Business.................................................... 38
Management.................................................. 50
Certain Transactions........................................ 58
Principal Shareholders...................................... 60
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 65
Underwriting................................................ 67
Legal Matters............................................... 69
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Financial Statements............................... F-1
</TABLE>

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Until , 2000, all dealers that buy, sell or trade the shares of
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
SINCE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY AND
CONSIDER THE INFORMATION UNDER "RISK FACTORS" AND IN OUR FINANCIAL STATEMENTS
AND THE NOTES RELATING TO THESE FINANCIAL STATEMENTS, TOGETHER WITH THE
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO
INVEST IN OUR SHARES OF COMMON STOCK. OUR FISCAL YEAR ENDS ON DECEMBER 31.
EXCEPT WHERE OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS IS BASED UPON
INFORMATION AS OF MARCH 31, 2000.

OUR COMPANY

We design, develop and market semiconductors and software that enable the
visual display of broadband content through a wide variety of electronic
devices. Broadband content includes video, computer graphics and visual Web
information delivered at high speeds via cable and telecommunications lines to
our homes and offices. Enhancing access to broadband information has typically
been associated with increasing transmission capacity of these lines over the
"last mile," the distance between the telephone and cable company and the user's
home or office. We are focused on the point where the information is processed
and displayed which we refer to as the "last meter." In the last meter, there is
an increasing requirement to rapidly process large amounts of data which is
received in a multitude of broadcast and Web formats. Our semiconductors open up
the last meter by processing broadband content to provide the best possible
image on a wide variety of display products such as flat panel computer
monitors, multimedia projectors and high-definition televisions.

Our semiconductors integrate a microprocessor, memory and image processing
circuits that function like a computer on a single chip, or system-on-a-chip. We
design our products to combine our system-on-a-chip semiconductors with easy to
use, feature-rich software. We pioneered our semiconductor designs in
technically demanding display products including the most advanced
high-resolution flat panel monitors, televisions and multimedia projectors. We
have recently extended our product line into high-volume, mass markets such as
those for flat panel monitors with features and prices designed for mainstream
consumers. In the future, we intend to develop products for new markets
including Internet appliances, electronic devices designed solely for accessing
and displaying Web information.

To date, we have announced that our semiconductors are used in products
marketed by Compaq, Sony and ViewSonic. Although a approximately 48.0% of our
total revenues for 1999 and 47.1% of our total revenues for the three months
ended March 31, 2000 were concentrated with three large customers, we have more
than 45 customers, including seven out of the top 10 computer monitor brands and
10 out of the top 15 television brands. Our customers have more than 75 products
in development or production using our system-on-a-chip semiconductors.

The convergence of television and computer applications is creating new
development opportunities for display devices that integrate the ability to
display full motion video and support interactive capabilities such as browsing
the Web while watching television. This convergence requires an increase in
transmission capacity and makes the translation, interpretation and display of
large amounts of information more complex. This has resulted in a bottleneck
that has limited access to the full visual potential of broadband content. Our
system-on-a-chip semiconductors break through this bottleneck by translating and
optimizing high-speed video, computer graphics and Web information in real time.
Our products can also process analog and digital information ranging from basic
computer graphics and broadcast television to the latest theater-quality
high-definition television standards.

Our semiconductors integrate as many as 10 separate components into a single
chip. These semiconductors, combined with our software, enable our customers to
create unique products with substantially more functions and lower overall
development costs in highly efficient designs that allow

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for miniaturization. Our highly integrated semiconductors enable our customers
to get their products into the market more rapidly by significantly reducing the
selection, sourcing, testing, integration, debugging, and design when using
separate components.

The key benefits of our products include:

- consistent, software-compatible design which can easily be implemented
across product lines;

- broad compatibility with a range of video, Web and computer graphics
signals and display technologies;

- a large suite of features for the most demanding applications; and

- rapid time to market with lower development costs.

Our objective is to be a leading provider of system-on-a-chip semiconductors
and software enabling universal access to broadband content through a wide array
of electronic devices in consumer and business markets.

The key elements of this strategy are to:

- design and sell increasingly integrated semiconductors;

- deliver highly flexible, software-driven products;

- expand from the most technically demanding markets into high-volume mass
markets;

- support and define industry standards; and

- build strategic relationships.

CORPORATE INFORMATION

We were incorporated in Oregon on January 16, 1997. Our principal executive
office is located at 7700 SW Mohawk, Tualatin, Oregon 97062 and our telephone
number is 503-612-6700. Our World Wide Web address is www.pixelworks.com.
Information on our Web site does not constitute part of this prospectus.

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THE OFFERING

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<S> <C>
Common stock offered......................... 5,750,000 shares

Common stock to be outstanding after the
offering................................... 35,503,572 shares

Use of proceeds.............................. For working capital and for general corporate
purposes. See "Use of Proceeds."

Proposed Nasdaq National Market symbol....... PXLW
</TABLE>

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Unless otherwise indicated, all information in this prospectus, including
the outstanding share information above, is based on the number of shares
outstanding as of March 31, 2000 and:

- gives effect to the automatic conversion of all currently outstanding
shares of preferred stock into 19,708,835 shares of common stock
immediately prior to the completion of the offering;

- reflects a three-for-two split of our common stock effective as of
March 31, 2000;

- excludes 3,010,832 shares of common stock issuable upon the exercise of
options outstanding at March 31, 2000 at a weighted average exercise of
$1.30 per share;

- excludes 2,637,741 shares of common stock available for issuance under our
1997 stock incentive plan;

- excludes 1,500,000 shares of common stock available for issuance under our
2000 employee stock purchase plan; and

- assumes no exercise of the underwriters' over-allotment option.

5
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SUMMARY FINANCIAL INFORMATION

The following table sets forth our summary financial data. You should read
this information together with our financial statements, the notes to those
statements beginning on page F-1 of this prospectus, the information under
"Selected Financial Data," "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The pro forma numbers in the table give effect to the conversion of all
outstanding shares of preferred stock into 19,708,835 shares of common stock
immediately prior to the completion of the offering.

The balance sheet data on a pro forma as adjusted basis reflects the sale of
5,750,000 shares of common stock offered by us at an assumed initial offering
price of $13.00 per share after deducting the underwriting discount and
estimated offering expenses payable by us, and the receipt of net proceeds from
this offering.

Pro forma net loss per share, basic
and diluted (unaudited)........... $ (0.38) $ (0.67)
======= =======
Shares used in computing pro forma
net loss per share, basic and
diluted (unaudited)............... 24,342 25,677
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 35,410 $35,410 $104,028
Working capital.......................................... 35,280 35,280 103,898
Total assets............................................. 44,396 44,396 113,014
Redeemable convertible preferred stock................... 65,077 -- --
Total shareholders' equity (deficit)..................... $(26,069) $39,008 107,626
</TABLE>

6
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RISK FACTORS

INVESTING IN OUR SHARES OF COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF
ANY OF THE FOLLOWING RISKS OCCUR, THE MARKET PRICE OF OUR SHARES OF COMMON STOCK
COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATED TO OUR OPERATIONS

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS.

We were founded in 1997 and have a limited operating history, which makes an
evaluation of our future prospects difficult. In addition, the revenue and
income potential of our business and markets are unproven. We began shipments of
our first product in December 1998. Accordingly, we face risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. If we do not successfully address these risks, including the risks
discussed below, we would likely not achieve anticipated levels of revenue
growth. In this event, we would be unable to achieve profitability or build a
sustainable business.

WE HAVE INCURRED NET LOSSES SINCE OUR INCEPTION, AND WE MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY.

We incurred net losses of approximately $376,000, $1.6 million and $4.9
million in 1997, 1998 and 1999, respectively, and had an accumulated deficit of
approximately $22.0 million as of March 31, 2000. In the future we expect our
research and development and selling, general and administrative expenses to
increase. In addition, we will incur substantial non-cash charges relating to
the amortization of deferred stock compensation. Accordingly, we expect to
continue to incur additional operating losses for at least the next 12 months,
and these losses may be substantial. Although we have experienced revenue growth
in recent quarters, this growth is not necessarily indicative of future
operating results, and we cannot assure you that we will be able to sustain the
growth in our revenues. We cannot be certain that we will achieve profitability
or that, if we do, that we can sustain or increase profitability on a quarterly
or annual basis in the future or at all. This may in turn cause the price of our
common stock to decline. In addition, if we do not achieve or sustain
profitability in the future, we may be unable to continue our operations.

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 quarterly operating results are likely to vary significantly in the
future based on a number of factors related to our industry and the markets for
our products, some of which are not in our control and any of which may cause
the price of our common stock to fluctuate. These factors include:

- demand for flat panel monitors, advanced television displays, multimedia
projectors and Internet appliances;

- demand for our products and the timing of orders for our products;

- the deferral of customer orders in anticipation of our new products or
product enhancements or due to a reduction in our customers' end demand;

- the loss of one or more of our key distributors or customers or a
reduction, delay or cancellation of orders from one or more of these
parties;

- changes in the available production capacity at the semiconductor
fabrication foundries that manufacture our products and changes in the
costs of manufacturing;

- our ability to provide adequate supplies of our products to customers and
avoid excess inventory;

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- announcement or introduction of products and technologies by our
competitors;

- changes in product mix, product costs or pricing, or distribution
channels; and

- general economic conditions and economic conditions specific to the
personal computer, display and semiconductor markets.

These factors are difficult to forecast, and these or other factors could
seriously harm our business. We anticipate the rate of new orders may vary
significantly from quarter to quarter. Our operating expenses and inventory
levels are based on our expectations of future revenues and our operating
expenses are relatively fixed in the short term. Consequently, if anticipated
sales and shipments in any quarter do not occur when expected, operating
expenses and inventory levels could be disproportionately high, and our
operating results for that quarter and, potentially, future quarters may be
negatively impacted. Any shortfall in our revenues would have a direct impact on
our business. In addition, fluctuations in our quarterly results could adversely
affect the price of our common stock in a manner unrelated to our long-term
operating performance. Because our operating results are volatile and difficult
to predict, you should not rely on the results of one quarter as an indication
of our future performance. It is likely that in some future quarter our
operating results will fall below the expectations of securities analysts and
investors. In this event, the price of our common stock may decline
significantly.

IF WE DO NOT ACHIEVE ADDITIONAL DESIGN WINS IN THE FUTURE, OUR ABILITY TO GROW
WOULD BE SERIOUSLY LIMITED.

Our future success will depend on developers of advanced display devices
designing our products into their systems. To achieve design wins we must define
and deliver cost-effective, innovative and integrated semiconductors. Once a
supplier's products have been designed into a system, the developer may be
reluctant to change its source of components due to the significant costs
associated with qualifying a new supplier. Accordingly, the failure on our part
to obtain additional design wins with leading branded manufacturers or
integrators, and to successfully design, develop and introduce new products and
product enhancements could harm our business, financial condition and results of
operations.

Achieving a design win does not necessarily mean that a developer will order
large volumes of our products. A design win is not a binding commitment by a
developer to purchase our products. Rather, it is a decision by a developer to
use our products in the design process of that developer's products. Developers
can choose at any time to discontinue using our products in their designs or
product development efforts. If our products are chosen to be incorporated into
a developer's products, we may still not realize significant revenues from that
developer, if that developer's products are not commercially successful.

BECAUSE OF THE COMPLEX NATURE OF OUR SEMICONDUCTOR DESIGNS AND THE ASSOCIATED
MANUFACTURING PROCESS AND THE RAPID EVOLUTION OF OUR CUSTOMERS' PRODUCT DESIGN
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.

The development of our semiconductors, which incorporate mixed analog and
digital signal processing, is highly complex. These complexities require that we
employ advanced designs and manufacturing processes that are unproven. Since
commencing our operations, we have experienced increased development time and
delays in introducing new products. We will not always succeed in developing new
products or product enhancements nor do so in a timely manner.

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Successful development and timely introduction of new or enhanced products
depends on a number of other factors, including:

- accurate prediction of customer requirements and evolving industry
standards, including digital interface and content piracy protection
standards;

- development of advanced display technologies and capabilities;

- timely completion and introduction of new product designs;

- use of advanced foundry processes and achievement of high manufacturing
yields; and

- market acceptance of the new products.

If we are not able to successfully develop and introduce our products in a
timely manner, our business and results of operations will be adversely
affected.

INTEGRATION OF SOFTWARE IN OUR PRODUCTS ADDS COMPLEXITY AND COST WHICH MAY
AFFECT OUR ABILITY TO ACHIEVE DESIGN WINS AND MAY AFFECT OUR PROFITABILITY.

Our products incorporate software and software development tools. The
integration of software 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. Some customers and potential customers may choose
not to use our products because of the additional requirements of implementing
our software, preferring to use a product that works with their existing
software. 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 ARE DIFFICULT TO MANUFACTURE WITHOUT DEFECTS AND
THE EXISTENCE OF DEFECTS IN THE MANUFACTURED PRODUCTS COULD RESULT IN AN
INCREASE IN OUR COSTS AND DELAYS IN THE AVAILABILITY OF OUR PRODUCTS.

The manufacture of semiconductors is a complex process and it is often
difficult for semiconductor foundries to produce semiconductors free of defects.
Because our products are more highly integrated than many other semiconductors
and incorporate mixed analog and digital signal processing and embedded memory
technology, they are even more difficult to produce without defects.

The ability to manufacture products of acceptable quality depends on both
product design and manufacturing process technology. Since defective products
can be caused by either design or manufacturing difficulties, 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. Failure to
achieve defect-free products due to their increasing complexity may result in an
increase in our cost and delays in the availability of our products.

A SIGNIFICANT AMOUNT OF OUR REVENUE COMES FROM A FEW CUSTOMERS AND DISTRIBUTORS
AND ANY DECREASE IN REVENUES FROM, OR LOSS OF ANY OF, THESE CUSTOMERS OR
DISTRIBUTORS COULD SIGNIFICANTLY REDUCE OUR TOTAL REVENUES.

We are and will continue to be dependent on a limited number of large
customers and distributors for a substantial portion of our revenue. In 1999 and
for the three months ended March 31, 2000, sales to Tokyo Electron Device
Limited, our Japanese distributor, represented 54.9% and 64.2% of our total
revenue, respectively, and sales to MicroMax International Corporation, our
Taiwanese distributor, represented 24.4% and 13.1% of our total revenue,
respectively. In 1999 and for the three months

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ended March 31, 2000, sales through Tokyo Electron Device to our customer Seiko
Epson Corporation. represented 23.3% and 25.3%, of our total revenue,
respectively, and sales through Tokyo Electron Device to our customer
Hitachi, Ltd represented 11.2% and 12.4% of our total revenue, respectively.
Sales through MicroMax to our customer Optoma Corp., formerly known as CTX
Opto-Electronics Corporation, an integrator for Compaq Computer Corporation,
represented 13.5% and 9.4% of our total revenue for 1999 and the three months
ended March 31, 2000, respectively. As a result of this customer and distributor
concentration, any one of the following factors could significantly impact our
revenues:

- a significant reduction, delay or cancellation of orders from one or more
of our key distributors, branded manufacturers or integrators; or

- a decision by one or more significant customers to select products
manufactured by a competitor, or its own internally developed
semiconductor, for inclusion in future product generations.

The display manufacturing market is highly concentrated among relatively few
large manufacturers. We expect our operating results to continue to depend on
sales and revenues from a relatively small number of distributors that sell our
products to display manufacturers and their suppliers.

THE CONCENTRATION OF OUR ACCOUNTS RECEIVABLE WITH A LIMITED NUMBER OF
DISTRIBUTORS EXPOSES US TO INCREASED CREDIT RISK AND COULD SERIOUSLY HARM OUR
OPERATING RESULTS AND CASH FLOWS.

As of March 31, 2000, we had accounts receivable from Tokyo Electron Device
and MicroMax that represented 69.0% and 14.8%, respectively, of our total
accounts receivable. The failure by either of these distributors to pay these
accounts receivable would result in a significant expense that would seriously
harm our operating results and would reduce our cash flows.

INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND IF WE
DO NOT SUCCESSFULLY ADDRESS THE RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS, OUR REVENUES COULD DECREASE.

Sales outside of the U.S. accounted for 0.0%, 51.1%, 92.8% and 94.7% of our
total revenue in 1997, 1998, 1999 and for the three months ended March 31, 2000,
respectively. Most of our customers are concentrated in Japan, Korea and Taiwan,
with aggregate sales from those three countries accounting for 89.7% and 90.1%
of our total revenue during the year ended December 31, 1999 and the three
months ended March 31, 2000, respectively. We anticipate that sales outside the
U.S. will continue to account for a substantial portion of our revenues in
future periods. In addition, customers who incorporate our products into their
products sell them outside of the U.S., thereby exposing us indirectly to
foreign risks. In addition, all of our products are manufactured outside of the
U.S. We are, therefore, subject to many international risks, including:

- increased difficulties in managing international distributors and
manufacturers of our products and components due to varying time zones,
languages and business customs;

- foreign currency exchange fluctuations such as the Asian financial crisis
that occurred in 1998 which caused a devaluation in the currencies of
Japan, Taiwan and Korea resulting in an increased cost of procuring our
semiconductors;

- potentially adverse tax consequences such as license fee revenue taxes
imposed in Japan;

- difficulties regarding timing and availability of export and import
licenses, which have limited our ability to freely move demonstration
equipment and samples in and out of Asia;

- political and economic instability, particularly in Taiwan and Korea;

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- reduced or limited protection of our intellectual property, significant
amounts of which are contained in software which is more prone to design
piracy;

- increased transaction costs related to sales transactions conducted
outside of the U.S. such as charges to secure letters of credit for
foreign receivables;

- difficulties in maintaining sales representatives outside of the U.S. that
are knowledgeable of the display processor industry and our display
processor products;

- changes in the regulatory environment in Japan, Korea and Taiwan that may
significantly impact purchases of our products by our customers; and

- difficulties in collecting accounts receivable.

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.

Selling through distributors reduces our ability to forecast sales and
increases the complexity of our business. Since our distributors are an
intermediary between us and the companies using our products, we must rely on
our distributors to accurately report inventory levels and production forecasts.
This arrangement requires us to manage a more complex supply chain and monitor
the financial condition and credit worthiness of our distributors and customers.
Our failure to manage one or more of these challenges could result in excess
inventory or shortages that could seriously impact our operating revenue or
limit the ability of companies using our semiconductors to deliver their
products.

DEPENDENCE ON A LIMITED NUMBER OF SOLE-SOURCE, THIRD PARTY MANUFACTURERS FOR OUR
PRODUCTS EXPOSES US TO SHORTAGES BASED ON CAPACITY ALLOCATION, 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.

We do not own or operate a semiconductor fabrication facility and we do not
have the resources to manufacture our products internally. We rely on Toshiba
Corporation and Taiwan Semiconductor Manufacturing Company, third party
foundries for wafer fabrication and other contract manufacturers for assembly
and electrical testing of our products. Our requirements represent only a small
portion of the total production capacity of our contract manufacturers. Our
third-party manufacturers have in the past reallocated capacity to other
customers even during periods of high demand for our products. We expect that
this will occur in the future. We have an agreement with Toshiba which covers
quantity and pricing terms relating to the manufacture of certain of our
semiconductors. Other than this agreement, we do not have a supply contract with
any of our other contract manufacturers, and they are not obligated to supply us
with products for any specific period, in any specific quantity or at any
specific price, except as may be provided in a particular purchase order. From
time to time our third-party manufacturers increase prices charged to
manufacture our products with little notice. This requires us to either increase
the price we charge for our products or suffer a decrease in our gross margins.
Currently, this risk is particularly applicable because worldwide semiconductor
manufacturing capacity is at full production. We try not to maintain substantial
inventories of products, but need to order products long before we have firm
purchase orders for those products which could result in excess inventory or
inventory shortages. None of our products is currently manufactured by more than
one supplier, and we expect that all of our products will continue to be
manufactured by a single third-party manufacturer. This means that a disruption
in production by a single third-party manufacturer would immediately result in
our inability to deliver our products. For example, in September 1999 we

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experienced a delay in delivery of a prototype of a product caused by the
shutdown of our third-party manufacturer's facility due to an earthquake.

If we are unable to obtain our products from manufacturers on schedule, our
ability to satisfy customer demand will be harmed, and revenue from the sale of
products may be lost or delayed. If orders for our products are canceled,
expected revenues will not be realized. In addition, if the price charged by our
third-party manufacturers increases we will be required to increase our prices,
which could harm our competitiveness, or suffer declines in our gross margin.

WE INTEND TO ASSUME MORE RESPONSIBILITY FOR THE MANUFACTURING OF OUR PRODUCTS
WHICH, IF NOT IMPLEMENTED SUCCESSFULLY, COULD RESULT IN INCREASED COSTS OR A
REDUCTION OR LOSS OF REVENUE.

Currently, we purchase packaged, assembled and tested products from contract
manufacturers. We expect that we will assume greater responsibility for this
process for our next-generation of products by subcontracting separately for the
production of wafers and for their assembly and testing. We intend to build some
future 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. If we do so, we will become subject to increased risks arising from
wafer manufacturing yields and associated with coordination of the
manufacturing, assembly and testing process. Failure to implement this approach
to manufacturing properly, would reduce our revenues and harm our gross margin
and results of operations.

WE ARE DEPENDENT ON OUR FOUNDRIES TO IMPLEMENT COMPLEX SEMICONDUCTOR
TECHNOLOGIES WHICH COULD ADVERSELY AFFECT OUR OPERATIONS IF THOSE TECHNOLOGIES
ARE NOT AVAILABLE, 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. However, 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 and adversely affected if advanced manufacturing processes
are unavailable to us, substantially delayed or inefficiently implemented.

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 products require manufacturing with state-of-the-art fabrication
equipment and techniques. Because the lead time needed to establish a
relationship with a new contract manufacturer is at least six months, and the
estimated time for us to adapt a product's design to a particular contract
manufacturer's processes is at least four months, there is no readily available
alternative source of supply for any specific product. This could cause
significant delays in shipping products, which may 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.

Our future success depends upon the continued services of our executive
officers, key hardware and software engineers, and sales, marketing and support
personnel, many of whom would be difficult to replace. The loss of one or more
of these employees could seriously harm our business. Particularly, because of
the highly technical nature of our business, the loss of key engineering
personnel could

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delay product introductions and significantly impair our ability to successfully
create future products. In particular, the loss of the services of Allen Alley,
our President, Chief Executive Officer and Chairman, Michael West, our Vice
President, Technology, or Robert Greenberg, our Vice President, Product
Development and Customer Support, could materially and adversely affect us. We
are currently planning to hire a significant number of additional employees this
year and in future periods, and we believe our success depends, in large part,
upon our ability to identify, attract and retain qualified hardware and software
engineers, and 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. We have experienced, and may continue to experience, difficulty in
hiring and retaining candidates with appropriate qualifications. If we do not
succeed in hiring and retaining candidates with appropriate qualifications, our
product development efforts, revenues and business could be seriously harmed.

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.

Because our sales are made on the basis of purchase orders rather than
long-term purchase commitments, which our customers may cancel or defer purchase
orders at any time. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we or our
customers overestimate demand, we may purchase products which we may not be able
to sell. As a result, we would have excess inventory, which would increase our
losses. Conversely, if we or our customers underestimate demand or if sufficient
manufacturing capacity is unavailable, we would forego revenue opportunities,
lose market share and damage our customer relationships.

DEVELOPMENT ARRANGEMENTS MAY CAUSE US TO INCUR SUBSTANTIAL OPERATING EXPENSES
WITHOUT THE GUARANTEE OF ANY ASSOCIATED REVENUE OR FAR IN ADVANCE OF REVENUE.

We have development arrangements with customers such as Compaq and ViewSonic
and other parties such as Intel Corporation that consume large amounts of
engineering resources far in advance of product revenue. Our work under these
arrangements will be technically challenging and may require deliverables on an
accelerated basis. For example, under our arrangement with Intel we are required
to deliver specifications for a semiconductor shortly after entering into the
arrangement. These arrangements place considerable demands on our limited
resources, particularly on our most senior engineering talent, and may not
result in revenue for twelve to eighteen months, if at all. In addition,
allocating significant resources to these arrangements may detract from or delay
the completion of other important development projects. Any of these development
agreements could be canceled at any time without notice. These factors could
have a material and adverse effect on our long term business and results of
operations.

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.

We develop products based on anticipated market and customer requirements
and incur substantial product development expenditures prior to generating
associated revenues. Because the development of our products incorporates not
only our complex and evolving technology, but 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 equipment can take up to six months
or more. It can take

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an additional six months before a customer commences volume shipments of systems
that incorporate our products. However, even when we achieve a design win, the
customer may never ship systems incorporating our products. Because of our
relatively limited history in selling our products, we cannot assure you that
the time required for the testing, evaluation and design of our products by our
customers will not exceed six months. Because of this lengthy development cycle,
we will experience delays between the time we incur expenditures for research
and development, sales and marketing, inventory levels and the time we generate
revenues, if any, from these expenditures.

SHORTAGES OF OTHER KEY COMPONENTS FOR OUR CUSTOMERS' PRODUCTS COULD DELAY OUR
ABILITY TO SELL OUR PRODUCTS.

Shortages of components and other materials that are critical to the design
and manufacture of our customers' products could limit our sales. These
components include liquid crystal display panels and other display components,
analog-to-digital converters, digital receivers and video decoders. During 1999,
companies that used our products experienced delays in the availability of key
components from other suppliers which, in turn, threatened a delay in demand for
the products that we supplied to them.

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.

From time to time, shortages of materials that are used in our board
products may occur. In particular, we may experience shortages of semiconductor
wafers and packages. If material shortages occur, we may incur additional costs
or be unable to ship our products to our customers in a timely fashion, all of
which could harm our business and negatively impact our earnings.

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 license technology from 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
available on terms that are commercially reasonable. If we are unable to obtain
any third-party license required to develop new products and product
enhancements, we may have to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
the competitiveness of our products.

WE MAY NOT BE ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE 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.

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. Recent examples of changing industry standards include the
introduction of high-definition television, or HDTV, new digital receivers and
displays with resolutions that have required us to accelerate development of new
products to meet these new standards.

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 existing products incorporate complex software tools designed to help
customers bring products into production. Software development is a complex
process and we are dependent on software development languages and operating
systems from vendors which may compromise our ability

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to design software in a timely manner. Also, software development is a volatile
market and new software languages are introduced to the market that may be
incompatible with our existing systems and tools. New software development
languages may not be compatible with our own requiring significant engineering
efforts to migrate our existing systems in order to be compatible with those new
languages. Our current products are developed using Visual C, a popular software
development language. However, 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.

OUR INTEGRATED CIRCUITS AND SOFTWARE COULD CONTAIN DEFECTS, WHICH COULD REDUCE
SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US.

Despite testing by us and our customers, errors may be found in existing or
new semiconductors and software. This could result in a delay in the recognition
or loss of revenues, loss of market share or failure to achieve market
acceptance. These defects may cause us to incur significant warranty, support
and repair costs. They could also divert the attention of our engineering
personnel from our product development efforts and harm our relationships with
our customers. The occurrence of these problems could result in the delay or
loss of market acceptance of our semiconductors and would likely harm our
business. Defects, integration issues or other performance problems in our
semiconductors and software could result in financial or other damages to our
customers or could damage market acceptance of our products. Our customers could
also seek damages from us for their losses. A product liability claim brought
against us even if unsuccessful, would likely be time consuming and costly to
defend.

OUR MANUFACTURERS AND CUSTOMERS ARE CONCENTRATED IN THE SAME GEOGRAPHIC REGION
WHICH INCREASES THE RISK THAT A NATURAL DISASTER, LABOR STRIKE OR POLITICAL
UNREST COULD DISRUPT OUR OPERATIONS.

Our current manufacturers and substantially all of our customers are located
in Japan, Korea and Taiwan. The risk of earthquakes in the Pacific Rim region is
significant due to the proximity of major earthquake fault lines in the area. In
September 1999, a current manufacturer's facilities were affected by a
significant earthquake in Taiwan. As a consequence of this earthquake, this
manufacturer suffered power outages and disruption that impaired its production
capacity. Earthquakes, fire, flooding and other natural disasters in the Pacific
Rim region, or political unrest, labor strikes or work stoppages in countries
where our manufacturers' and customers are located likely would result in the
disruption of our foundry partners' assembly capacity. Any disruption resulting
from extraordinary events could cause significant delays in shipments of our
solutions until we are able to shift our manufacturing or assembling from the
affected contractor to another third-party vendor. There can be no assurance
that alternative capacity could be obtained on favorable terms, if at all.

OTHERS MAY BRING INFRINGEMENT ACTIONS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND.

We may become subject to claims involving patents or other intellectual
property rights. For example, we were recently notified by InFocus Systems, Inc.
that InFocus believed we were infringing patents held by InFocus that relate to
methods and apparatus for automatic pixel clock phase and frequency correction.
While we do not believe we are infringing these patents, in order to avoid the
business uncertainty and diversion of management attention associated with
contesting this assertion, we have entered into a license agreement with InFocus
granting us the right to use the technology covered by the InFocus patents in
exchange for 156,863 shares of our Series D preferred stock and $2.4 million in
cash payable in four quarterly installments commencing in March 2000. Under this
license agreement, we also received a release of any claims that InFocus may
have against us relating to these patents. Intellectual property claims could
subject us to significant liability for damages and invalidate our proprietary
rights. In addition, intellectual property claims may be brought against

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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 future intellectual property litigation or claims also
could force us to do one or more of the following:

- stop selling products using technology that contain the allegedly
infringing intellectual property;

- attempt to obtain a license to the relevant intellectual property, which
license may not be available on reasonable terms or at all; and

- attempt to redesign those products that contain the allegedly infringing
intellectual property.

If we are forced to take any of the foregoing actions, we may 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 could adversely affect our ability to
increase our earnings.

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 DISPLAY PROCESSOR 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 rely on a combination of
patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect our proprietary technologies. We have
three patent applications pending with the U.S. Patent and Trademark Office for
protection of our significant technologies. We cannot assure you that the degree
of protection offered by patents 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, if issued, any claims allowed will be
sufficiently broad to protect our technology. In addition, it is possible that
existing or future patents may be challenged, invalidated or circumvented. We
provide the computer programming code for our software to selected customers in
connection with their product development efforts, thereby increasing the risk
that customers will misappropriate our proprietary software. Competitors in both
the United States and foreign countries, many of which have substantially
greater resources, may apply for and obtain patents that will prevent, limit or
interfere with our ability to make and sell our products, or develop similar
technology independently or design around our patents. Effective copyright,
trademark and trade secret protection may be unavailable or limited in foreign
countries.

ANY ACQUISITION WE MAKE COULD DISRUPT OUR BUSINESS AND SEVERELY HARM OUR
FINANCIAL CONDITION.

We intend to consider investments in or acquisitions of complementary
businesses, products or technologies. While we have no current agreements to do
so, we may acquire businesses, products or technologies in the future. In the
event of any future acquisitions, we could:

- issue stock that would dilute our current stockholders' percentage
ownership;

- incur debt;

- assume liabilities;

- incur amortization expenses related to goodwill and other intangible
assets; or

- incur large and immediate write-offs.

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Our operation of any acquired business will also involve numerous risks,
including:

- problems combining the purchased operations, technologies or products;

- unanticipated costs;

- diversion of management's attention from our core business;

- adverse effects on existing business relationships with customers;

- risks associated with entering markets in which we have no or limited
prior experience; and

- potential loss of key employees, particularly those of the acquired
organizations.

We may not be able to successfully integrate businesses, products or
technologies or personnel that we might acquire in the future and any failure to
do so could disrupt our business and seriously harm our financial condition.

FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY COULD ADVERSELY AFFECT OUR ABILITY
TO INCREASE OUR BUSINESS AND RESULTS OF OPERATIONS.

Our ability to successfully market and sell our products in a rapidly
evolving market requires effective planning and management processes. We
continue to increase the scope of our operations domestically and
internationally and have increased our headcount substantially. We grew from 22
employees on January 1, 1999, to 88 employees on March 31, 2000. In addition, we
are currently planning to hire a significant number of additional employees this
year. Our past growth, and our expected future growth, places a significant
strain on our management systems and resources including our financial and
managerial controls, reporting systems and procedures. To manage our growth
effectively, we must implement and improve operational and financial systems,
train and manage our employee base, 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.
Moreover, we will spend substantial amounts of time and money in connection with
our rapid growth and may have unexpected costs. 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. While we have
not, to date, suffered any significant adverse consequences due to our growth,
if we do not continue to manage growth effectively our business would be
seriously harmed.

RISKS RELATED TO OUR INDUSTRY

FAILURE OF CONSUMER DEMAND FOR FLAT PANEL DISPLAYS AND OTHER DISPLAY
TECHNOLOGIES TO INCREASE COULD IMPEDE OUR GROWTH.

Our product development strategies anticipate that consumer demand for flat
panel displays and other emerging display products will increase in the future.
The success of our products is dependent on increased demand for these products,
which are at early stages of development. The potential size of the flat panel
display market and the timing of its development are uncertain and will depend
upon a number of factors, all of which are beyond our control. In order for the
market for many of our products to grow, advanced flat panel displays must be
widely available and affordable to consumers. Currently there is a limited
supply of advanced flat panel displays, and increasing the supply of advanced
displays is a costly and lengthy process requiring significant capital
investment. Accordingly, we do not expect the current shortage of advanced flat
panel displays or their high prices to change in the near term. In the past, the
supply of advanced flat panel displays has been cyclical. We expect this pattern
to continue. Undercapacity in the advanced flat panel display market may limit
our ability to increase our revenues because our customers may limit their
purchases of our products if they cannot obtain sufficient supplies of advanced
flat panel displays. In addition, advance flat panel display prices

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may remain high because of limited supply, and consumer demand may not grow if
the supply of advanced flat panel displays does not increase.

THE FAILURE OF BROADBAND COMMUNICATIONS TO DEVELOP WILL ADVERSELY AFFECT DEMAND
FOR OUR PRODUCTS.

We anticipate deriving significant portions of our future revenues from
products that are dependent on the delivery of information via broadband
communications. Our business will be negatively impacted if broadband
communications develop more slowly than we anticipate. Factors impacting the
acceptance of broadband communications include the introduction of new
technologies, consumer pricing, cost and time required to provide broadband
infrastructure, lack of industry standards and government regulation. The
emergence of industry standards could make our products or those of our
customers unmarketable or obsolete and may require us to incur substantial
unanticipated development costs to comply with any new standards.

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.

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 the these protocols
and standards, consumers will return these products, or consumers will 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.

INTENSE COMPETITION IN OUR MARKETS MAY REDUCE SALES OF OUR PRODUCTS, REDUCE OUR
MARKET SHARE, DECREASE OUR GROSS PROFIT AND INCREASE LOSSES.

Rapid technological change, evolving industry standards, 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 advanced flat panel
display screens continues to fall, we may be required to offer our products to
manufacturers at discounted prices due to increased price competition. At the
same time, new, alternative display processing technologies and industry
standards may emerge that directly compete with technologies that 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 a range of specialized and diversified electronic and
semiconductor companies that offer display processors. In particular, we compete
against Genesis Microchip, Inc., Macronix International Co., Ltd., Sage, Inc.,
Silicon Image, Inc., SmartASIC, Inc., STMicroelectronics NV, Trident
Microsystems, Inc. and other companies. Potential competitors may include
diversified semiconductor manufacturers including Broadcom Corporation, National
Semiconductor Corp., Texas Instruments, Inc. and other diversified semiconductor
companies. We also compete in some instances against in-house processing
solutions designed by our customers. Many of our competitors have longer
operating histories and greater resources to support development and marketing
efforts. Some of our competitors may operate their own fabrication facilities.
These competitors may be able to react faster and devote more resources to
efforts that compete directly with our own. In the future, our current or
potential customers may also develop their own proprietary display processors
and become our competitors. In addition, start-up companies may seek to compete
in our markets. Our competitors may develop advanced technologies enabling them
to offer more cost-effective and higher quality

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semiconductors to our customers than those offered by us. Increased competition
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 MARKET FOR INTERNET APPLIANCES MAY NOT EVOLVE RAPIDLY ENOUGH TO SUPPORT
EXPANDED MARKET ACCEPTANCE OF OUR PRODUCTS AND INDUSTRY STANDARDS IN THIS MARKET
CONTINUE TO EVOLVE.

If the emerging market for Internet appliances does not develop or does not
evolve fast enough to support rapid market acceptance of our products, our
business, financial condition and results of operations will be materially and
adversely affected. The Internet appliance market includes netTVs, screenphones,
e-mail terminals, Web terminals and tablets. Our success will depend on our
ability to achieve design wins with customers developing new products and
enhanced products for the Internet appliance market and their ability to
successfully introduce and promote these products. There can be no assurance
that the Internet appliance market will develop to the extent or in the
timeframes necessary to support expansion of our business. We anticipate that
Internet appliance products will be generally based on industry standards, which
are continually evolving. The emergence of new industry standards could render
our products or our customers products unmarketable or obsolete and we may incur
substantial unanticipated costs to comply with any new standards. Moreover, our
past sales have resulted, to a significant extent, from our ability to
anticipate changes in technology and industry standards and to develop and
introduce new and enhanced products addressing changes within our industry. Our
continued ability to adapt to industry changes and to anticipate future
standards, and the rate of adoption and acceptance of those standards, will be a
significant factor in maintaining or improving our competitive position and our
prospects for growth. There can be no assurance that we will be able to
anticipate the evolving standards in the semiconductor industry and, in
particular, the applications in the Internet appliance market, or that we will
be able to successfully develop and introduce new products into this market.

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, during
this time, the industry has experienced significant fluctuations in anticipation
of changes in general economic conditions, including economic conditions in
Asia. The cyclical nature of the semiconductor industry has led to significant
variances in product demand and production capacity. It has also accelerated
erosion of average selling prices per unit. We may experience periodic
fluctuations in our future financial results because of changes in industry-wide
conditions.

RISKS RELATING TO THE OFFERING

THE SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE
COULD CAUSE THE MARKET PRICE OF SHARES OF OUR COMMON STOCK TO DECLINE.

We will have approximately 35,503,572 shares of common stock outstanding
immediately after the offering. The shares of our common stock sold in the
offering will be freely transferable. Additional shares may be sold in the
public market to the extent permitted by Rule 144 or exemptions under the
Securities Act of 1933. Lock-up agreements executed by our officers, directors
and existing shareholders limit the number of shares of our common stock that
may be sold in the public market for periods of up to 180 days. However, Salomon
Smith Barney may, in its sole discretion and at any time, release all or some
portion of the securities subject to the lock-up agreements. The market price of
shares of our common stock could decline as a result of sales of a large number
of shares of our common stock in

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<PAGE>
the market after the offering, or the perception that significant sales could
occur. These factors also could make it more difficult for us to raise funds
through future offerings of our common stock.

INVESTORS IN THIS OFFERING WILL EXPERIENCE SUBSTANTIAL AND IMMEDIATE DILUTION IN
THE BOOK VALUE OF THEIR INVESTMENT.

The initial public offering price of shares of our common stock will be
substantially higher than the net tangible book value per share of the
outstanding common stock immediately after this offering. Therefore, based upon
an assumed initial public offering price of $13.00 per share, if you purchase
our common stock in this offering, you will incur substantial and immediate
dilution of approximately $10.02 per share. If additional shares are sold by the
underwriters following the exercise of their over-allotment option, or if
outstanding options to purchase shares of our common stock are exercised, there
will be further dilution of your investment. See "Dilution."

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.

The anti-takeover provisions of Oregon law and our articles of incorporation
may make a change in control of our business more difficult, even if a change in
control would be beneficial to the shareholders. These provisions may allow the
board of directors to prevent changes in the management and control of our
business. Under Oregon law, our board of directors may adopt additional
anti-takeover measures in the future. One anti-takeover provision that we have
is the ability of our board of directors to determine the terms of preferred
stock and issue preferred stock without the approval of the holders of the
common stock. At the time of the offering, there are no shares of preferred
stock outstanding. However, because the rights and preferences of any series of
preferred stock may be set by the board of directors in its sole discretion
without approval of the holders of the common stock, the rights and preferences
of this preferred stock may be superior to those of the common stock.
Accordingly, the rights of the holders of common stock may be adversely
affected.

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 TAKEOVER
CANDIDATES.

Immediately after the offering, our executive officers, directors and other
principal shareholders will, in the aggregate, beneficially own 22,263,145
shares or approximately 62% of our outstanding common stock. These shareholders
currently have, and will continue to have, significant influence with respect to
the election of our directors and approval or disapproval of our significant
corporate actions. This influence over our affairs might be adverse to the
interest of our shareholders. In addition, the voting power of these
shareholders could have the effect of delaying or preventing a change in control
of our business or otherwise discouraging a potential acquirer from attempting
to obtain control of us, which could prevent our shareholders from realizing a
premium over the market price for their common stock.

WE EXPECT THAT THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SUBSTANTIALLY.

The initial public offering price of our common stock will be determined
through negotiations between the underwriters and us, and may not be indicative
of the price that will prevail in the open market after this offering. An active
trading market for our common stock may not develop or be sustained after this
offering. You may not be able to sell your shares of our common stock at or
above the initial public offering price due to a number of factors, including:

- actual or anticipated fluctuations in our operating results;

- changes in expectations as to our future financial performance;

20
<PAGE>
- 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;

- changes in market valuations of other technology companies; and

- inconsistent trading volume levels of our common stock.

In particular, the stock prices of technology companies like us have been
highly volatile recently. These fluctuations often have been unrelated or
disproportionate to the operating performance of those companies. Market
fluctuations as well as general economic, political and market conditions
including recessions, interest rate changes or international currency
fluctuations, may negatively impact the market price of our common stock.
Therefore, the price of our common stock may decline, and the value of your
investment may be reduced regardless of our performance.

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW.

We believe our net proceeds from this offering, together with our existing
cash balances and funds available under our credit facility will be sufficient
to meet our capital requirements for at least the next 12 months. However, we
may need, or could elect, to seek additional funding prior to that time. To the
extent that funds generated by this offering, together with existing resources,
are insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. Additional funds may
not be available on terms favorable to us or our shareholders. Further, 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. If we cannot raise funds on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.

21
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled "Prospectus Summary," Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" contains forward-looking information. This
forward-looking information is subject to risks and uncertainties including the
factors listed under "Risk Factors," Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue," or the negative of these terms or other comparable terminology.
These statements are only predictions and may be inaccurate. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.

22
<PAGE>
USE OF PROCEEDS

Based on an assumed initial public offering price of $13.00 per share, our
net proceeds from the sale of the 5.75 million shares of common stock that we
are offering will be approximately $68.6 million after deducting the
underwriting discount and estimated expenses payable by us in connection with
this offering. If the underwriters exercise their over-allotment option in full,
our net proceeds will be approximately $79.0 million.

The principal purposes of this offering are to increase our working capital
and other general corporate purposes. See "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Although we may use a portion of the net proceeds to acquire complementary
technologies or businesses, we have no current plans in this regard. Pending
these uses, we plan to invest the net proceeds in short-term, interest-bearing,
investment grade securities. Management will retain broad discretion in the
allocation of the net proceeds of this offering. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use the proceeds.

DIVIDEND POLICY

We have never declared or paid cash dividends on shares of our capital
stock. We currently expect to retain any future earnings to fund the operation
and expansion of our business, and therefore we do not currently expect to pay
cash dividends in the foreseeable future.

23
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2000:

- on an actual basis;

- on a pro forma basis after giving effect to the automatic conversion of
all outstanding shares of preferred stock into 19,708,835 shares of common
stock immediately prior to the completion of the offering; and

- on a pro forma as adjusted basis, after giving effect to the sale of
5,750,000 shares of common stock offered by us at an assumed initial
public offering price of $13.00 per share after deducting the underwriting
discount and estimated offering expenses payable by us, and the receipt of
net proceeds from this offering.

<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 35,410 $ 35,410 $104,028
Redeemable convertible preferred stock, $.001 par value:
Authorized 16,100,000 shares; issued and outstanding
13,139,219 shares (actual); no shares (pro forma and
as adjusted)............................................ 65,077 -- --
Common stock, $.001 par value:
Authorized 35,000,000 shares; issued and outstanding
10,044,737 shares (actual); 29,753,572 shares (pro
forma); 35,503,572 shares (as adjusted)................. -- 65,077 133,695
Deferred stock compensation................................. (3,849) (3,849) (3,849)
Note receivable for common stock............................ (199) (199) (199)
Accumulated deficit......................................... (22,021) (22,021) (22,021)
-------- -------- --------
Total shareholders' equity (deficit)........................ (26,069) 39,008 107,626
-------- -------- --------
Total capitalization........................................ $ 39,008 $ 39,008 $107,626
======== ======== ========
</TABLE>

Common stock excludes:

- 3,010,832 shares of common stock issuable upon the exercise of options
outstanding at March 31, 2000 at a weighted average exercise price of
$1.30 per share;

- 2,637,741 shares of common stock available for issuance under our 1997
stock incentive plan; and

- 1,500,000 shares of common stock available for issuance under our 2000
employee stock purchase plan.

24
<PAGE>
DILUTION

Our pro forma net tangible book value as of March 31, 2000 was approximately
$37.3 million or approximately $1.25 per share. Pro forma net tangible book
value per share represents pro forma tangible assets less total liabilities,
divided by our pro forma number of outstanding shares of common stock after
giving effect to, on a pro forma basis, the automatic conversion of all
currently outstanding shares of preferred stock into 19,708,835 shares of common
stock immediately prior to the completion of the offering.

Without taking into account any changes in pro forma net tangible book value
per share after March 31, 2000, other than to give effect to the sale of the
shares of common stock in this offering at an assumed initial public offering
price of $13.00 per share after deducting the underwriting discount and
estimated expenses payable by us and the receipt of the net proceeds of the
sale, the pro forma net tangible book value as of March 31, 2000 would have been
approximately $105.9 million or approximately $2.98 per share. This represents
an immediate increase in pro forma net tangible book value per share of $1.73 to
existing shareholders and an immediate dilution of $10.02 per share to new
investors. The following table sets forth this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at March 31,
2000.................................................... $ 1.25
Increase in pro forma net tangible book value per share
attributable to this offering........................... 1.73
------
Pro forma net tangible book value per share after the
offering.................................................. 2.98
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $10.02
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by the
existing shareholders and by the new investors in this offering, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us, at an assumed initial public offering price of $13.00
per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 29,753,572 83.8% $49,489,264 39.8% $ 1.66
New investors.............................. 5,750,000 16.2 74,750,000 60.2 13.00
---------- ----- ----------- -----
Total.................................... 35,503,572 100.0% 124,239,264 100.0%
========== ===== =========== =====
</TABLE>

The foregoing discussion and table excludes:

- 3,010,832 shares of common stock issuable upon the exercise of options
outstanding at March 31, 2000 at a weighted average exercise price of
$1.30 per share;

- 2,637,741 shares of common stock available for issuance under our 1997
stock incentive plan; and

- 1,500,000 shares of common stock available for issuance under our 2000
employee share purchase plan.

If all options outstanding at March 31, 2000 were exercised, the pro forma
net tangible book value per share immediately after completion of the offering
would be $2.85, which represents an immediate dilution in net tangible book
value per share of $10.15 to purchasers of shares of common stock in the
offering. See "Management--Employee Benefit Plans" and the notes to our
financial statements for more information on our option plans.

25
<PAGE>
SELECTED FINANCIAL DATA

The following selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, including the related notes found
elsewhere in this prospectus. The statement of operations data for the period
from January 16, 1997 through December 31, 1997 and years ended December 31,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are
derived from the audited financial statements of Pixelworks included elsewhere
in this prospectus, which have been audited by KPMG LLP, independent auditors.
The audited balance sheet data as of December 31, 1997 is derived from the
audited financial statements not included in this Prospectus. The statement of
operations data for the periods ended March 31, 1999 and 2000 and the balance
sheet data as of March 31, 2000, are derived from unaudited interim financial
statements included in this prospectus. The unaudited financial statements have
been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 16, 1997 YEARS ENDED ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------- --------------------
1997 1998 1999 1999 2000
------------------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue, net.......................... $ 25 $ 105 $12,647 $ 451 $ 7,064
Commissions................................... 375 373 65 65 --
Licensing and development fees................ -- 500 100 100 --
--------------- ------- ------- ------- ---------
Total revenue................................. $ 400 $ 978 $12,812 $ 616 $ 7,064
Cost of revenue................................. 24 22 8,369 163 4,495
--------------- ------- ------- ------- ---------
Gross profit.................................... 376 956 4,443 453 2,569
--------------- ------- ------- ------- ---------
Operating expenses:
Research and development...................... 215 1,446 4,805 823 1,690
Selling, general and administrative........... 590 1,314 4,366 604 1,784
Patent settlement expense..................... -- -- -- -- 4,078
Amortization of deferred stock compensation... -- -- 565 4 444
--------------- ------- ------- ------- ---------
Total operating expenses........................ 805 2,760 9,736 1,431 7,996
--------------- ------- ------- ------- ---------
Loss from operations............................ (429) (1,804) (5,293) (978) (5,427)
Interest and other income, net.................. 53 215 409 36 267
--------------- ------- ------- ------- ---------
Loss before income taxes........................ (376) (1,589) (4,884) (942) (5,160)
Income taxes.................................... -- 14 3 3 --
--------------- ------- ------- ------- ---------
Net loss........................................ (376) (1,603) (4,887) (945) (5,160)
Preferred stock beneficial conversion feature... -- -- -- -- (9,995)
Accretion of preferred stock redemption
preference.................................... -- (10) (4,278) (98) (2,100)
--------------- ------- ------- ------- ---------
Net loss attributable to common shareholders.... $ (376) $(1,613) $(9,165) $(1,043) $ (17,255)
=============== ======= ======= ======= =========
Historical loss per share:
Basic and diluted............................. $ (0.45) $ (0.61) $ (1.53) $ (0.27) $ (2.19)
=============== ======= ======= ======= =========
Weighted average shares, basic and diluted.... 828 2,660 5,971 3,828 7,887
Pro forma loss per share (unaudited):
Basic and diluted............................. $ (0.38) $ (0.67)
======= =========
Shares used in computing basic and diluted.... 24,342 25,677
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, MARCH 31,
------------------------------ ---------
1997 1998 1999 2000
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 367 $ 6,119 $12,199 $35,410
Working capital.......................................... 568 4,427 12,770 35,280
Total assets............................................. 1,006 7,676 18,394 44,396
Long-term obligations, net of current portion............ -- -- 591 --
Redeemable convertible preferred stock................... 1,216 7,755 23,701 65,077
Total shareholders' deficit.............................. (366) (1,908) (9,295) (26,069)
</TABLE>

The pro forma statement of operations data presented above reflects the
automatic conversion upon the closing of the offering of all outstanding shares
of preferred stock into 19,708,835 shares of common stock. The conversion of the
13,139,219 currently outstanding shares of preferred stock into 19,708,835
shares of common stock reflects the three-for-two split of our common stock
effective as of March 31, 2000.

27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS USED
BELOW, REFERENCES TO THE YEAR ENDED DECEMBER 31, 1997 REFER TO THE PERIOD FROM
JANUARY 16, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997.

OVERVIEW

We design, develop and market complete system-on-a-chip semiconductors and
software that enable the visual display of broadband content. Our technology
translates and optimizes video, computer graphics, and visual Web information
for display on a wide variety of electronic devices. We have announced products
in production with Compaq, Sony and ViewSonic, and have more than 45 customers
who are using our products in more than 75 products.

During our first year of operation, we were the sole marketing and sales
agent of plasma display panels for Fujitsu General America, Inc. in the United
States. The relationship began in January 1997 and provided us with operating
revenue through the conclusion of the relationship in March 1999. The revenues
helped finance research and development of our core business of system-on-a-chip
design and the development of our marketing and sales infrastructure.

In December 1998, we began shipping PW364 ImageProcessor semiconductors,
which we believe to be the world's first single-chip flat panel display
controller. Additional semiconductors were introduced in 1999: the PW264
ImageProcessor semiconductors in April and the PW164 ImageProcessor
semiconductors in August. These semiconductors extended the product line into
new markets by providing new features for specific display applications at lower
price points.

We sell our products worldwide through a direct sales force and indirectly
through distributors and manufacturers representatives. Distributors have been
established in Japan and Taiwan. Manufacturers representatives support European
and Korean sales. In February 2000, sales and marketing offices were established
in Japan and Taiwan.

We recognize revenue from product sales to direct customers upon shipment.
We recognize revenue from product sales to distributors upon shipment if the
distributor has a firm sales commitment from an end customer. Reserves for sales
returns and allowances are recorded at the time of shipment.

Historically, significant portions of our product revenue have been from a
relatively small number of customers and distributors. Our top five customers
accounted for 62.3% of product revenue in 1999. See "Risk Factors--A significant
amount of our revenue comes from a few customers and distributors and any
decrease in revenues from, or loss of any of, these customers or distributors
could significantly reduce our total revenue" and "Risk Factors--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."

Significant portions of our products are sold overseas. Sales outside the
U.S. accounted for 92.8% of total revenue in 1999 and 94.7% of total revenue for
the three months ended March 31, 2000. Our end customers, branded manufacturers
and integrators, incorporate our products into systems that are sold worldwide.
All revenue to date has been denominated in U.S. dollars. See "Risk
Factors--International sales account for a significant portion of our revenues,
and if we do not successfully address the risks associated with our
international operations, our revenues could decrease."

Product gross profit fluctuated over the past several quarters due to a
change in mix from low volume chip and evaluation board samples to high volume
semiconductor production. We expect average selling prices to decrease as we
move to higher volume, lower cost products. Additionally there will be some
average selling price reductions for our existing products due to the highly
competitive nature of the semiconductor industry. We anticipate that our product
gross profit may fluctuate quarter to quarter

28
<PAGE>
because we sell multiple products with varying margins and the mix of products
sold from period to period will change. Our gross profit will also be affected
by our move from a turnkey application specific integrated circuit, or ASIC,
business model to a customer owned tooling, or COT, business model which should,
if executed successfully, offset some of the negative effect on gross margins
resulting from reductions in average selling prices. See "Risk Factors--Intense
competition in our markets may reduce sales of our products, reduce our market
share, decrease our gross profit and increase losses."

Within the semiconductor industry we are known as a "fabless" company,
meaning that we do not fabricate the semiconductors that we design and develop,
but instead rely on third parties to manufacture our products. This business
model enables us to focus on designing, developing, and marketing our products
and significantly reduces the amount of capital we need to invest in capital
expenditures related to semiconductor manufacturing. See "Risk Factors--We
depend on a limited number of contract manufacturers for our products, and we
must order products from them based on forecasts from our customers from which
we do not have firm purchase orders."

Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. In addition, the sales cycle for our products
is long which may cause us to experience a delay between the time we incur
expenses and the time we generate revenue from these expenditures. We intend to
increase our investment in research and development, selling, general and
administrative functions and inventory as we seek to expand our operations. We
anticipate the rate of new orders may vary significantly from quarter to
quarter. Consequently, if anticipated sales and shipments in any quarter do not
occur when expected, expenses and inventory levels could be disproportionately
high, seriously harming our operating results for that quarter and, potentially,
future quarters. See "Risk Factors--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" and "Risk Factors--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."

29
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth statement of operations data expressed as a
percentage of total revenue for the periods indicated.

<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 16, 1997 YEARS ENDED ENDED
(DATE OF INCEPTION) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ---------------------- ----------------------
1997 1998 1999 1999 2000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net.... 6.2% 10.8% 98.7% 73.2% 100.0%
Commissions............. 93.8 38.1 0.5 10.6 0.0
Licensing and
development fees...... 0.0 51.1 0.8 16.2 0.0
------ ------ ------ ------ ------
Total revenue............. 100.0 100.0 100.0 100.0 100.0
Cost of revenue........... 6.0 2.2 65.3 26.5 63.6
------ ------ ------ ------ ------
Gross profit.............. 94.0 97.8 34.7 73.5 36.4
------ ------ ------ ------ ------
Operating expenses:
Research and
development........... 53.8 147.8 37.5 133.6 23.9
Selling, general and
administrative........ 147.5 134.4 34.1 98.0 25.3
Patent settlement
expense............... 0.0 0.0 0.0 0.0 57.7
Amortization of deferred
stock compensation.... 0.0 0.0 4.4 0.7 6.3
------ ------ ------ ------ ------
Total operating expense... 201.3 282.2 76.0 232.3 113.2
------ ------ ------ ------ ------
Loss from operations...... (107.3) (184.4) (41.3) (158.8) (76.8)
Interest and other income,
net..................... 13.3 21.9 3.2 5.9 3.8
------ ------ ------ ------ ------
Loss before income
taxes................... (94.0) (162.5) (38.1) (152.9) (73.0)
Income taxes.............. 0.0 1.4 0.0 0.5 0.0
------ ------ ------ ------ ------
Net loss.................. (94.0)% (163.9)% (38.1)% (153.4)% (73.0)%
====== ====== ====== ====== ======
</TABLE>

THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999

PRODUCT REVENUE. Product revenue increased from $451,000 for the three
months ended March 31, 1999 to $7.1 million for the three months ended
March 31, 2000. The $6.6 million dollar increase in product revenue was related
to increased volume shipments of ImageProcessor semiconductors.

COMMISSIONS REVENUE. Commissions revenue decreased from $65,000 for the
three months ended March 31, 1999 to $0 for the three months ended March 31,
2000. Commissions revenue for the three months ended March 31, 1999 was derived
from an agreement with Fujitsu General America, Inc. to sell their plasma
display products in the United States.

LICENSING AND DEVELOPMENT FEES. Licensing and development fees decreased
from $100,000 for the three months ended March 31, 1999 to $0 for the three
months ended March 31, 2000. Licensing and development fees from the three
months ended March 31, 1999 resulted from a 1998 agreement with a major customer
to develop a product for exclusive use by the customer for front projection
applications.

GROSS PROFIT. Gross profit was 73.5% for the period ended March 31, 1999
compared to 36.4% for the period ended March 31, 2000. Gross profit was
significantly higher in the first quarter of 1999 as a result of 26.8% of total
revenue coming from commissions revenue and licensing and development fees,

30
<PAGE>
which have no associated cost of sales. Gross profit decreased to 36.4% in the
first quarter of 2000 due to the increase of product revenue as a percent of
total revenue, which have associated cost of sales.

RESEARCH AND DEVELOPMENT. Research and development expense was $823,000, or
133.6% of total revenue for the three months ended March 31, 1999 compared to
$1.7 million, or 23.9% of revenue for the three months ended March 31, 2000. The
increase of $867,000 resulted primarily from a $505,000 increase in compensation
expenses related to an increase in personnel and a $111,000 increase in expenses
related to engineering consulting services.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was $604,000, or 98.0% of total revenue for the three months ended
March 31, 1999 as compared to $1.8 million, or 25.3% of total revenue. Most of
the $1.2 million increase resulted from a $713,000 increase in compensation
expenses related to an increase in personnel, $94,000 increase in accounting and
legal expenses, $86,000 increase in travel expenses and $62,000 increase in
sales commissions.

PATENT SETTLEMENT EXPENSE The $4.1 million in patent settlement expense for
the three months ended March 31, 2000 was the result of our settlement of a
patent dispute with InFocus Systems, Inc. in February, 2000.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. Stock compensation expense
increased $440,000 to $444,000 for the three months ended March 31, 2000 from
$4,000 for the three months ended March 31, 1999. The increase in stock
compensation expense is the result of the issuance of additional stock options
to employees at a deemed discount from the fair value of the common stock on the
date of grant through March 31, 2000. At March 31, 2000, the amount of employee
unearned compensation was $3.8 million. The deferred balance will be amortized
on an accelerated method as the employee provides services over the vesting
period of the options.

INTEREST AND OTHER INCOME & EXPENSE. Interest and other income and expense
consists of interest income, interest expense and other non-operating income and
expense. Interest and other income and expense, net increased $231,000 from
$36,000 of income for the three months ended March 31, 1999 to $267,000 of
income for the three months ended March 31, 2000. This increase was the result
of increased interest income of $231,000 related to higher average cash
balances.

PROVISION FOR INCOME TAXES. During the three months ended March 31, 1999 we
had approximately $3,000 of income tax expenses related to foreign taxes on
license fee revenue. We recorded no provision for income tax expense during the
three months ended March 31, 2000.

YEAR ENDED DECEMBER 31, 1997, 1998 AND 1999

PRODUCT REVENUE. Product revenue increased from $25,000 in 1997 to $105,000
in 1998, and increased to $12.6 million in 1999. Revenues in 1997 and 1998 were
from the sale of stands and cases for flat screen televisions. In
December 1998, we shipped our first ImageProcessor semiconductors. Two
additional, lower cost products, the PW264 ImageProcessor semiconductor and the
PW164 ImageProcessor semiconductor, were introduced in April 1999 and
August 1999, respectively, to broaden our addressable market. The increase in
revenue from 1998 to 1999 resulted from the introduction of these ImageProcessor
semiconductors.

COMMISSIONS REVENUE. Commissions revenue decreased from $375,000 in 1997 to
$373,000 in 1998, and decreased to $65,000 in 1999. Commissions revenue
decreased from 1998 to 1999 as a result of the termination of an agreement with
Fujitsu General America, Inc. to sell their plasma display products in the
United States. We have not recognized commissions revenue since the first
quarter of 1999 and do not expect to recognize commissions revenue in future
periods.

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<PAGE>
LICENSING AND DEVELOPMENT FEES. Licensing and development fees were
$500,000 in 1998 and $100,000 in 1999. Licensing and development fees resulted
from a 1998 agreement with a major customer to develop a product for exclusive
use by the customer for front projection applications. We have not recognized
licensing and development fees since the first quarter of 1999. However to the
extent we enter into licensing or development arrangements in future periods, we
would recognize licensing and development fees in those periods.

GROSS PROFIT. Gross profit was 94.0% in 1997 and 97.8% in 1998 as a
majority of revenues came from commissions revenue and licensing and development
fees which have no associated cost of sales. Gross profit decreased from 97.8%
in 1998 to 34.7% in 1999 as a result of the increase of product revenue as a
percent of total revenue. Product sales which have associated cost of sales
increased from 10.8% in 1998 to 98.7% in 1999.

RESEARCH AND DEVELOPMENT. Research and development expense was $215,000, or
53.8% of total revenue for 1997, $1.4 million, or 147.8% of total revenue in
1998, and $4.8 million, or 37.5% of total revenue for 1999. Most of the
$1.2 million increase from 1997 to 1998 resulted from an increase of $555,000 in
compensation expenses related to an increase in personnel, an increase of
$344,000 in depreciation expense from capital expenditures and an increase of
$187,000 in engineering professional services. Most of the $3.4 million increase
from 1998 to 1999 resulted from an increase of $2.0 million in compensation
expenses related to an increase in personnel, an increase of $761,000 in
depreciation expense and an increase of $432,000 in engineering professional
services. Although absolute expenses increased from 1998 to 1999, research and
development expenses, as a percentage of total revenue, declined. We believe
that continued investment in research and development is critical to our
strategic objectives and we expect these expenses to increase in the future.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense was $590,000, or 147.5% of total revenue for 1997, $1.3 million, or
134.4% of total revenue for 1998, and $4.4 million or 34.1% of total revenue for
1999. A majority of the $724,000 increase from 1997 to 1998 resulted from an
increase of $309,000 in compensation expenses related to an increase in
personnel and an increase of $97,000 in accounting, legal and outside consulting
expense. Most of the $3.1 million increase from 1998 to 1999 resulted from an
increase of $1.7 million in compensation expenses relating to an increase in
personnel, an increase of $312,000 in travel expenses, an increase of $272,000
in accounting, legal and outside consulting expenses and an increase of $161,000
in reserves for doubtful accounts. We expect selling, general and administrative
expenses to increase in the future as we add personnel, incur additional costs
to support continued growth and implement additional internal systems to support
a public company.

AMORTIZATION OF DEFERRED STOCK COMPENSATION. Stock compensation expense was
$565,000 or 4.4% of total revenue in 1999. We will incur substantial stock
compensation expense in future periods which represents non-cash charges
incurred as a result of the issuance of stock options to employees and
consultants. At December 31, 1999, the amount of employee unearned compensation
was $2.2 million which will be amortized in future periods. Amortization of the
December 31, 1999 balance of deferred stock compensation for the years ending
December 31, 2000, 2001, 2002 and 2003 is estimated to be $1.1 million,
$640,000, $346,000 and $131,000, respectively. With respect to stock options
granted to employees, charges are recorded based on the difference between the
deemed fair value of the common stock and the option exercise price of the
subject options at the date of grant.

INTEREST AND OTHER INCOME, NET. Interest and other income, net consists of
interest income, interest expense and other non-operating income. Interest and
other income, net was $53,000, $215,000 and $409,000 in 1997, 1998 and 1999,
respectively. The increases are attributable to interest income from cash
proceeds from financing activities, partially offset by interest expense related
to higher average debt balance.

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<PAGE>
PROVISION FOR INCOME TAXES. We recorded no provision for income tax in
1997. We recorded income tax expense of $14,000 and $3,000 for 1998 and 1999,
respectively, related to foreign taxes on license fee revenue. As of
December 31, 1999 we had approximately $5 million of net operating loss
carryforwards to offset against future taxable income. The carryforwards expire
on various dates through 2018, if not used. Utilization of net operating losses
is subject to an annual limitation due to the changes in ownership provisions of
the Internal Revenue Code of 1986 and similar state provisions. We are in a
deferred tax asset position, which has been fully reserved. We will continue to
provide a valuation allowance for our deferred tax assets until it becomes more
likely than not, in our assessment, that our deferred tax assets will be
realized.

QUARTERLY RESULTS OF OPERATIONS

The tables below set forth our quarterly results of operations in dollars
and as a percentage of revenue for our last five quarters. This data has been
derived from unaudited financial statements that have been prepared on the same
basis as our annual audited financial statements and, in our opinion, include
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of this information. These unaudited quarterly
results should be read in conjunction with the annual audited financial
statements and notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 1999 2000
--------- --------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue, net........................... $ 451 $ 1,849 $ 4,289 $ 6,058 $ 7,064
Commissions.................................... 65 -- -- -- --
Licensing and development fees................. 100 -- -- -- --
------ ------- ------- ------- -------
Total revenue.................................... 616 1,849 4,289 6,058 7,064
Cost of revenue.................................. 163 1,318 2,850 4,038 4,495
------ ------- ------- ------- -------
Gross profit..................................... 453 531 1,439 2,020 2,569
------ ------- ------- ------- -------
Operating expenses:
Research and development....................... 823 1,052 1,342 1,588 1,690
Selling, general and administrative............ 604 915 1,270 1,577 1,784
Patent settlement expense...................... -- -- -- -- 4,078
Amortization of deferred stock compensation.... 4 29 140 392 444
------ ------- ------- ------- -------
Total operating expenses......................... 1,431 1,996 2,752 3,557 7,996
------ ------- ------- ------- -------
Loss from operations............................. (978) (1,465) (1,313) (1,537) (5,427)
Interest and other income, net................... 36 74 157 142 267
------ ------- ------- ------- -------
Loss before income taxes......................... (942) (1,391) (1,156) (1,395) (5,160)
Income taxes..................................... 3 -- -- -- --
------ ------- ------- ------- -------
Net loss......................................... $ (945) $(1,391) $(1,156) $(1,395) $(5,160)
====== ======= ======= ======= =======
</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 1999 2000
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net...................... 73.2 % 100.0 % 100.0 % 100.0 % 100.0 %
Commissions............................... 10.6 0.0 0.0 0.0 0.0
Licensing and development fees............ 16.2 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
Total revenue............................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue............................. 26.5 71.3 66.4 66.7 63.6
------ ------ ------ ------ ------
Gross profit................................ 73.5 28.7 33.6 33.3 36.4
------ ------ ------ ------ ------
Operating expenses:
Research and development.................. 133.6 56.9 31.3 26.2 23.9
Selling, general and administrative....... 98.0 49.5 29.6 26.0 25.3
Patent settlement expense................. 0.0 0.0 0.0 0.0 57.7
Amortization of deferred stock
compensation............................ 0.7 1.6 3.3 6.5 6.3
------ ------ ------ ------ ------
Total operating expenses.................... 232.3 108.0 64.2 58.7 113.2
------ ------ ------ ------ ------
Loss from operations........................ (158.8) (79.2) (30.6) (25.4) (76.8)
Interest and other income, net.............. 5.9 4.0 3.6 2.4 3.8
------ ------ ------ ------ ------
Loss before income taxes.................... (152.9) (75.2) (27.0) (23.0) (73.0)
Income taxes................................ 0.5 0.0 0.0 0.0 0.0
------ ------ ------ ------ ------
Net loss.................................... (153.4)% (75.2)% (27.0)% (23.0)% (73.0)%
====== ====== ====== ====== ======
</TABLE>

TOTAL REVENUE. Quarterly revenue increased in each quarter from $616,000 in
the quarter ended March 31, 1999 to $7.1 million in the quarter ended March 31,
2000. The increase in revenue resulted from increasing unit shipments of the
PW364 ImageProcessor semiconductor which began shipping in December 1998 and the
introduction of two new products, the PW264 ImageProcessor semiconductor and
PW164 ImageProcessor semiconductor, which began shipping in April and August,
respectively.

GROSS PROFIT. As a percentage of total revenue, gross profit decreased from
73.5% in the first quarter of 1999 to 28.7% in the second quarter of 1999 as a
result of a decrease in commissions revenue and licensing and development fees,
which have higher gross profits than product revenues. As a percentage of total
revenue, gross profit increased from 28.7% in the second quarter to 33.6% and
33.3% in the third and fourth quarters of 1999, respectively and 36.4% in the
first quarter of 2000. This increase was a result of a change in product mix
which included the introduction of a new product, the PW164 ImageProcessor
semiconductor, which began shipping in August.

OPERATING EXPENSES. Research and development expense increased in absolute
dollars each quarter as a result of an increase in personnel for the development
of new products. Selling, general and administrative expense also increased in
absolute dollars in each quarter as a result of an increase in sales and
marketing personnel to support customer growth. Amortization of deferred stock
compensation increased in absolute dollars each quarter as a result of
additional stock options granted in each quarter.

We believe that period-to-period comparisons of our operating results are
not necessarily meaningful. You should not rely on them to predict future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. We face a
number of risks and uncertainties encountered by early stage companies,
particularly those in rapidly evolving markets such as the display device
industry. We may not be able to address these risks and difficulties
successfully. In addition, we may not be able to increase sales to existing
customers or add

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<PAGE>
new customers on a regular basis and our revenue may not grow, and we may not
achieve or maintain profitability in the future.

Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future. It is likely that in some
future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the market price of our common
share could significantly decline. See "Risk Factors--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" for more
information on the factors affecting our quarterly results.

Our sales cycle, which is typically between two and 12 months, contributed
to fluctuations in our quarterly operating results. Most of our operating
expenses are relatively fixed in the near term. In addition, our expense levels
are based, in part, on our expectations regarding future revenues. As a result,
any shortfall in revenues relative to our expectations could cause significant
changes in our operating results from quarter to quarter.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed operations through private placements
of our preferred convertible stock. Through March 31, 2000, gross proceeds from
private placements of preferred stock and the exercise of common stock purchase
warrants issued to investors totaled approximately $47.3 million. To a lesser
extent, we have financed operations through accounts payable and equipment lines
of credit.

As of March 31, 2000, we had cash and cash equivalents of $35.4 million, an
increase of $23.2 million from cash and cash equivalents held as of
December 31, 1999. The increase was due to the sale of our preferred stock,
which raised $26.5 million, offset by cash used in operating activities and
purchases of property and equipment and other assets. In addition, we paid off
all of our short-term and long-term borrowings.

Net cash used in operating activities was $306,000, $901,000, $5.0 million,
$903,000 and $70,000 for the years ended December 31, 1997, 1998 and 1999 and
the three months ended March 31, 1999 and 2000, respectively. These net cash
outflows resulted from operating losses as well as increases in inventory and
accounts receivable due to increased sales and were partially offset by
increases in accounts payable and accrued liabilities.

Net cash used in investing activities was $553,000, $1.3 million,
$2.2 million, $335,000 and $1.5 million for the years ended December 31, 1997,
1998 and 1999 and the three months ended March 31, 1999 and 2000, respectively.
In 1997, the use of cash was attributable to purchases of short-term investments
and property equipment. In 1998 and 1999, the use of cash was attributable to
purchases of property and equipment. For the three months ended March 31, 1999
and 2000, the use of cash was attributable to purchases of intangible assets and
property and equipment.

Net cash provided by financing activities was $1.2 million, $7.9 million,
$13.3 million, $127,000 and $24.8 million for the years ended December 31, 1997,
1998 and 1999 and the three months ended March 31, 1999 and 2000. In 1997, cash
provided by financing activities was attributable to the issuance of convertible
preferred stock. In 1998, cash provided by financing activities was attributable
to proceeds from the financing of equipment and the issuance of convertible
preferred stock. In 1999, cash provided by financing activities was attributable
to proceeds from borrowings against the accounts receivable line of credit and
proceeds from the issuance of common stock, warrants and convertible preferred
stock. During the three months ended March 31, 2000 cash provided by financing
activities was attributable to proceeds from the issuance of our Series D
preferred stock to strategic investors. The participants include: Analog
Devices, Compaq, Sanyo, Seiko Epson, Toshiba, ViewSonic and a major
semiconductor company.

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<PAGE>
As of March 31, 2000, our principal commitment consisted of obligations
outstanding under operating leases. In June 1999, we agreed to lease
approximately 23,400 square feet in a facility located in Tualatin, Oregon, for
a term of 60 months. The first year annual cost of this lease is approximately
$312,000, increasing to an approximate annual cost of $462,000 for the next two
years and an approximate annual cost of $497,000 for the remaining two years.
Although we have no other material commitments, we anticipate a substantial
increase in our capital expenditures consistent with anticipated growth in our
operations, infrastructure and personnel. In the future we may also require a
larger inventory of products in order to support anticipated growth in our
business.

In February of 2000, we licensed rights to two patents from InFocus Systems,
Inc. The terms of the license call for four quarterly payments of $600,000
beginning on March 31, 2000.

From time to time, we may evaluate acquisitions of businesses, products or
technologies that compliment our business. Although we have no current plans in
this regard, any transactions, if consummated, may consume a material portion of
our working capital or require the issuance of equity securities that may result
in further dilution to existing shareholders.

We intend to substantially increase our operating expenses. These operating
expenses will consume a material amount of our cash resources, including a
portion of the net proceeds of this offering. We believe that the net proceeds
from this offering, together with existing cash balances and funds available
under our existing credit facilities, will be sufficient to meet our capital
requirements for at least the next 12 months. After this period, capital
requirements will depend on many factors, including the levels at which we
maintain accounts receivable and inventory. We may need to raise additional
funds, and additional financing may not be available on favorable terms, if at
all. Further, if we issue additional equity securities, shareholders may
experience dilution, and the new equity securities may have rights, preferences
or privileges senior to those of existing holders of our common stock. If we
cannot raise funds, if needed, on acceptable terms, we may not be able to
develop new products or enhance our existing products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
This may seriously harm our business and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. We manage the exposure to
financial market risk by performing ongoing evaluations of our investment
portfolio and investing in short-term investment-grade corporate securities.
These securities are highly liquid and generally mature within 12 months from
our purchase date. Due to the short maturities of our investments, the carrying
value approximates the fair value. In addition, we do not use our investments
for trading or other speculative purposes.

We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in interest and foreign currency exchange rates. The
effect of such rate changes is not expected to be material to our results of
operations, cash flows or financial condition. All transactions to date have
been denominated in United States dollars.

As of March 31, 2000 our cash included money market securities. Due to the
short duration of our investment portfolio, an immediate 10% change in interest
rates would not have a material effect on the fair market value of our
portfolio. Therefore, we would not expect our operating results or cash flows to
be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.

36
<PAGE>
FOREIGN CURRENCY EXCHANGE RISK

We are an international company, selling our products globally and, in
particular, in Japan, Taiwan and Korea. Although we transact our business in
U.S. dollars, we cannot assure you that future fluctuations in the value of the
U.S. dollar would not affect the competitiveness of our products, gross profits
realized, and results of operations. Further, we incur expenses in Japan, Korea
and Taiwan and other countries that are denominated in currencies other than
U.S. dollars. We cannot estimate the effect that an immediate 10% change in
foreign currency exchange rates would have on our future operating results or
cash flows as a direct result of changes in exchange rates. However, we do not
believe that we currently have any significant direct foreign currency exchange
rate risk and have not hedged exposures denominated in foreign currencies or any
other derivative financial instruments.

INFLATION

The impact of inflation on our business has not been material since our
inception.

RECENTLY ISSUE ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or SFAS, No. 133, Accounting For Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect the adoption of SFAS No. 133 to have a material impact on our results of
operations.

YEAR 2000

No significant Year 2000 problems arose. No significant expenditures related
to the Year 2000 are expected.

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<PAGE>
BUSINESS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."

OVERVIEW

Initially, we introduced products for use in the most technically demanding
display devices including advanced multimedia projectors, flat panel computer
monitors and high-definition televisions. We have recently extended our product
offerings into lower cost flat panel monitors with features and prices designed
for consumer markets. In the future, we intend to develop products for emerging
markets including Internet appliances, electronic devices designed solely for
accessing and displaying Web content.

Our system-on-a-chip semiconductors and feature-rich software help our
customers to simplify their product design, reduce time to market, lower
development costs and increase product performance. In addition, our customers
can use a common design across multiple products.

To date, we have announced that our semiconductors are used in products
marketed by Compaq, Sony and ViewSonic. We have more than 45 customers,
including seven out of the top 10 computer monitor brands and 10 out of the top
15 television brands. Our customers have more than 75 products in development or
production using our system-on-a-chip semiconductors.

INDUSTRY BACKGROUND

The increasing availability of high-speed access to broadband content is
transforming the way we see and use information. The amount of information that
can be transmitted at high speeds over long distances is increasing
dramatically. At the same time, new technologies are allowing end users to
receive data at significantly increased transmission speeds in the "last mile,"
the distance between the telephone and cable company and the user's home or
office. According to IDC, broadband access is expected to grow at a compounded
annual growth rate of approximately 78% from 1999 to 2003. In order to take full
advantage of the large amounts of visual information arriving at the "last
meter," the point where the information is processed and displayed, users are
demanding more sophisticated display devices capable of showing text, graphics
and full motion video simultaneously. These products include flat panel
monitors, high definition televisions, or HDTVs, multimedia projectors, and
Internet appliances. Independent research firms are projecting significant
growth for these devices over the next several years. The following data has
been gathered from published sources which were not specifically prepared or
approved for use in this prospectus.

- DisplaySearch estimates that the market for flat panel monitors will grow
from 4.5 million units in 1999 to 23.2 million units in 2004, a compound
annual growth rate of 39%.

- Stanford Resources estimates that the market for HDTVs will grow from 1.5
million units in 1999 to 2.9 million units in 2004, a compound annual
growth rate of 14%.

- Pacific Media Associates estimates that the market for multimedia
projectors will grow from 750,000 units in 1999 to 1.5 million units in
2003, a compound annual growth rate of 19%.

- IDC estimates that an emerging category of devices including netTVs,
screenphones and other Internet appliances will grow from 7.3 million
units in 1999 to 32.5 million units in 2004, a compound annual growth rate
of 35%.

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<PAGE>
Today, the convergence of television and computer applications is creating
new development opportunities for products that integrate the ability to display
full motion video and support interactive capabilities such as browsing the Web
while watching television. This convergence requires an increase in transmission
capacity and makes the interpretion and display of information more complex.
While significant growth is forecasted for display devices, the increasing need
to rapidly process large amounts of information delivered in a multitude of
broadcast and Web transmission formats could constrain this growth. This
bottleneck limits access to the full visual potential of broadband content.

Developing the technology to cost effectively meet the breadth and
complexity of new display devices poses several technical challenges. First, the
signals delivering content to these devices include analog, digital and video
information that has been encoded using a combination of standard and
non-standard industry formats. This information must be translated and optimized
at very high speeds to match the functionality and display characteristics of
different display devices. Second, these new devices require visual information
to be displayed in a wide variety of sizes and formats. Each signal, whether
analog or digital, must be manipulated to properly display the appropriate image
in the correct format on the device. Third, all of these differing signals and
formats need to be processed without compromising the visual quality of the
information displayed.

The rapid development of high resolution display technologies has created
another challenge. The quality of a display device largely depends on its
resolution. Resolution is defined by the number of picture elements, or pixels,
that can be displayed. Pixels on a display are arranged in a matrix made up of a
series of rows and columns. With higher resolution, more information can be
displayed resulting in a crisper and cleaner image. In order to meet end users'
expectations for higher quality images, new display technologies are frequently
introduced with higher resolutions. Today's mainstream computer monitors use an
Extended Graphics Array, or XGA, display consisting of a matrix of 1,024 by 768
pixels. Higher computer resolution formats are emerging such as Super Extended
Graphics Array, or SXGA, with 1,280 by 1,024 pixels, and Ultra Extended Graphics
Array, or UXGA, with 1,600 by 1,200 pixels. In addition, 18 definition
television formats have been created to support HDTV video content.

The industry is seeking to address some of this complexity and to accelerate
the acceptance of flat panel displays through the development of new standards
such as the Digital Visual Interface, or DVI, specification, a new digital
standard for attaching a flat panel monitor to a computer. However, even with
development of these standards, today's technology is reaching its physical
limit of transmitting and receiving image data. New standards are required to
increase the available transmission capacity, or bandwidth, in the last meter.
Without new standards, the adoption of advanced high-resolution,
high-performance display products may be impeded.

Furthermore, the traditional design approach of creating "hard-wired"
solutions for specific technical challenges results in single-purpose
semiconductors that are difficult to re-configure for new products. The
resulting fixed functionality combined with the lengthy design cycles for new
products has made it difficult for developers to quickly design
high-performance, flexible, multi-featured, and affordable new display products.

PIXELWORKS SOLUTION

Our solution, the highly integrated ImageProcessor semiconductor coupled
with our software, breaks through the bottleneck which has been limiting access
to broadband content. Our products are capable of translating and optimizing
high-speed video, computer graphics and Web information in real time. Our
products also process signals ranging from low-resolution computer graphics to
the latest high-definition television standards. We enable our customers to
quickly integrate our products into their own advanced display product
development programs with our system-on-a-chip semiconductors and software. We
provide our customers with a new design approach that lets them develop all of
their

39
<PAGE>
display solutions products using a consistent design method that is software
compatible across product lines.

We have embraced a systems design process rather than requiring our
customers to design their products using many individual electronic components.
Our semiconductors integrate a microprocessor, memory and image processing
circuits. This approach enables our customers to substantially increase
functionality, reduce time to market, and lower overall development costs in
highly efficient designs that allow miniaturization. Our highly integrated
products enable our customers to get their products into the market more rapidly
by significantly reducing the selection, sourcing, testing, integration,
debugging, and design of separate components.

The following diagram illustrates the high level of integration of our
semiconductors which results in reduced complexity, cost and time to market for
our customers.

Description of graphics on page :
This graphic is entitled "Pixelworks Integrates Up to 10 Chips onto a Single
Chip." Two discrete diagrams are positioned side by side. Above the left diagram
it reads "Individual Component Design Approach," and below that is an arrow
pointing downward toward a group of 10 boxes connected by black lines with a
second downward-pointing arrow at the bottom. All components of the diagram are
shaded by black lines with a second downward-pointing arrow at the bottom. All
components of the diagram are shaded gray and are represented as
three-dimensional. Text inside the top arrow reads "Input Source." Reading from
top to bottom, left to right, the individual boxes are labeled as follows:
"Microprocessor," "Scaler," "Video Processor," "Frame Rate Conversion," "Auto
Image Optimization," "Color Compensation," "On-Screen Display," and three
individual boxes labeled "Frame Buffer Memory." Lines connect all of the boxes
with arrowheads pointing at each of the boxes. The bottom downward-pointing
arrow is labeled "Output to Display." Above the diagram on the right side it
reads "Pixelworks System-on-a-chip Design Approach," and below that is an arrow
pointing downward to a single box comprised of small, sub-sections and another
downward-pointing arrow at the bottom. All components of the diagram are shaded
gray and are represented as three-dimensional. The top arrow is labeled "Input
Source." Within the single box, there is one large box containing smaller boxes.
This large box is shaded in black with white letters reading "Pixelworks
Software." A slightly smaller, gray box is positioned within the larger box and
is labeled "ImageProcessor IC." Within this smaller gray box are eight smaller
boxes which read as follows from top to bottom, left to right: "Microprocessor,"
"Scaler," "Video Processor," "Frame Rate Conversion," "Auto Image Optimization,"
"Color Compensation," "On-Screen Display," and "Frame Buffer Memory." Below the
box is an arrow labeled "Output to Display." Five semi-transparent, gray
trapezoids link the left and right diagrams with the first top trapezoid
connecting the top row of blocks of the left diagram to the top row of smaller
blocks in the right diagram. The second trapezoid connects the second row of
blocks in the left diagram to the second row of smaller blocks in the right
diagram with this pattern continuing for rows three through five in each
diagram.

Key benefits of our semiconductors and software include:

CONSISTENT DESIGN ACROSS MULTIPLE PRODUCTS. Our products, comprised of both
system-on-a-chip semiconductors and software, can be easily implemented across
multiple product models and categories. Customers can significantly reduce
development investments by leveraging a single effort to create a line of
products, a benefit we believe to be unique to our design. Many of our customers
are taking

40
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advantage of this capability. For example, Compaq is using our products in both
flat panel display monitors and a multimedia projector, all leveraged from the
same development effort.

BROAD COMPATIBILITY. Our products work with a broad range of video, Web and
computer graphics signals and display technologies. Our products instantly
recognize, interpret, and optimize video and computer graphics for display on a
wide variety of devices used in the home and office. This allows our customers
to use our system-on-a-chip semiconductors in display products that address
multiple market segments and applications. For example, ViewSonic has used our
products to design flat panel monitors that have five data connectors--two
analog, two digital, and one video--handling resolutions up to UXGA, or 1600 by
1200 pixels.

NUMEROUS INNOVATIVE FEATURES. Our semiconductors and software give our
customers a large variety of features required for the most demanding
applications. These features include picture-in-picture, video rotation,
projected image correction, and digital zoom. Our software also allows our
customers to rapidly develop unique features that differentiate their end
products.

RAPID TIME TO MARKET WITH LOWER DEVELOPMENT COSTS. Our customers leverage
our designs from one project to the next, lowering their overall development
costs and promoting efficient design processes.

PIXELWORKS STRATEGY

DESIGN AND SELL INCREASINGLY INTEGRATED SEMICONDUCTORS. We intend to
continue to combine more and more of the functionality required to open up the
last meter of broadband content delivery. Our semiconductors include an
integrated microprocessor, memory, and image processing circuits capable of
processing high-resolution images.

DELIVER HIGHLY FLEXIBLE SOFTWARE-DRIVEN PRODUCTS. Unlike component
semiconductor suppliers, our products include both highly integrated
semiconductors and software. Our ready-to-implement software modules shorten our
customers' development time by giving them the option to reduce or eliminate
their own custom development. Our strategy is to continuously provide our
customers with new software, driving higher levels of performance and
functionality.

EXPAND FROM HIGH-END MARKETS INTO MASS MARKETS. We targeted our initial
products at the most challenging segments of the market: high-resolution
flat-panel monitors and multimedia projectors. These technically demanding
products were and continue to be a proving ground for our design approach and
products. Our products have been widely accepted in these markets. Our strategy
is to leverage our technology advantage and market acceptance by offering many
of the same capabilities in system-on-a-chip semiconductors specifically
designed for higher volume flat panel monitor markets by helping to drive down
product costs while providing superior performance. We also expect these markets
to include emerging applications, including Internet appliances, screenphones
and netTVs.

SUPPORT AND DEFINE INDUSTRY STANDARDS. Development and broad industry
support of standards is critical to the continued adoption of flat panel
displays and future broadband appliances. The current generation of standards is
inadequate for the processing and display of next-generation broadband content.
Future standards will have to address new device requirements such as higher
resolutions, larger formats, multiple displays and high speed bandwidth. Our
philosophy has been to support accepted industry standards including the DVI
standard developed by the Digital Display Working Group. Moving forward we
expect to be more proactive in the definition of new standards to drive the
adoption of advanced display products.

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<PAGE>
In support of this strategy, concurrent with the closing of our Series D
preferred stock offering, we began collaborating with Intel Corporation to
develop a new standard for next generation digital displays. Pixelworks intends
to develop a new semiconductor that embodies that new standard, which we
anticipate will incorporate functionality included in the current DVI standard
as well as additional features useful for driving next generation displays. We
have committed to offer the specification to the Digital Display Working Group
for inclusion in future widely available specifications.

BUILD STRATEGIC RELATIONSHIPS. We intend to continue to work closely with
strategically important partners to develop widely useful products as our
next-generation products. Those strategically important partners may be our
customers, our suppliers, or participants in the industry whose own strategic
interests led them to work with us. In February 2000, we invited a select list
of strategic investors to participate in our Series D investment round based on
their ability to offer competitive advantages to us as market channels, or as
suppliers, or as technology collaborators, in areas of strategic importance to
us including monitors and televisions for mass markets, next-generation high
performance displays, and broadband appliances. Participants in the Series D
offering include: Analog Devices, Compaq, Sanyo, Seiko Epson, Toshiba, ViewSonic
and a major semiconductor company.

We are pioneering the development of ultra high-resolution display
technology. We have provided IBM with semiconductors that drive the world's
first commercially available super high-resolution display panel. With a
resolution that approaches the quality of printed text at 123 pixels per inch,
the 3.15 million pixels display the equivalent of four XGA-resolution monitors
on a single screen.

PRODUCTS

Our ImageProcessor products combine system-on-a-chip semiconductors,
software and software development tools which enable our customers to quickly
integrate our system-on-a-chip semiconductors into their end products. Designs
using our products are portable across different product lines and models. All
of our products are manufactured using state-of-the-art manufacturing processes.

In December 1998, we began shipping the PW364 ImageProcessor semiconductor,
which we believe to be the world's first single-chip flat panel display
controller. Additional semiconductors were introduced in 1999--the PW264
ImageProcessor semiconductor in April and the PW164 ImageProcessor semiconductor
in August. These semiconductors extended the product line into new markets by
providing new features for specific display applications at lower price points.

In December 1999, the Society for Information Display, or SID, recognized
our PW364 and PW264 ImageProcessor semiconductors with the "Display Material or
Component of the Year Gold Award," a distinguished technical recognition in the
advanced display industry. The winners of the SID INFORMATION DISPLAY MAGAZINE
Display of the Year Awards are selected by a committee of display technologists
and leading editors who cover the display industry.

All of our ImageProcessor semiconductors include the following features:

- INTELLIGENT IMAGE PROCESSING--interprets and resizes incoming image
signals to match the resolution and aspect ratio, or the relation of the
width to the height of the specific display used in the product

- ADAPTIVE IMAGE OPTIMIZATION--identifies the incoming computer or video
signals and adjusts the display to produce the best possible image

- ADVANCED VIDEO SUPPORT--recognizes and optimizes incoming video signals,
including HDTV, for a wide variety of display resolutions

- SOFTWARE COMPATIBILITY--allows customers to rapidly create products across
product lines and categories

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<PAGE>
Other features of our ImageProcessor semiconductors include:

- SUPPORT FOR A RANGE OF RESOLUTIONS--the ability to handle a full range of
resolution standards from 640 by 480 pixels to 2,048 by 1,536 pixels.

- PICTURE-IN-PICTURE--the ability to overlay and view one image source
simultaneously with another image source in a resizable and movable window

- KEYSTONE CORRECTION--a feature designed for projectors that allows users
to adjust the image electronically to compensate for optical distortions
in a projected image so it appears square.

Our current ImageProcessor semiconductors are:
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C> <C> <C> <C>
MARKET OTHER MODULAR FEATURES
<CAPTION>

ADVANCED
TELEVAPPLICATIONSUTING
<S> <C><C>
- --------------------------------------------------------------------------------------------------------------------------
PW364 X X UXGA UXGA X
- --------------------------------------------------------------------------------------------------------------------------
PW364D X UXGA UXGA X X
- --------------------------------------------------------------------------------------------------------------------------
PW264 X X SXGA XGA X
- --------------------------------------------------------------------------------------------------------------------------
PW264-K X X SXGA XGA X X
- --------------------------------------------------------------------------------------------------------------------------
PW164W-20 X X UXGA SXGA X
- --------------------------------------------------------------------------------------------------------------------------
PW164-10R X SXGA XGA
- --------------------------------------------------------------------------------------------------------------------------
PW164-20R X UXGA SXGA
- --------------------------------------------------------------------------------------------------------------------------
PW164-10RK X X SXGA XGA X
- --------------------------------------------------------------------------------------------------------------------------
PW164-20RK X X UXGA SXGA X
- --------------------------------------------------------------------------------------------------------------------------
PWSR-01 X QXGA QXGA X
Chip Set
- --------------------------------------------------------------------------------------------------------------------------

- --------------------------------------------------------
PW364 Full-featured
SXGA, UXGA
Multimedia
Monitors and TVs
- -------------------------------------------------------------------------
PW364D Full-featured
SXGA, UXGA
Multimedia
Projection
- ------------------------------------------------------------------------------------------
PW264 Full-featured
XGA
Monitors
- -----------------------------------------------------------------------------------------------------------
PW264-K Mainstream XGA
Projection
- --------------------------------------------------------------------------------------------------------------------------
PW164W-20 Low Cost XGA
Projection
- --------------------------------------------------------------------------------------------------------------------------
PW164-10R 15 in. XGA
Multimedia
Monitors
- --------------------------------------------------------------------------------------------------------------------------
PW164-20R 17-18 in. SXGA
Multimedia
Monitors
- --------------------------------------------------------------------------------------------------------------------------
PW164-10RK Low cost
XGA/SVGA
Projection
- --------------------------------------------------------------------------------------------------------------------------
PW164-20RK Low cost
SXGA Projection
- --------------------------------------------------------------------------------------------------------------------------
PWSR-01 Super Resolution
Chip Set Monitors
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

<S> <C> <C> <C> <C>
(1) Resolution standards:
XGA 1,024 X 768 pixels UXGA 1,600 X 1,200 pixels
SXGA 1,280 X 1,024 pixels QXGA 2,048 X 1,536 pixels
</TABLE>

43
<PAGE>
OUR SOFTWARE

We provide a complete software development environment that helps customers
reduce their time to market by providing an embedded operating system, computer
programming code and tools necessary to customize display devices. Our Software
Development Kit enables product differentiation through rapid customization of
features, performance, and device "look and feel" with fast time to market and
reduced development costs. Our software provides a consistent development
platform that is portable across product lines and product categories.

The Software Development Kit includes:

- An operating system, computer programming code and programming tools;

- Software that provides automatic image optimization which is compatible
with a wide range of analog, digital, and video formats;

- Application programming interfaces that allow the customer to address our
software and hardware functionality at a high level;

- Support for a wide range of hardware devices; and

- Windows-based utilities:

- GUIBuilder--allows the customer to build graphical on-screen user
interfaces

- Display Configurator--allows the customer to configure timing for
particular display panels

- FlashUpgrader--allows the customer to download software into memory for
use by our system-on-a-chip semiconductors

- PW Debug--gives the customer the capability for interactive debugging
of the system over a serial interface

FUTURE PRODUCT DEVELOPMENT

We plan to develop new system-on-a-chip semiconductors which address
customer demand and are logical extensions of our design architecture. Higher
levels of integration may include adding analog to digital converters, video
decoders and DVI compliant digital receivers. These higher levels of integration
will further reduce the number of components on circuit boards and help to lower
overall system costs. Future products may incorporate functionality targeted at
Internet appliance and advanced video applications.

TECHNOLOGY

Our core competency in semiconductor design involves an innovative
methodology for developing complex system-on-a-chip designs. Our designs are
based on self-contained modules that can be reassembled and reused in new
development programs. We extensively simulate and test our designs using the
best available simulation and synthesis tools and internally developed
proprietary validation tools. We work closely with our foundry partners to use
state-of-the-art manufacturing process technology.

IMAGEPROCESSOR SEMICONDUCTOR TECHNOLOGY

UNIQUE ON-CHIP INTEGRATION OF MICROPROCESSOR, MEMORY AND DIGITAL SIGNAL
PROCESSOR. Our ImageProcessor semiconductor is a complete, integrated display
controller on a single chip, which includes automatic image optimization,
automatic image resizing and an onboard microprocessor. This single chip
replaces all of the individual components of the traditional display controller.

44
<PAGE>
The technical specifications of our system-on-a-chip semiconductors include
an embedded x86-compatible microprocessor and peripherals, 4 megabytes of
memory, and a high performance digital signal processing, or DSP, core. Our
proprietary memory system architecture enables up to 33.2 gigabits per second of
bandwidth, and our DSP enables processing of image resolutions as high as Quad
Extended Graphics Array, or 2,048 by 1,536 pixels, which requires more than 5
gigabits per second of transmission capacity. By integrating the microprocessor
and peripherals, memory, and DSP our products provide a complete solution to the
core electronics of a display device.

BROAD INTERFACE FLEXIBILITY. Our ImageProcessor semiconductors work with
analog or digital signals, ranging from low resolution computer graphics to the
latest high-definition television formats.

COMPLETE SOFTWARE DEVELOPMENT ENVIRONMENT. We provide an embedded operating
system, source code, and software tools necessary to customize display devices.
Our software development environment includes a proprietary Windows based user
interface creation tool, GUI Builder, that enables customers to create finished
products with a distinct "look and feel." The GUI Builder also allows our
customers to easily create multiple differentiated products. In addition to
controlling the user interface our software forms the heart of the real time
system at the core of any modern display product. Our software provides a
consistent development platform that is portable across product lines and
product categories. For example, a customer that develops a projector product
that uses our software can easily port that software to a monitor. This benefits
the customer by dramatically reducing time to market and providing a unique
"look and feel" that delivers a consistent customer experience across an entire
product portfolio.

INTELLIGENT IMAGE PROCESSING TECHNOLOGY

Our technology supports multi-standard analog and digital video, including
digital television or DTV, HDTV, National Television Standards Committee, or
NTSC, and other international video standards. Our intelligent image processing
products simplifies the use and development of display devices. Features of our
technology include the following:

IMAGE SCALING AND SHAPING. Our image processing technology incorporates a
proprietary programmable two-dimensional image scaler capable of resizing images
to fit a wide variety of aspect ratios, which is the ratio of width to height of
display screens, and resolutions. With our scaler, images can be adapted to
aspect ratios ranging from traditional 4:3 aspect ratios of conventional
computer monitors and televisions to the 16:9 format used in wide screen HDTVs.
In addition, content designed for a specific resolution can be intelligently
stretched or reduced in real time to fit a new resolution for a specific display
without degrading the image. For example low-resolution images are processed by
intelligently adding information, so that when the new image is displayed, it
looks smooth without any jagged image areas. High-resolution content can be
displayed on lower resolution displays by intelligently removing information
without degrading image quality.

Our technology allows the shape of an image to be changed in multiple
dimensions. This is useful in compensating for optical distortions in products
including front projection systems and rear projection televisions. For example,
standard resolution videotapes designed for conventional television display can
be resized and formatted for display on a high-resolution wide-screen flat panel
television without degrading the image. This capability is increasingly
important as HDTV becomes more prevalent. HDTV content can be delivered in as
many as 18 different combinations of resolutions and aspect ratios.

ADAPTIVE IMAGE OPTIMIZATION. Our products must translate a broad range of
signals in standard and non-standard formats. We use a proprietary image
processing technique to identify the characteristics of a signal and configure
the system to produce the best possible image. Our adaptive image optimization
technology automatically adjusts incoming signals to achieve the highest
possible image quality. The

45
<PAGE>
display adjusts itself when it is turned on and continuously adjusts with every
change of the incoming signals to display an optimal image.

ADVANCED VIDEO PROCESSING. Flat panel displays are progressive scan devices.
Images are built and displayed sequentially one row or line at time. Typically,
video signals are interlaced or built using every other row. First the odd rows
are displayed and then the image is updated with the even rows. Our image
processing technology converts the incoming interlaced video signals for display
on flat panels by doubling the incoming signals to match the progressive scan
capabilities of flat panel displays. This is an especially difficult challenge.
Simply merging the odd and even fields results in very jagged image edges. Our
intelligent approach uses a sophisticated video digital signal processing
technique to display the best possible image.

COLOR COMPENSATION TECHNOLOGY. Our sophisticated custom color compensation
technology makes it possible to display consistent color images from video and
computer graphics, which use very different color palettes, on different display
devices. Our color processing technology compensates for variations in the color
performance of a display. Using our unique approach any color can be addressed
independently and adjusted without impacting other colors. Our customers can use
our color compensation technology to compensate for non-uniform color in a
specific display and to provide consistent color performance across multiple
products using different display technologies. It can also be used to compensate
for color variations in display components provided by different vendors.

Our non-linear color compensation technology allows precise color matching
and may enable products which can precisely represent the color of the original
source. The applications of this technology include graphic design where colors
on a display using an ImageProcessor semiconductor can be accurately matched to
a print output. Another application is for improving end-user satisfaction when
using Internet e-commerce shopping sites by enabling exact color representation
of products to be shown on a display.

FULLY CUSTOMIZABLE ON-SCREEN DISPLAY

Our technology couples an integrated on-screen display controller with a
unique Windows-based application that allows customers who are designing
ImageProcessor semiconductors into their display products to quickly develop and
implement their own unique user interfaces that can incorporate graphics and
colorful icons in start-up displays and menus.

CUSTOMIZABLE FEATURE SUPPORT FOR SPECIFIC DEVICE FUNCTIONALITY

This allows developers to add unique features for specific devices.
Customizable features currently include:

- Picture-in-picture for products in the consumer multimedia, high-end
desktop monitors and business presentation markets;

- Image shaping for keystone correction in business presentation products;
and

- Digital zoom to enlarge images electronically.

MIXED ANALOG AND DIGITAL SIGNAL SUPPORT

Our ImageProcessor semiconductors can support as many as four different
sources of computer and video content to be displayed on a single device through
integrated and add-on analog and digital receivers and connectors. Analog
computer graphics, digital graphics supporting the DVI standard and video
through a variety of sources that can be captured, decoded and optimized.

46
<PAGE>
CUSTOMERS, SALES AND MARKETING

We have achieved design wins with global leaders in the business computing
and consumer electronics markets. We have announced products in production with
Compaq, Sony and ViewSonic and have more than 45 customers who are using our
system-on-a-chip semiconductors in over 75 products. Customers that use our
products include seven out of the top 10 monitor brands and 10 out of the top 15
television brands.

The key elements of our sales and marketing strategy are to achieve design
wins with industry leading branded manufacturers in targeted markets and to
continue building strong customer-supplier relationships. Once a design win has
been achieved, sales and marketing efforts are focused on building long-term
mutually beneficial business relationships with our customers by providing
superior technology which complements their 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 system-on-a-chip semiconductors.

Our global distribution channel is multi-tiered and involves:

- Manufacturers Representatives--Independent sales agents who represent us
in local markets and provide pre- and post-sales support and do not carry
inventory

- Distributors--Resellers in local markets who provide pre- and post-sales
support and stock our ImageProcessor semiconductors in direct relation to
specific manufacturing customer orders

- Integrators--OEM customers who build display devices based on
specifications provided by branded manufacturers

- Branded Manufacturers--Globally recognized manufacturers who develop
display device specifications, manufacture, market and distribute display
devices either directly or through resellers to end-users

In Japan, our products are sold through our distributor, Tokyo Electron
Device who represented 54.9% and 64.2% of our total revenue for 1999 and the
three months ended March 31, 2000, respectively. Sales through Tokyo Electron
Device to our customer Seiko Epson represented 23.3% and 25.3% of our total
revenue for 1999 and the three months ended March 31, 2000, respectively. Sales
through Tokyo Electron Device to our customer Hitachi represented 11.2% and
12.4% of our total revenue for 1999 and the three months ended March 31, 2000,
respectively. In Taiwan, we sell through our distributor MicroMax International
who represented 24.4% and 13.1% of our total revenue for 1999 and the three
months ended March 31, 2000, respectively. Sales through MicroMax to our
customer Optoma, formerly known as CTX Opto-Electronics, an integrator for
Compaq, represented 13.5% and 9.4% of our total revenue for 1999 and the three
months ended March 31, 2000, respectively. We support our European and Korean
customers through direct sales supported by manufacturer representatives. We
sell our products to and support our U.S. customers directly.

Our sales and marketing team included 36 employees as of March 31, 2000. The
sales and marketing team includes the architecture support team of 20
application engineers who provide technical expertise and assistance to
manufacturing customers on final product development. In February 2000, we
established sales and marketing offices in Japan and Taiwan.

RESEARCH AND DEVELOPMENT

At our inception, our internal research and development efforts were focused
on the development of our PW364 ImageProcessor semiconductor for the high-end
multimedia projection and flat panel monitor markets. In 1998, our development
efforts for the PW264 ImageProcessor semiconductor were focused on extending our
technology into new markets. In 1999, our development efforts for the

47
<PAGE>
PW164 ImageProcessor semiconductor product series were focused on developing
highly efficient designs while maintaining product performance and features.

We are now pursuing higher levels of integration of new features in order to
extend our system-on-a-chip semiconductors into new market segments. These
higher levels of integration will further reduce components on circuit boards
and help to lower final systems costs for our customers. Future development
efforts include system-on-a-chip technologies required for Internet appliance
and advanced video applications.

In addition to our 20 applications engineers we have 37 engineers,
technologists and scientists who are organized into the following functional
groups: Integrated Circuit Design, Software engineering, Systems Engineering and
Product and Test Engineering. Software engineers constitute 40% of our
engineering resources and 21% are systems engineers. This concentration of
systems and software engineering reflects our system-on-a-chip focus.

We have invested and expect that we will continue to invest significant
resources in research and development activities. Our research and development
expenses were $215,000, $1.4 million and $4.8 million in 1997, 1998 and 1999,
respectively.

MANUFACTURING

Our products require advanced semiconductor processes and packaging
technologies. Within the semiconductor industry we are known as a "fabless"
company, meaning that we do not fabricate the semiconductors that we design and
develop, but instead rely on third parties to manufacture our products. We have
established strategic technology relationships with our fab partners Toshiba and
Taiwan Semiconductor Manufacturing Corporation, or TSMC. This approach allows us
to concentrate our resources on product design and development where we believe
we have greater competitive advantages. All of our current products are
manufactured by Toshiba on an application specific integrated circuit, or ASIC,
turnkey basis. On this basis, Toshiba manufactures wafers, performs all assembly
and test operations and is responsible for the quality and reliability testing
of our products.

Our current products are manufactured by Toshiba using a standard 0.25
micron embedded memory process. We plan to have our future products manufactured
by Toshiba and TSMC using 0.25 micron and 0.18 micron embedded memory and
standard complementary metal-oxide semiconductor, or CMOS, processes. We intend
to build some future products on a customer owned tooling, or COT, basis,
directly contracting the manufacture of wafers and the assembly and testing of
our products. While this COT manufacturing model adds greater responsibility and
risk for our production, it provides us with the manufacturing flexibility
required for future products and may reduce our manufacturing costs.

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 system-on-a-chip technology. We currently have six patent
applications pending with the U.S. Patent and Trademark Office, which relate
generally to image scaling, auto image optimization and improving the DVI
interface standard. We intend to seek patent protection for other significant
technologies that we have already developed and expect to seek patent protection
for future products as necessary. Any future patents may not be granted and if
granted may be invalidated, circumvented, challenged or licensed to others.

To supplement the technologies that we develop internally, we have licensed
rights to use intellectual properties held by third parties, and we may license
additional technology rights in the future. In November, 1997 we entered into a
license agreement with VAutomation Incorporated pursuant to which, among other
things, we licensed rights relating to VAutomation's soft core technology. In
March, 1999 we entered into another agreement with VAutomation pursuant to
which, among other things, we sublicensed certain rights related to x86
semiconductor core technology. That

48
<PAGE>
agreement terminates on November 6, 2006. We have also recently obtained a
license from InFocus for the use of its proprietary automatic pixel clock phase
and frequency correction technology specified in two patents held by InFocus. We
acquired this technology in connection with the settlement of a claim by InFocus
that we were infringing on its patents relating to this technology. We obtained
this license to avoid any uncertainty which this claim might create for our
customers and our business. The license gives us the right to use this
technology without payment of royalty in our products. If any of these
agreements terminate, we would be required to exclude the licensed technology
from our existing and future product lines.

The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. We have indemnification
obligations with respect to the infringement of third party intellectual
property rights. There is no intellectual property litigation currently pending
against us. However, we may from time to time receive notifications of claims
that we may be infringing patents or other intellectual property rights owned by
third parties. If it is necessary or desirable, we may seek licenses under those
patents or intellectual property rights. However, we cannot be sure that
licenses will be offered or that the terms of any offered licenses will be
acceptable to us.

COMPETITION

In general, the market for semiconductors is intensely competitive. Our
market is characterized by rapid technological change, evolving industry
standards, compressed product life cycles and declining average selling prices.
We believe the principle factors impacting competition in our markets are levels
of product integration, functional versatility provided by software, compliance
with industry standards, time to market, cost, product performance, system
design costs, intellectual property, customer relationships and reputation.

Our current products face competition from specialized display controller
developers and in-house display control chips 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 scaler components. Some of these
include Genesis Microchip, Macronix, Sage, Silicon Image, SmartASIC,
STMicroelectronics and Trident Microsystems.

Potential competitors may include diversified semiconductor manufacturers
including Broadcom Corporation, National Semiconductor and Texas Instruments. In
addition, start-up companies may seek to compete in our markets.

EMPLOYEES

As of March 31, 2000, we had a total of 88 employees--37 in engineering, 36
in sales and marketing, 5 in operations and 10 in finance and administration. Of
these employees, 85 are in the United States. None of our employees are
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We consider our relationship with our employees to be good. We
depend on the continued service of our key technical, sales and senior
management personnel and our ability to attract and retain additional qualified
personnel. If we are unable to hire and retain qualified personnel in the
future, our business could be seriously harmed.

FACILITIES

Our 23,400 square foot headquarters located in Tualatin, Oregon includes our
engineering, marketing and administrative facilities. We have leased this space
through May 2004.

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<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding our directors
and executive officers, as of March 31, 2000:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Allen H. Alley................. 45 Chairman, President and Chief Executive Officer
Hans H. Olsen.................. 51 Vice President, Operations
Michael G. West................ 43 Vice President, Technology
Robert Y. Greenberg............ 38 Vice President, Product Development and Customer Support
Bradley A. Zenger.............. 38 Vice President, Marketing
Michael E. Barton.............. 59 Vice President, Sales
Jeffrey B. Bouchard............ 39 Vice President, Finance and Chief Financial Officer
Oliver D. Curme................ 46 Director
Frank Gill..................... 56 Director
Mark A. Stevens................ 39 Director
Michael D. Yonker.............. 42 Director
</TABLE>

ALLEN H. ALLEY co-founded Pixelworks and has served as our President, Chief
Executive Officer and Chairman since our inception. From 1992 to 1996,
Mr. Alley served as the Vice President, Corporate Development, Engineering and
Product Marketing for In Focus Systems, a leading electronic display company.
While at InFocus, Mr. Alley also was the co-CEO of a joint venture with
Motorola, Inc. called Motif. From 1986 to 1992, Mr. Alley was a General Partner
of Battery Ventures, a venture capital investment firm. From 1983 to 1986,
Mr. Alley was the Director of Mechanical Computer Aided Engineering of
Computervision Corporation, a computer-aided design software developer. From
1979 to 1983, Mr. Alley was a Lead Mechanical Engineer at Boeing Commercial
Airplane Division. From 1976 to 1979, Mr. Alley served as a Product Design
Engineer for the Ford Motor Company. Mr. Alley holds a B.S. in Mechanical
Engineering from Purdue University.

HANS H. OLSEN has served as Vice President, Operations since joining us in
July 1998. From 1997 to 1998, Mr. Olsen held the positions of Vice President,
Graphics Marketing and Vice President, North American Sales at Trident
Microsystems, a graphics controller semiconductor company. From 1996 to 1997,
Mr. Olsen served as Vice President Marketing at Paradigm Technology, Inc. which
acquired IChips Corporation, a personal computer chipset and embedded memory
technology provider, that he founded and was CEO of from 1993 to 1996. From 1982
to 1993, Mr. Olsen held the position of CEO of Electronic Designs, Inc., a
semiconductor memory company he co-founded. From 1973 to 1982, Mr. Olsen held
engineering and management positions at Christian Rovsing A/S in Copenhagen,
Denmark. Mr. Olsen holds a B.S.E.E. from Copenhagen Technical University and a
M.S.E.E. from the University of Copenhagen.

MICHAEL G. WEST co-founded Pixelworks and has served as our Vice President,
Technology since our inception. From 1988 to 1996, Mr. West led the
semiconductor engineering efforts on advanced display products at InFocus
Systems where he served as Chief Scientist and in other senior engineering
capacities. From 1986 to 1987, Mr. West led design for a VLSI design of a
full-custom bipolar integrated circuit and a microsequencer as an Integrated
Circuit Design Engineer for Bipolar Integrated Technology, a semiconductor
developer and manufacturer. From 1982 to 1986, Mr. West held semiconductor
design positions, including leading system architecture development for a VLIW
super computer at Floating Point Systems, a super-computer company. Mr. West
holds a B.S. in Electronic Engineering and a B.S. in Mathematics from Oregon
State University and a M.S.E.E. from the University of Illinois.

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<PAGE>
ROBERT Y. GREENBERG co-founded Pixelworks and has served as our Vice
President, Product Development and Customer Support since our inception. From
1988 to 1996, Mr. Greenberg designed system architectures, high-speed
board-level hardware, integrated circuits and simulation and embedded system
software for InFocus Systems. From 1987 to 1988, Mr. Greenberg developed a
high-speed CMOS application specific semiconductor verification system for
Integrated Measurement Systems, Inc., a manufacturer of performance engineering
test stations. Mr. Greenberg has also held electrical engineering positions at
Floating Point Systems, Inc. and Sperry Corporation. Mr. Greenberg holds a
B.S.E.E. and a B.S.C.E. from the University of Michigan.

BRADLEY A. ZENGER co-founded Pixelworks and has served as our Vice
President, Marketing since our inception. From 1995 to 1996, Mr. Zenger served
as the Director, Marketing Services at In Focus Systems where he developed and
implemented worldwide demand creation programs. He also held management-level
marketing positions at InFocus Systems from 1992 to 1995. From 1989 to 1992,
Mr. Zenger was a Technical Support Manager (1990 to 1992) and held supervisory
positions (1989 to 1991) at KLA Instruments, a semiconductor manufacturing
equipment manufacturer, where he led installations and product support. From
1984 to 1989, Mr. Zenger served as a decorated officer in the U.S. Navy on-board
a nuclear attack submarine. Mr. Zenger holds a B.S. in Mechanical Engineering
from the University of Notre Dame and an M.B.A. from Santa Clara University.

MICHAEL E. BARTON has served as Vice President, Sales since January 1999.
From 1996 to 1998, Mr. Barton was the Senior Vice President of Sales at
Evergreen Technologies, Inc., a PC processor subsystem manufacturer. From 1991
to 1996, Mr. Barton served as Vice President of Sales, Americas of Cyrix
Corporation, a microprocessor semiconductor company. From 1975 to 1991,
Mr. Barton was employed at Intel Corporation, holding senior sales management
positions including Worldwide Sales Manager, Automotive and Corporate Major
Accounts Manager.

JEFFREY B. BOUCHARD has served as Vice President, Finance and Chief
Financial Officer since December 1999. During 1999, Mr. Bouchard served as Chief
Financial Officer at eVineyard, a start-up online retailer of premium wines.
From 1993 to 1999, Mr. Bouchard held senior financial management positions at
InFocus Systems, including Director of Investor Relations and Treasury (1998 to
1999) and Director of Finance (1995 to 1998) where he was responsible for the
company's financial management and planning. From 1988 to 1992, Mr. Bouchard
held a variety of senior financial positions including Worldwide Operations
Financial Planning and Analysis Manager at Sun Microsystems, an enterprise
network computing company. Prior to joining Sun Microsystems, Mr. Bouchard held
finance and accounting positions at several high-technology companies from 1983
to 1988. Mr. Bouchard holds a B.S. in Business Administration--Finance from San
Jose State University and an M.B.A. from Santa Clara University.

OLIVER D. CURME has served as a director of Pixelworks since April 1997.
Since 1988, Mr. Curme has been a General Partner of funds related to Battery
Ventures, a venture capital firm located in Wellesley, Massachusetts. Mr. Curme
sits on the board of directors of Chordiant Software, Inc. and several privately
held companies. Mr. Curme holds a B.S. in Biochemistry from Brown University and
an M.B.A. from Harvard Graduate School of Business Administration.

FRANK GILL has served as a director of Pixelworks since December 1998. From
1975 to 1998, Mr. Gill was employed at Intel Corporation in a variety of sales,
marketing, product development and manufacturing positions and retired from
Intel as an Executive Vice President. In 1989, he served as the Senior Vice
President in charge of worldwide sales and marketing operations and became
General Manager of the Intel Systems Group in 1990 and the Internet and
Communications Group in 1995. Mr. Gill serves as a director of Inktomi
Corporation, McAfee.com Corporation, Tektronix, Inc., Logitech International
S.A. and Telecom Semi, Inc. Mr. Gill holds a B.S.E.E. degree from the University
of California at Davis.

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<PAGE>
MARK A. STEVENS has served as a director of Pixelworks since April 1998.
Since 1993, Mr. Stevens has been a General Partner of Sequoia Capital, a venture
capital investment firm. From 1989 to 1993, Mr. Stevens was an Associate with
Sequoia Capital. From 1982 to 1987, Mr. Stevens held technical sales and
marketing positions at Intel Corporation. Mr. Stevens currently serves on the
Board of Directors of NVIDIA, Corp., a 3D graphics processor semiconductor
company, Terayon Communications Systems, Inc., MedicaLogic, Inc., an Internet
healthcare information company, MP3.com, Inc., an online music service provider,
Medibuy.com, a business-to-business exchange for healthcare supplies procurment,
and several privately held companies. Mr. Stevens holds a B.S.E.E. degree, a
B.A. degree in Economics, an M.S. degree in Computer Engineering from the
University of Southern California and an M.B.A. degree from Harvard Business
School.

MICHAEL D. YONKER was appointed as a director of Pixelworks in April 2000.
Since July 1998, Mr. Yonker has been the Chief Financial Officer of Wieden &
Kennedy, a global advertising agency serving companies such as Nike, ESPN,
Coca-Cola and Microsoft. From 1993 to 1998, Mr. Yonker served as the Chief
Financial Officer of InFocus Systems, having responsibility for investor
relations and information technology in addition to the finance and accounting
functions. From 1980 to 1993, Mr. Yonker held numerous positions with Arthur
Andersen including partner in charge of the Northwest Manufacturing Practice.
Mr. Yonker holds a B.A. degree in accounting and finance from Linfield College.

BOARD OF DIRECTORS

We currently have five directors. Our directors hold office until the next
annual meeting of shareholders or until their successor are duly elected or
appointed. Pursuant to the Company's Fifth Amended and Restated Articles of
Incorporation, one director has been elected by the holders of our shares of
common stock, one director has been elected by the holders of our Series A
preferred shares, one director has been elected by the holders of our Series B
preferred shares and one director has been elected by the holders of our shares
of common stock, Series A preferred shares, Series B preferred shares and
Series C preferred shares, each voting separately. Following the effective date
of our initial public offering, there will no longer be class voting in the
election of directors. Our Fifth Amended and Restated Articles of Incorporation
provide that if the number of directors is fixed at six or more, our directors
will be divided into three classes and, after a transitional period, will serve
for terms of three years, with one class being elected by the shareholders each
year.

BOARD COMMITTEES

The compensation committee currently consists of Messrs. Curme, Stevens and
Gill. The compensation committee reviews and makes recommendations regarding our
compensation policies and all forms of compensation to be provided to our
executive officers and directors, including annual salaries, bonuses, stock
options and other incentive compensation agreements. The compensation committee
also administers our 1997 stock incentive plan and our 2000 employee stock
purchase plan.

The audit committee currently consists of Messrs. Curme, Stevens and Gill.
The audit committee reviews and monitors our corporate financial reporting and
external audits, including our internal control functions, the results and scope
of the annual audit and other services provided by our independent auditors and
our compliance with legal matters that have a significant impact on our
financial reports. The audit committee also consults with our management and our
independent auditors prior to the presentation of financial statements to
shareholders and, as appropriate, initiates inquiries into aspects of our
financial affairs.

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<PAGE>
DIRECTOR COMPENSATION

Our non-employee directors currently receive no compensation for service on
our board of directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the compensation committee is currently, or has been
at any time since the beginning of our last fiscal year, one of our officers or
employees. During the fiscal year ended December 31, 1999, none of our executive
officers served as a member of the board of directors or compensation committee
of any entity that has one or more officers serving as a member of our board of
directors or compensation committee.

EXECUTIVE OFFICERS

Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors or
officers.

COMPENSATION OF EXECUTIVE OFFICERS

SUMMARY COMPENSATION TABLE

The following table sets forth compensation awarded to, earned by, or paid
to our Chief Executive Officer and the other five most highly compensated
executive officers, each of whose total cash compensation exceeded $100,000
during the year ended December 31, 1999 (the "named executives"):

<TABLE>
<CAPTION>
ANNUAL COMPENSATION STOCK ALL
------------------- OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED(#) COMPENSATION
- --------------------------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Allen H. Alley
President and Chief Executive Officer..... 1999 $160,714 $40,000 33,750 --

Hans H. Olsen
Vice President, Operations................ 1999 133,429 45,000 -- $134,441(1)

Robert Y. Greenberg
Vice President, Product Development....... 1999 118,899 30,000 15,000 --

Michael G. West
Vice President, Technology................ 1999 118,899 30,000 15,000 --

Bradley A. Zenger
Vice President, Marketing................. 1999 118,928 30,000 15,000 --

Michael E. Barton
Vice President, Sales..................... 1999 120,248 40,000 -- --
</TABLE>

- ------------------------

(1) Represents the difference between the fair market value and the purchase
price of 305,937 shares of common stock purchased pursuant to a restricted
stock purchase award under our 1997 stock incentive plan.

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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information with respect to options granted
during the year ended December 31, 1999 to the named executives:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------ REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(1) IN 1999 PER SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allen H. Alley..................... 33,750 1.5% $.257 01/20/09 $5,455 $13,824
Hans H. Olsen...................... -- -- -- -- -- --
Robert Y. Greenberg................ 15,000 .7 .23 01/20/09 2,170 5,498
Michael G. West.................... 15,000 .7 .23 01/20/09 2,170 5,498
Bradley A. Zenger.................. 15,000 .7 .23 01/20/09 2,170 5,498
Michael E. Barton.................. -- -- -- -- -- --
</TABLE>

- ------------------------

(1) Options granted in 1999 became exercisable starting 12 months after the
grant date, with one-fourth of the options becoming exercisable at that time
and with an additional 1/36th of the options becoming exercisable on each of
the next thirty-six months thereafter.

(2) In accordance with the rules of the SEC, the potential realizable value is
calculated based on the term of the option at its time of grant (10 years)
and is calculated by assuming that the stock price on the date of grant
(determined by the board of directors to equal the exercise price set forth
above) appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated price. These amounts do not
represent our estimate of future share price. Actual gains, if any, on
option exercises will depend on the future performance of our shares of
common stock.

OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

The following table sets forth information for our named executives relating
to the number and value of securities underlying exercisable and unexercisable
options held at December 31, 1999.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen H. Alley......... -- -- 0 33,750 -- $ 430,076
Hans H. Olsen.......... 69,063 $42,359 -- -- -- --
Robert Y. Greenberg.... -- -- 0 15,000 -- 191,550
Michael G. West........ -- -- 0 15,000 -- 191,550
Bradley A. Zenger...... -- -- 0 15,000 -- 191,550
Michael E. Barton...... -- -- 63,750 191,250 $817,913 2,453,738
</TABLE>

- ------------------------

(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.

(2) The value of unexercised in-the-money options represents the difference
between the fair market value of the underlying shares of common stock using
an assumed initial public offering price of $13.00 per share and the
exercise price of the option, multiplied by the number of shares underlying
the option.

54
<PAGE>
EMPLOYMENT AGREEMENTS

We entered into an employment agreement with Jeffrey B. Bouchard, our Vice
President, Finance and Chief Financial Officer. In consideration for his
services we agreed to pay Mr. Bouchard an annual salary of $140,000, plus our
standard employee benefits, and granted him 225,000 options under our incentive
stock option plan. If he is terminated without cause, which is defined as
termination for other than committing a criminal, fraudulent or grossly
negligent act, misappropriation of our assets or willful failure to perform his
duties, then he is entitled to severance pay of three months salary. If we
substantially sell all of our assets or are merged into another company which
our shareholders do not control, then under his stock option grant,
Mr. Bouchard is entitled to his options which have already vested as well as an
automatic vesting of the options he would have been entitled to receive over the
twelve months following a merger or sale. As a condition of his employment,
Mr. Bouchard entered into our standard employee nondisclosure and developments
agreement pursuant to which he may not divulge any of our proprietary
information other than as permitted as part of his employment with us.

EMPLOYEE BENEFIT PLANS

1997 STOCK INCENTIVE PLAN

Our 1997 Stock Incentive Plan, the 1997 Plan, which was approved by our
shareholders on January 16, 1997, provides for grants of both "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and "nonqualified stock options" which are not qualified
for treatment under Section 422 of the Code, and for direct stock grants and
sales to employees or consultants of the Company. The purposes of the 1997 Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentives to our employees
and consultants and to promote the success of our business. The 1997 Plan is
administered by the compensation committee of the board of directors.

The term of each incentive option granted under the 1997 Plan will generally
be ten years from the date of grant, or a shorter period as may be established
at the time of the grant. An option granted under the 1997 Plan may be exercised
at the times and under the conditions as determined by the compensation
committee. If a person who has been granted an incentive stock option ceases to
be employed by or on a consulting basis with us, that person may exercise that
option only during the exercise period established by the compensation committee
at the time the options were granted, which shall not exceed 90 days after the
date of termination, and only to the extent that the option was exercisable on
the date of termination. Nonqualified stock options may be exercised during a
period determined by the compensation committee. If a person who has been
granted an option ceases to be an employee or consultant as a result of the
person's total and permanent disability, the person may exercise that option at
any time within twelve months after the date of termination, but only to the
extent that the option was exercisable on the date of termination. No option
granted under the 1997 Plan is transferable other than at death, and each option
is exercisable during the life of the optionee only by the optionee. In the
event of the death of a person who has received an option, the option generally
may be exercised by a person who acquired the option by bequest or inheritance
during the twelve month period after the date of death to the extent that such
option was exercisable at the date of death.

The exercise price of incentive stock options granted under the 1997 Plan
may not be less than the fair market value of a share of common stock on the
last market trading day prior to the date of grant of the option. Nonqualified
stock options may not be granted for less than 85% of fair market value and
options granted to greater than 10% shareholders may not be granted for less
than 110% of fair market value. The consideration to be paid upon exercise of an
option, including the method of payment, will be determined by the compensation
committee and may consist entirely of cash, check,

55
<PAGE>
shares of common stock or any combination of these methods of payment as
permitted by the compensation committee.

The 1997 Plan will continue in effect until January 16, 2007, unless earlier
terminated by the board of directors, but termination will not affect the terms
of any options outstanding at that time. The Board of Directors may amend,
terminate or suspend the 1997 Plan at any time, provided that no amendment
regarding amount, price or timing of the grants may be made more than once every
six months other than to conform with changes in certain Internal Revenue Code
requirements. Amendments that would materially increase the number of shares
that may be issued, materially modify the requirements as to eligibility for
Plan participation, or materially increase the benefits to Plan participants
must be approved by our shareholders.

From the end of the prior year through March 31, 2000, options to purchase
267,000 shares of common stock were granted to our employees under the 1997 Plan
at exercise prices ranging from $2.43 to $6.75 per share. None of our named
executives were granted options under the 1997 Plan since the end of the last
fiscal year.

2000 EMPLOYEE STOCK PURCHASE PLAN

Our 2000 Employee Stock Purchase Plan, the 2000 Plan, was adopted by the
board in February 2000 and will be submitted to our shareholders for their
approval prior to the date of this offering, to become effective on the date of
this offering. A total of 1,500,000 of our shares of common stock have been
reserved for issuance under the 2000 Plan. Beginning in 2005 the number of
shares reserved for issuance under the 2000 Plan will be increased annually by
the lesser of the number of shares issued under the plan during the preceding
year, 2% of the outstanding shares of common stock on the first day of our
fiscal year in which the increase is being made or a lesser amount determined by
the board of directors.

The compensation committee of the board of directors will administer the
2000 Plan and will have full and exclusive authority to interpret the terms of
the plan and determine eligibility.

The 2000 Plan contains 24 month offering periods, with each offering period
being divided into four six-month purchase periods. The offering periods
generally start on the first trading day on or after February 1 and August 1 of
each year, except for the first offering period, which commences on the date of
this offering and ends on the last trading day on or before January 31, 2002.

Employees are eligible to participate in our 2000 Plan if they are
customarily employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar year, although any
employee who could own shares representing 5% or more of the total combined
voting power or value of all classes of our capital shares may not participate
in the plan. In addition, no employee of ours may be granted an option to
purchase shares under the plan if that person's right to purchase shares under
all of our employee stock purchase plans accrues at a rate that exceeds $25,000
worth of shares for each calendar year. Furthermore, no employee is permitted to
purchase more than 2,500 shares during a six month purchase period. The 2000
Plan permits participants to purchase shares of common stock through payroll
deductions in 1% increments not less than 2% or greater than 10% of the
participant's compensation, which includes the participant's base straight time
gross earnings and commissions, but excludes payments for overtime, profit
sharing payments, shift premium payments, incentive compensation, incentive
payments and bonuses.

Amounts deducted and accumulated under the 2000 Plan are used to purchase
shares of common stock at the end of each six-month purchase period. The price
of shares purchased under the plan is 85% of the lower of the fair market value
of the shares of common stock at the beginning of the offering period or after a
purchase period ends. If the offering period commences on the date of this
offering, the price of the shares purchased shall be the lower of 85% the price
to the public of the shares offered in this offering or 85% of the fair market
value of the shares of common stock after the

56
<PAGE>
purchase period ends. In the event the fair market value at the end of a
purchase period is less than the fair market value at the beginning of the
offering period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and will be
automatically re-enrolled in a new offering period. In addition, in the event
the fair market value at the end of a purchase period is less than the fair
market value at the beginning of the offering period, a participant is limited
to purchasing no more than 200% of the number of shares that the participant
would have purchased at 85% of the fair market value at the beginning of the
offering period. Participants may end their participation at any time during an
offering period and will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with us. Rights granted under
the 2000 Plan are not transferable by a participant other than by will, the laws
of descent and distribution, or as otherwise provided under the plan.

The 2000 Plan provides that, in the event that we merge with or into another
corporation or sell substantially all of our assets, each outstanding right to
purchase shares under the plan during the offering period then in progress may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute, the offering period then in
progress will be shortened and a new purchase date will be set at or prior to
the closing of that transaction after which time the 2000 Plan will terminate.

The 2000 Plan will terminate in February 2010. The board has the authority
to amend or terminate the plan, except that no amendment or termination may
adversely affect any outstanding rights to purchase shares under the plan.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY

As an Oregon corporation, we are subject to the Oregon Business Corporation
Act ("OBCA") and the exculpation from liability and indemnification provisions
contained therein. Pursuant to Section 60.047(2)(d) of the OBCA, Article IV of
our Second Restated Articles of Incorporation (the "Restated Articles")
eliminates the liability of our directors to us or our shareholders, except for
any liability related to breach of the duty of loyalty, actions not in good
faith and certain other liabilities.

Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with claims. Corporations may not indemnify against breaches
of the duty of loyalty. The OBCA provides for mandatory indemnification of
directors against all reasonable expenses incurred in the successful defense of
any claim made or threatened whether or not the claim was by or in the right of
the corporation. Finally, a court may order indemnification if it determines
that the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances whether or not the
director or officer met the good faith and reasonable belief standards of
conduct set out in the statute. Article IV of the Restated Articles requires us
to indemnify our directors and officers to the fullest extent not prohibited by
law.

The OBCA also provides that the statutory indemnification provisions are not
deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
shareholders or otherwise.

We also have entered into indemnity agreements with each of our executive
officers and each member of our Board of Directors. These indemnity agreements
provide for indemnification of the indemnitee to the fullest extent allowed by
law.

57
<PAGE>
CERTAIN TRANSACTIONS

COMPANY FORMATION

On January 16, 1997, in connection with our formation, we issued 2,549,880
shares of common stock to Allen H. Alley, our President and Chief Executive
Officer, 1,425,060 shares of common stock to Robert Y. Greenberg, our Vice
President, Product Development and Customer Support, 1,425,060 shares of common
stock to Michael G. West, our Vice President, Technology and 1,125,000 shares of
common stock to Bradley A. Zenger, our Vice President, Marketing, in each case
at a purchase price of $0.0013 per share.

SERIES A PREFERRED FINANCING

On April 25, 1997, we raised approximately $1,250,000 through the sale of
Series A Preferred Stock and Common Stock Purchase Warrants which entitled the
holders to acquire shares of our common stock at $0.675 per share. Battery
Ventures received 2,325,581 Series A preferred shares and warrants to purchase
1,482,559 common shares and Enterprise Development Fund received 581,395
Series A preferred shares and warrants to purchase 370,640 common shares.
Oliver D. Curme, one of our directors, is affiliated with Battery Ventures.

SERIES B PREFERRED FINANCING

On April 29, 1998, we raised approximately $6,600,000 through the sale of
5,500,005 shares of our Series B preferred stock. Battery Ventures purchased
1,833,345 shares, Enterprise Development Fund purchased 458,335 shares and
Sequoia Capital purchased 3,095,825 shares. Oliver D. Curme, one of our
directors, is affiliated with Battery Ventures and Mark A. Stevens, another of
our directors, is affiliated with Sequoia Capital.

GILL OPTION

On December 17, 1998, Frank Gill, one of our directors, was awarded an
option to purchase 75,000 shares of our common stock at an exercise price of
$0.167 per share. This option vests over four years, with 25% vesting on the
first anniversary of the grant and 1/36th of the remainder vesting at the end of
each of the following 36 months.

EXERCISE OF COMMON STOCK PURCHASE WARRANTS

In April 1999, Battery Ventures and Enterprise Development Fund fully
exercised the Common Stock Purchase Warrants acquired in connection with our
Series A financing. Battery Ventures acquired 1,482,559 common shares at a price
of $0.675 per share and Enterprise Development Fund acquired 370,640 common
shares at a price of $0.675 per share. Oliver D. Curme, one of our directors, is
affiliated with Battery Ventures.

SERIES C PREFERRED FINANCING

On May 28, 1999, we raised approximately $11,667,000 through the sale of
2,493,026 shares of our Series C Preferred Stock. Battery Ventures purchased
750,000 shares, Enterprise Development Fund purchased 32,000 shares and Sequoia
Capital purchased 1,070,000 shares. Oliver D. Curme, one of our directors, is
affiliated with Battery Ventures and Mark A. Stevens, another of our directors,
is affiliated with Sequoia Capital.

TRANSACTIONS WITH HANS H. OLSEN

On August 31, 1999, Hans H. Olsen, our Vice President, Operations exercised
stock options to acquire 69,063 shares of our common stock at an aggregate
exercise price of $11,511 and agreed to

58
<PAGE>
cancel options to acquire 185,937 shares of common stock at $0.167 per share,
options to acquire 45,000 shares of common stock at $0.327 per share and options
to acquire 75,000 shares of common stock at $0.78 per share. On the same date,
pursuant to restricted stock awards, Mr. Olsen purchased 185,937 shares of
common stock at $0.167 per share, 45,000 shares of common stock at $0.327 per
share and 75,000 shares of common stock at $0.78 per share. Mr. Olsen paid the
aggregate exercise price for the options exercised and the aggregate purchase
price for the additional shares purchased, $115,700, by delivering to us a
recourse promissory note. In addition, we advanced Mr. Olsen an additional
$82,826 under the note to cover any tax liability arising from his purchase of
shares pursuant to his restricted stock award. The note bears interest at an
annual rate of 6.02% payable annually. The principal amount of the note must be
repaid on the earlier of August 31, 2008 or termination of Mr. Olsen's
employment voluntary or for cause. Upon termination of Mr. Olsen's employment we
have the right to re-purchase any of these shares which are unvested for an
amount equal to the price paid. Of the 305,937 restricted shares purchased by
Mr. Olsen, 268,746 remain unvested as of March 31, 2000.

59
<PAGE>
PRINCIPAL SHAREHOLDERS

The following table sets forth information known to us with respect to the
beneficial ownership of our shares of common stock as of March 31, 2000 and as
adjusted to reflect the sale of shares of common stock offered in this
prospectus by:

- each shareholder known by us to own beneficially more than 5% of our
shares of common stock, as explained below;

- each of named executives;

- each of our directors; and

- all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, the shares of common stock subject to
options held by that person that are currently exercisable or will become
exercisable within 60 days after March 31, 2000, are deemed outstanding, while
the shares are not deemed outstanding for purposes of computing percentage
ownership of any other person.

Unless otherwise indicated below, the address for each shareholder on this
table is c/o Pixelworks, Inc., 7700 SW Mohawk, Tualatin, Oregon 97062. Unless
otherwise indicated below, the persons and entities named in the table have sole
voting or investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.

The information presented below is based on:

- 29,753,572 shares of common stock outstanding as of March 31, 2000,
assuming the automatic conversion of all currently outstanding preferred
shares into 19,708,835 shares of common stock immediately prior to the
completion of this offering; and

- 5,750,000 shares of common stock issued in this offering. Assumes no
exercise of underwriters' over-allotment option. Percentage ownership
figures after the offering do not include shares that may be purchased by
each person in the offering.

<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIAL OWNERS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ----------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Battery Ventures IV, L.P.(1)...................... 8,845,949 29.7% 24.9%
20 Williams Street
Wellesley, MA 02181

Sequoia Capital VII(2)............................ 6,248,739 21.0 17.6
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Enterprise Development Fund II, Limited 1,978,236 6.6 5.6
Partnership.....................................
425 N. Main Street
Ann Arbor, MI 48104

Oliver D. Curme(3)................................ 8,845,949 29.7 24.9

Mark A. Stevens(4)................................ 6,248,739 21.0 17.6

Frank Gill(5)..................................... 26,565 * *

Allen H. Alley(6)................................. 2,561,132 8.6 7.2

Hans H. Olsen..................................... 375,000 1.3 1.1

Robert Y. Greenberg(7)............................ 1,430,064 4.8 4.0
</TABLE>

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<PAGE>

<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIAL OWNERS BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ----------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Michael G. West(8)................................ 1,430,064 4.8 4.0

Bradley A. Zenger(9).............................. 1,130,004 3.8 3.2

Michael E. Barton(10)............................. 159,378 * *

Directors and Executive Officers as a group
(10 persons).................................... 22,263,145 74.8% 62.4%
</TABLE>

- ------------------------

* Less than one percent (1%).

(1) Includes (a) 8,718,886 shares held by Battery Ventures IV, L.P. and
(b) 127,063 shares held by Battery Investment Partners IV, LLC.

(2) Includes (a) 4,835,570 shares held by Sequoia Capital VII, (b) 819,378
shares held by Sequoia Capital Franchise Fund, (c) 211,392 shares held by
Sequoia Technology Partners VII, (d) 144,597 shares held by Sequoia Capital
Franchise Partners, (e) 98,073 shares held by SQP 1997, (f) 84,557 shares
held Sequoia International Partners and (g) 55,172 shares held by
Sequoia1997 LLC.

(3) Includes (a) 8,718,886 shares held by Battery Ventures IV, L.P. and
(b) 127,063 shares held by Battery Investment Partners IV, LLC. Mr. Curme
is a General Partner of Battery Ventures and has authority to vote the
shares held by Battery entities. Mr. Curme disclaims beneficial ownership
of all such shares except to the extent of his individual pecuniary
interest therein.

(4) Includes (a) 4,835,570 shares held by Sequoia Capital VII, (b) 819,378
shares held by Sequoia Capital Franchise Fund, (c) 211,392 shares held by
Sequoia Technology Partners VII, (d) 144,597 shares held by Sequoia Capital
Franchise Partners, (e) 98,073 shares held by SQP 1997, (f) 84,557 shares
held Sequoia International Partners and (g) 55,172 shares held by
Sequoia1997 LLC. Mr. Stevens is a General Partner of Sequoia Capital and
has authority to vote the shares held by Sequoia entities. Mr. Stevens
disclaims beneficial ownership of all such shares except to the extent of
his individual pecuniary interest therein.

(5) Represents shares issuable upon the exercise of stock options held by
Mr. Gill.

(6) Includes (a) 2,549,880 outstanding shares and (b) 11,252 shares issuable
upon exercise of stock options held by Mr. Alley.

(7) Includes (a) 1,425,060 outstanding shares and (b) 5,004 shares issuable
upon exercise of stock options held by Mr. Greenberg.

(8) Includes (a) 1,425,060 outstanding shares and (b) 5,004 shares issuable
upon exercise of stock options held by Mr. West.

(9) Includes (a) 1,125,000 outstanding shares and (b) 5,004 shares issuable
upon exercise of stock options held by Mr. Zenger.

(10) Includes (a) 69,063 outstanding shares and (b) 90,315 shares issuable upon
exercise of stock options held by Mr. Barton.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

After this offering, we will be authorized to issue up to 250,000,000 of
common stock, par value $0.001 per share, and 50,000,000 shares of preferred
stock, par value, $0.001 per share. Immediately after this offering, we estimate
there will be approximately 35,503,572 shares of common stock outstanding,
3,010,832 shares of common stock issuable on exercise of outstanding options and
no preferred shares. The weighted average exercise price of the outstanding
options is $1.30. The following description of our capital stock is not
complete. You should carefully read our Fifth Amended and Restated Articles of
Incorporation and First Restated Bylaws, which have been filed as exhibits to
the Registration Statement, of which this Prospectus is a part. Additionally,
certain provisions of Oregon law may impact our capital stock.

COMMON STOCK

Holders of common stock are entitled to receive such dividends as may from
time to time be declared by our board of directors out of funds legally
available for that purpose. See "Dividend Policy." Holders of common stock are
entitled to one vote per share on all matters on which they are entitled to
vote. They do not have any cumulative voting rights. There are no preemptive,
conversion, redemption or sinking fund rights applicable to the common stock. In
the event of a liquidation, dissolution or winding up of Pixelworks, holders of
common stock are entitled to share equally and ratably in all assets remaining
after the payment of all debts and liabilities as well as the liquidation
preference of any outstanding class or series of preferred stock. The
outstanding shares of common stock, including those offered through this
prospectus, are fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to any series of preferred
stock which we may issue in the future as described below.

PREFERRED STOCK

The board of directors has the authority, without action by the
shareholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include restricting dividends on the common stock diluting the
voting power of the common stock, impairing the liquidation rights of the common
stock and delaying or preventing a change in control of Pixelworks without
further action by the shareholders. There are no agreements or understandings
for the issuance of preferred stock, and the board of directors has no present
intention of issuing any shares of preferred stock, except as contemplated by
the shareholder rights plan described below.

REGISTRATION RIGHTS

Certain shareholders holding an aggregate of 27,208,829 shares are entitled
to rights with respect to registration of these shares under the securities act.
The rights are provided under the terms of an agreement between us and the
holders of registrable securities. Beginning six months following the completion
of this offering, certain holders of then outstanding registrable securities may
require on up to two occasions that we register their shares for public resale.
We are obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $5,000,000.
Also, holders of registrable securities may require, on one occasion in any
12 month period that shares for public resale on Form S-3 or similar short form
registration if the value of the securities to be registered is at least
$500,000. Furthermore, in the event we determine to register any of our

62
<PAGE>
securities under the Securities Act of 1933, either for our own account or for
the account of other security holders exercising their registration rights, the
holder of registrable securities are entitled to include their shares of common
stock in the registration. The registration rights are subject to conditions and
limitations, among them our right to limit the number of shares included in the
registration which may reduce the number of shares proposed to be registered in
view of market conditions. These registration rights are triggered by this
offering, but we have obtained waivers of these registration rights from all
holders of registrable securities in connection with the offering. All expenses
in connection with any registration, other than underwriting discounts and
commissions, will be borne by us. All registration rights will terminate five
years following the consummation of this offering.

The rights agreement may be amended by the board of directors in any way
prior to the distribution date. After the distribution date, the provisions of
the rights agreement may only be amended by the board in order to cure any
ambiguity, defect or inconsistency or to make any other changes which do not
adversely affect the interests of holders of preferred stock purchase rights
(excluding the interests of any acquiring person).

Until a preferred stock purchase right is exercised, the holder has no
rights as a shareholder of Pixelworks, including the right to vote or to receive
dividends.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OREGON LAW, THE RESTATED ARTICLES
AND BYLAWS

Upon completion of the offering, we will become subject to the Oregon
Control Share Act. The Oregon Control Share Act generally provides that a person
who acquires voting stock of an Oregon corporation, in a transaction that
results in the acquiror holding more than 20%, 33 1/3% or 50% of the total
voting power of the corporation, cannot vote the shares its acquires in the
acquisition. An acquiror is broadly defined to include companies or persons
acting as a group to acquire the shares of the Oregon corporation. This
restriction does not apply if voting rights are given to the control shares by:

- a majority of each voting group entitled to vote; and

- the holders of a majority of the outstanding voting shares, excluding the
control shares held by the acquiror and shares held by the company's
officers and employee directors.

The acquiror may, but is not required to, submit to the target company a
statement including specific information about the acquiror and its plans for
the company. The statement may also request that the company call a special
meeting of shareholders to determine whether the control shares will be allowed
to have voting rights. If the acquiror does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual or special meeting of shareholders. If the acquiror's control
shares are allowed to have voting rights and represent a majority or more of all
voting power, shareholders who do not vote in favor of voting rights for the
control shares will have the right to receive the appraised fair value for their
shares, which may not be less than the highest price paid per share by the
acquiror for the control shares.

We are also subject to the Oregon Business Combination Act. The Business
Combination Act generally provides that in the event a person or entity acquires
15% or more of the voting stock of an Oregon corporation, thereby becoming an
"interested shareholder," the corporation and the interested shareholder, or any
affiliated entity, may not engage in certain business combination transactions
for a period of three years following the date the person became an interested
shareholder. Business combination transactions for this purpose include:

- a merger or plan of share exchange;

63
<PAGE>
- any sale, lease, mortgage or other disposition of the assets of the
corporation where the assets have an aggregate market value equal to 10%
or more of the aggregate market value of the corporation's assets or
outstanding capital stock; or

- certain transactions that result in the issuance of capital stock of the
corporation to the interested shareholder.

These restrictions are not applicable if:

- as a result of the transaction in which a person became an interested
shareholder, they will own at least 85% of the outstanding voting stock of
the corporation (excluding shares owned by directors who are also
officers, and certain employee benefit plans);

- the board of directors approves the share acquisition or business
combination before the interested shareholder acquires 15% or more of the
corporation's voting stock; or

- the board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation (excluding shares owned by the
interested shareholder) approve the transaction after the interested
shareholder has acquired 15% or more of the corporation's voting stock.

Our Fifth Amended and Restated Articles provide that (i) if the number of
directors is fixed at six or more, our directors will be divided into three
classes, each of which serves for a three-year term with one class elected each
year, (ii) provide that directors may be removed by shareholders only for cause
and only upon the vote of 75% of the outstanding shares of common stock, and
(iii) permit the board of directors to issue preferred stock in one or more
series and to fix the number of shares constituting any such series, the voting
powers and all other rights and preferences of any such series, without any
further vote or action by our shareholders.

The staggered terms for directors, the provisions allowing the removal of
directors only for cause and the availability of preferred stock for issuance
without shareholder approval may have the effect of lengthening the time
required for a person to acquire control of our company through a proxy contest
or the election of a majority of the board of directors and may deter any
potential unfriendly offers or other efforts to obtain control. This could
deprive our shareholders of opportunities to realize a premium for their common
stock and could make removal of incumbent directors more difficult. At the same
time, these provisions may have the effect of inducing any persons seeking
control of our company to negotiate terms acceptable to the board of directors.

NASDAQ NATIONAL MARKET LISTING

We have applied to have our shares of common stock included for quotation on
the Nasdaq National Market under the symbol "PXLW."

TRANSFER AGENT

The transfer agent and registrar for the shares of common stock is
ChaseMellon Shareholder Services, LLC. ChaseMellon's telephone number for
shareholder inquiries is 800-522-6645.

64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

We cannot provide any assurance that after this offering has been completed
a significant public market for our shares of common stock will develop or be
sustained. The sale of substantial numbers of our shares of common stock in the
public market, or the possibility of a sale, could adversely affect prevailing
market prices for our shares of common stock. Furthermore, only a limited number
of our shares of common stock currently held by our shareholders will be
available for sale shortly after this offering because of contractual and legal
restrictions on resale described below. Future sales of substantial amounts of
our shares in the public market after these restrictions lapse could adversely
affect the prevailing market price and our ability to raid equity capital in the
future.

Upon completion of this offering and assuming no exercise after that date of
the underwriters' over-allotment option or any outstanding options, we expect to
have 35,503,572 shares of common stock outstanding based on shares outstanding
as of March 31, 2000.

Of the shares of common stock, the 5,750,000 shares that we expect to sell
in the offering, and any shares of common stock sold upon exercise of the
underwriters' over-allotment option, will be freely tradable without restriction
under the securities act. However, there will be trading restrictions imposed on
"affiliates" and "control persons" as defined under Rule 144. The remaining
shares of common stock held by existing shareholders are restricted securities
as that term is defined in Rule 144 of the securities act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 promulgated under the securities act,
which rules are summarized below. As a result of the contractual restrictions
described below and the provisions of Rule 144, the restricted securities will
be eligible for sale in the public market immediately following the offering
subject to the expiration of 180-day lock-up agreements with representatives of
the underwriters and to volume limitations and other conditions under Rule 144.
Following this offering, the holders of an aggregate of 27,208,829 of the
outstanding shares of common stock have the right to require us to register
their shares for sale upon meeting requirements to which the parties have
previously agreed. See "Description of Share Capital--Registration Rights" for
additional information regarding registration rights.

The following table indicates approximately when the 29,753,572 of our
shares of common stock, held by existing shareholders, that are not being sold
in the offering but which will be outstanding at the time the offering is
complete will be eligible for sale into the public market:

<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
- ----------------------------------------------------------
<S> <C>
At effective date........................................... 0
90 days after effective date................................ 0
180 days after effective date............................... 26,394,753
At February 22, 2001........................................ 3,358,819
</TABLE>

The shares eligible for sale includes shares outstanding as of March 31,
2000 and assumes the automatic conversion of all outstanding preferred shares
into shares of common stock upon completion of the offering.

LOCK-UP AGREEMENTS

Our officers, directors and all of our other shareholders have signed
lock-up agreements under which they agree not to dispose of or hedge any shares
of common stock or securities convertible into or exchangeable for shares of
common stock for a period of 180 days from the date of this prospectus.
Dispositions can be made sooner with the prior written consent of Salomon Smith
Barney Inc.

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<PAGE>
OPTIONS AND WARRANTS

As of March 31, 2000, 2,637,741 and 1,500,000 of the shares of common stock
are reserved for future issuance pursuant to our 1997 stock incentive plan and
2000 employee stock purchase plan, respectively. We intend to file, shortly
after effectiveness of this offering, a registration statement on Form S-8 under
the securities act covering all shares of common stock reserved for issuance
under the share plans. Substantially all of the shares of common stock issuable
upon exercise of outstanding options are subject to 180-day lock-up agreements
with the representatives of the underwriters.

RULE 144

In general, under Rule 144, as in effect on the date of this prospectus, any
person who has beneficially owned restricted securities for at least one year
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of:

- 1% of the then outstanding shares of common stock which are approximately
355,036 shares immediately after the offering; or

- the average weekly trading volume of our shares of common stock on the
Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the SEC.
Sales of restricted securities pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of
current public information about us. Our affiliates must also comply with
the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of common stock which
are not restricted securities.

RULE 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell those shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144(k).
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.

RULE 701

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by employees, directors,
officers, consultants or advisers prior to the date we become subject to the
reporting requirements of the securities exchange act, pursuant to written
compensatory benefit plans or written contracts relating to the compensation of
such persons. In addition, the SEC has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the exchange act, along with the shares acquired upon
exercise of options. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, these securities may be
sold.

- by persons other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and

- by our affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.

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<PAGE>
UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each of the underwriters named below has severally agreed
to purchase, and we have agreed to sell to the underwriters, the respective
number of shares of common stock set forth opposite the name of each underwriter
below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Salomon Smith Barney Inc....................................
Deutsche Bank Securities Inc................................
SG Cowen Securities Corporation.............................
E*OFFERING Corp.............................................
---------

Total..................................................... 5,750,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock included in this offering
are subject to the approval of legal matters by counsel and to other conditions.
The underwriters are obligated to purchase all of the shares of common stock
offered hereby other than those covered by the over-allotment option described
below if they purchase any of the shares of common stock.

The underwriters, for whom Salomon Smith Barney Inc., Deutsche Bank
Securities Inc., SG Cowen Securities Corporation and E*OFFERING Corp. are acting
as representatives, initially propose to offer some of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and some of the shares of common stock to various
securities dealers at the public offering price less a concession not exceeding
$ per common share. The underwriters may allow, and these dealers may
reallow, a concession not exceeding $ per common share to certain
brokers and dealers. After the initial offering of the shares of common stock to
the public, the public offering price and other selling terms may from time to
time be varied by the representatives. The representatives have advised us that
the underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.

We have granted the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of additional
shares of common stock at the public offering price less the underwriting
discount. The underwriters may exercise this option solely to cover
over-allotments, if any, in connection with this offering. To the extent that
the underwriters exercise this option, each of them will be obligated, subject
to certain conditions, to purchase a number of additional shares approximately
proportionate to the underwriters' initial commitment.

Pixelworks, each of our officers and directors and our other shareholders
have agreed with the representatives that, for a period of 180 days after the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc. dispose of or hedge any shares of common stock or any
of our securities convertible into or exchangeable for shares of common stock
other than, in the case of Pixelworks, shares pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of Pixelworks in
effect at the time the underwriting agreement is signed and common stock
issuable upon the conversion of securities or the exercise of warrants
outstanding at the time the underwriting agreement is signed, and in the case of
the officers, directors and shareholders, shares of common stock disposed of as
bona fide gifts approved by Salomon Smith Barney Inc. Salomon Smith Barney Inc.
in its sole discretion may release any of the securities subject to the lock-up
agreements at any time without notice. The release of any lock-up is considered
on a case by case basis. Factors in deciding whether to release shares may
include the length of time before the lock-up expires, the trading price of the
common stock and whether the person seeking the release is an officer,

67
<PAGE>
director or affiliate of Pixelworks. Salomon Smith Barney Inc. has no current
intention to release shares subject to the lock-up agreements.

The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of common stock for customers, directors, employees
and other persons associated with us who have expressed an interest in
purchasing shares of common stock in the offering. The number of shares
available for sale to the general public in the offering will be reduced to the
extent these persons purchase these reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.

Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares of
common stock was determined by negotiations between us and the representatives.
Among the factors considered in determining the initial public offering price
were our record of operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future prospects for the
industry in which we compete, our management, and currently prevailing general
conditions in the equity securities markets, including current market valuations
of publicly traded companies considered comparable to us. We cannot assure you,
however, that the prices at which the shares will sell in the public market
after this offering will not be lower than the price at which they are sold by
the underwriters or that an active trading market in the shares of common stock
will develop and continue after the offering.

We have applied to have our shares of common stock included for quotation on
the Nasdaq Stock Market's National Market under the symbol "PXLW."

The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.

<TABLE>
<CAPTION>
PAID BY PIXELWORKS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................
Total................................................
</TABLE>

The expense of the offering, exclusive of the underwriting discounts and
commissions, are estimated to be $900,000 and are payable entirely by us.

In connection with the offering, Salomon Smith Barney Inc. on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of shares of common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of the shares of
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of shares of common stock made for the purpose of
preventing or retarding a decline in the market price of the shares of common
stock while the offering is in progress. Penalty bids permit the underwriters to
reclaim a selling concession from a syndicate member when Salomon Smith
Barney Inc., in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that syndicate member. These
activities may cause the price of the shares of common stock to be higher than
the price that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.

E*OFFERING Corp. will allocate for distribution by E*TRADE Securities, Inc.
a portion of the shares that E*OFFERING Corp. is underwriting. Copies of the
prospectus in electronic format will be made available on Internet websites
maintained by E*OFFERING Corp. and E*TRADE Securities, Inc. Customers of E*TRADE
Securities, Inc. who complete and pass an online eligibility profile may place
conditional offers to purchase shares in this offering through E*TRADE

68
<PAGE>
Securities, Inc.'s Internet website. Additionally, a prospectus in electronic
format will be made available on the Web sites maintained by one or more of the
other underwriters. The representatives may agree to allocate a number of shares
to underwriters for sale to their on line brokerage account holders. The
representatives will allocate shares to the underwriters that make Internet
distributions on the same basis as other allocations.

The prospectus may be used by underwriters and dealers in connection with
offers and sales of the shares of common stock, including shares of common stock
initially sold outside the United States, to persons located in the United
States.

We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the securities act, or to contribute to
payments the underwriters may be required to make with respect to any of those
liabilities.

LEGAL MATTERS

The validity of the shares of common stock offered hereby and certain other
legal matters relating to the offering are being passed upon for us by Ater
Wynne LLP, Portland, Oregon. Certain legal matters relating to the offering are
being passed upon for the underwriters by Brown & Wood LLP, San Francisco,
California. Brown & Wood LLP may rely on Ater Wynne LLP as to matters of Oregon
law.

EXPERTS

The financial statements of Pixelworks, Inc. as of December 31, 1998 and
1999, and for the period from January 16, 1997 (date of inception) through
December 31, 1997 and for each of the years in the two-year period ended
December 31, 1999, have been included in this prospectus and elsewhere in the
registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere herein and upon the authority of KPMG LLP as
experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
Prospectus to any of our contracts or other documents, the references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement, including exhibits and schedules
filed therewith that we have filed at the Securities and Exchange Commission's
public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Securities and Exchange Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of these
materials from the Public Reference Section of the Securities and Exchange
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Securities and Exchange
Commission maintains a Web site at HTTP://WWW.SEC.GOV.

69
<PAGE>
PIXELWORKS, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP.......................................... F-2

Balance Sheets.............................................. F-3

Statements of Operations.................................... F-4

Statements of Redeemable Convertible Preferred Stock and
Shareholders' Equity (Deficit)............................ F-5

Statements of Cash Flows.................................... F-6

Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Pixelworks, Inc.:

We have audited the accompanying balance sheets of Pixelworks, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, redeemable
convertible preferred stock and shareholders' equity (deficit), and cash flows
for the period from January 16, 1997 (date of inception) through December 31,
1997 and for each of the years in the two-year period ended December 31, 1999.
These financial statements are the responsibility of Pixelworks' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pixelworks, Inc. as of
December 31, 1998 and 1999, and the results of its operations, and its cash
flows for the period from January 16, 1997 (date of inception) through
December 31, 1997 and for each of the years in the two-year period ended
December 31, 1999 in conformity with generally accepted accounting principles.

/s/ KPMG LLP

Portland, Oregon
January 26, 2000

F-2
<PAGE>
PIXELWORKS, INC.

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -------------------------
1998 1999 2000 2000
-------- -------- ----------- -----------
(UNAUDITED) (PROFORMA)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $6,119 $12,199 $ 35,410
Accounts receivable, net........................... 83 2,537 2,268
Inventories........................................ 43 1,404 2,641
Prepaid expenses and other current assets.......... 11 21 343
------ ------- --------
Total current assets............................. 6,256 16,161 40,662
Property and equipment, net.......................... 1,120 1,730 1,972
Other assets, net.................................... 300 503 1,762
------ ------- --------
$7,676 $18,394 $ 44,396
====== ======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 257 $ 712 $ 1,323
Accrued liabilities................................ 241 1,518 4,059
Line of credit..................................... 1,331 669 --
Current portion of long-term obligations........... -- 492 --
------ ------- --------
Total current liabilities........................ 1,829 3,391 5,382
Long-term obligations, less current portion.......... -- 591 --
Other long-term liabilities.......................... -- 6 6
------ ------- --------
Total liabilities................................ 1,829 3,988 5,388
------ ------- --------
Redeemable convertible preferred stock, $.001 par
value. Authorized 16,100,000 shares; 8,406,981,
10,900,007, and 13,139,219 (unaudited) at
December 31, 1998, 1999 and March 31, 2000,
respectively; (liquidation preference of $19,517 at
December 31, 1999)................................. 7,755 23,701 65,077
Commitments and contingencies........................ -- -- --
Shareholders' equity (deficit):
Common stock, $.001 par value. Authorized
35,000,000 shares; 7,500,000, 9,874,313 and
10,044,737 (unaudited) shares issued and
outstanding at December 31, 1998, 1999 and
March 31, 2000, respectively, (pro forma
29,753,572)...................................... -- -- -- $65,077
Warrants........................................... 71 -- -- --
Deferred stock compensation........................ -- (2,230) (3,849) (3,849)
Note receivable for common stock................... -- (199) (199) (199)
Accumulated deficit................................ (1,979) (6,866) (22,021) (22,021)
------ ------- -------- -------
Total shareholders' equity (deficit)............. (1,908) (9,295) (26,069) $39,008
------ ------- -------- -------
$7,676 $18,394 $ 44,396
====== ======= ========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>
PIXELWORKS, INC.

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16,
1997 (DATE OF THREE MONTHS ENDED
INCEPTION) TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -----------------------
1997 1998 1999 1999 2000
------------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue, net.................... $ 25 $ 105 $ 12,647 $ 451 $ 7,064
Commissions............................. 375 373 65 65 --
Licensing and development fees.......... -- 500 100 100 --
-------- ---------- ---------- ---------- ----------
Total revenue......................... 400 978 12,812 616 7,064
-------- ---------- ---------- ---------- ----------
Cost of revenue(1)........................ 24 22 8,369 163 4,495
-------- ---------- ---------- ---------- ----------
Gross profit.......................... 376 956 4,443 453 2,569
Operating expenses:
Research and development(2)............. 215 1,446 4,805 823 1,690
Selling, general and
administrative(3)..................... 590 1,314 4,366 604 1,784
Patent settlement expense............... -- -- -- -- 4,078
Amortization of deferred stock
compensation.......................... -- -- 565 4 444
-------- ---------- ---------- ---------- ----------
Total operating expenses.............. 805 2,760 9,736 1,431 7,996
-------- ---------- ---------- ---------- ----------
Loss from operations.................. (429) (1,804) (5,293) (978) (5,427)
-------- ---------- ---------- ---------- ----------
Interest and other:
Interest income......................... 14 238 519 64 295
Interest expense........................ -- (23) (110) (28) (38)
Miscellaneous income.................... 39 -- -- -- 10
-------- ---------- ---------- ---------- ----------
Interest and other income, net........ 53 215 409 36 267
-------- ---------- ---------- ---------- ----------
Loss before income taxes.............. (376) (1,589) (4,884) (942) (5,160)
Income taxes.............................. -- 14 3 3 --
-------- ---------- ---------- ---------- ----------
Net loss.............................. (376) (1,603) (4,887) (945) (5,160)
Preferred stock beneficial conversion
feature................................. -- -- -- -- (9,995)
Accretion of preferred stock redemption
preference.............................. -- (10) (4,278) (98) (2,100)
-------- ---------- ---------- ---------- ----------
Net loss attributable to common
shareholders........................ $ (376) $ (1,613) $ (9,165) $ (1,043) $ (17,255)
======== ========== ========== ========== ==========
Historical loss per share:
Basic and diluted....................... $ (0.45) $ (0.61) $ (1.53) $ (0.27) $ (2.19)
======== ========== ========== ========== ==========
Weighted average shares--basic and
diluted............................... 828,263 2,660,327 5,970,785 3,828,138 7,887,063
- ------------------------

Amount excludes amortization of deferred
stock compensation of:
(1) Cost of revenue.................... $ -- $ -- $ 7 $ -- $ 5
(2) Research and development........... -- -- 233 3 179
(3) Selling, general and
administrative..................... -- -- 325 1 260
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>
PIXELWORKS, INC.

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE
--------------------- --------------------- STOCK FOR
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION COMMON STOCK
---------- -------- ---------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of January 16, 1997.... -- $ -- -- $ -- $ -- $ -- $ --
Sale of common stock............... -- -- 7,500,000 10 -- -- --
Issuance of Series A redeemable
convertible preferred stock and
warrants, net.................... 2,906,976 1,145 -- -- 71 -- --
Net loss........................... -- -- -- -- -- -- --
---------- -------- ---------- ------- ---- ------- -----
Balances as of December 31, 1997... 2,906,976 1,145 7,500,000 10 71 -- --
Issuance of Series B redeemable
convertible preferred stock...... 5,500,005 6,600 -- -- -- -- --
Accretion of preferred stock
redemption preference............ -- 10 -- (10) -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- -------- ---------- ------- ---- ------- -----
Balances as of December 31, 1998... 8,406,981 7,755 7,500,000 -- 71 -- --
Issuance of Series C redeemable
convertible preferred stock...... 2,493,026 11,668 -- -- -- -- --
Exercise of stock options and
issuance of common stock......... -- -- 521,115 162 -- -- (199)
Exercise of warrants............... -- -- 1,853,198 1,321 (71) -- --
Deferred compensation related to
stock options.................... -- -- -- 2,795 -- (2,795) --
Amortization of deferred stock
compensation..................... -- -- -- -- -- 565 --
Accretion of preferred stock
redemption preference............ -- 4,278 -- (4,278) -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- -------- ---------- ------- ---- ------- -----
Balances as of December 31, 1999... 10,900,007 23,701 9,874,313 -- -- (2,230) (199)
Issuance of Series D convertible
preferred stock (unaudited)...... 2,239,212 28,528 -- -- -- -- --
Exercise of stock options
(unaudited)...................... -- -- 170,424 37 -- -- --
Deferred compensation related to
stock options (unaudited)........ -- -- -- 2,063 -- (2,063) --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- 444 --
Preferred stock beneficial
conversion feature (unaudited)... -- 10,748 -- -- -- -- --
Accretion of preferred stock
redemption preference
(unaudited)...................... -- 2,100 -- (2,100) -- -- --
Net loss (unaudited)............... -- -- -- -- -- -- --
---------- -------- ---------- ------- ---- ------- -----
Balances as of March 31, 2000
(unaudited)...................... 13,139,219 $ 65,077 10,044,737 $ -- $ -- $(3,849) $(199)
========== ======== ========== ======= ==== ======= =====

TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY (DEFICIT)
------------ ----------------
<S> <C> <C>
Balances as of January 16, 1997.... $ -- $ --
Sale of common stock............... -- 10
Issuance of Series A redeemable
convertible preferred stock and
warrants, net.................... -- 71
Net loss........................... (376) (376)
-------- --------
Balances as of December 31, 1997... (376) (295)
Issuance of Series B redeemable
convertible preferred stock...... -- --
Accretion of preferred stock
redemption preference............ -- (10)
Net loss........................... (1,603) (1,603)
-------- --------
Balances as of December 31, 1998... (1,979) (1,908)
Issuance of Series C redeemable
convertible preferred stock...... -- --
Exercise of stock options and
issuance of common stock......... -- (37)
Exercise of warrants............... -- 1,250
Deferred compensation related to
stock options.................... -- --
Amortization of deferred stock
compensation..................... -- 565
Accretion of preferred stock
redemption preference............ -- (4,278)
Net loss........................... (4,887) (4,887)
-------- --------
Balances as of December 31, 1999... (6,866) (9,295)
Issuance of Series D convertible
preferred stock (unaudited)...... -- --
Exercise of stock options
(unaudited)...................... -- 37
Deferred compensation related to
stock options (unaudited)........ -- --
Amortization of deferred stock
compensation (unaudited)......... -- 444
Preferred stock beneficial
conversion feature (unaudited)... (9,995) (9,995)
Accretion of preferred stock
redemption preference
(unaudited)...................... -- (2,100)
Net loss (unaudited)............... (5,160) (5,160)
-------- --------
Balances as of March 31, 2000
(unaudited)...................... $(22,021) $(26,069)
======== ========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>
PIXELWORKS, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16,
1997 (DATE OF YEARS ENDED THREE MONTH
INCEPTION) THROUGH DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------- -------------------
1997 1998 1999 1999 2000
------------------ -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(376) $(1,603) $(4,887) $ (945) $(5,160)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 55 431 1,303 229 506
Write-off of property and equipment and other assets.... -- -- 74 11 --
Provision for doubtful accounts......................... -- 10 160 9 58
Amortization of deferred stock compensation............. -- -- 565 4 444
Patent settlement expenses.............................. -- -- -- -- 4,078
Changes in operating assets and liabilities:
Accounts receivable................................... (58) (35) (2,614) (390) 211
Inventories........................................... -- (43) (1,361) (228) (1,237)
Prepaid expenses and other current assets............. (8) (3) (10) 4 (322)
Accounts payable...................................... 77 180 455 224 611
Accrued liabilities................................... 4 162 1,277 179 741
Other long-term liabilities........................... -- -- 6 -- --
----- ------- ------- ------ -------
Net cash used in operating activities............... (306) (901) (5,032) (903) (70)
----- ------- ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment........................ (256) (1,275) (1,710) (335) (666)
Other assets.............................................. (5) (295) (480) -- (866)
Purchase of investments................................... (838) -- -- -- --
Proceeds from maturities of investments................... 546 292 -- -- --
----- ------- ------- ------ -------
Net cash used in investing activities............... (553) (1,278) (2,190) (335) (1,532)
----- ------- ------- ------ -------
Cash flows from financing activities:
Proceeds from lines of credit............................. -- 1,331 669 127 (669)
Payments on long-term debt................................ -- -- (248) -- (1,083)
Issuance of preferred stock and common stock warrants..... 1,216 6,600 11,668 -- 26,528
Issuance of common stock.................................. 10 -- 1,213 -- 37
----- ------- ------- ------ -------
Net cash provided by financing activities........... 1,226 7,931 13,302 127 24,813
----- ------- ------- ------ -------
Net increase (decrease) in cash and cash
equivalents......................................... 367 5,752 6,080 (1,111) 23,211
Cash and cash equivalents at beginning of period............ -- 367 6,119 6,119 12,199
----- ------- ------- ------ -------
Cash and cash equivalents at end of period.................. $ 367 $ 6,119 $12,199 $5,008 $35,410
===== ======= ======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ -- $ 23 $ 110 $ 28 $ 38
Supplemental disclosure of non-cash investing and financing
activities:
Accrued liabilities for the purchase of property and
equipment, other assets and settlement.................. $ 75 $ -- $ -- $ -- $ 1,800
Stock issued for the purchase of other assets and
settlement.............................................. -- -- -- -- 2,000
Warrants issued in connection with preferred stock
issuance................................................ 71 -- -- -- --
Conversion of line of credit to term note................. -- -- 1,331 -- --
Preferred stock beneficial conversion feature............. -- -- -- -- 9,995
Accretion of preferred stock redemption preference........ -- 10 4,278 98 2,853
Note receivable for issuance of common stock.............. -- -- 199 -- --
Warrants exercised for common stock....................... -- -- 71 -- --
===== ======= ======= ====== =======
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) NATURE OF BUSINESS

Pixelworks, Inc. (Pixelworks) designs and develops complete system-on-a-chip
solutions that enable the visual display of broadband content. Pixelworks'
technology interprets and optimizes video, computer graphics, and visual Web
information for display on a wide variety of devices.

(b) CASH AND CASH EQUIVALENTS

Pixelworks considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents.

Accounts receivable is net of an allowance for doubtful accounts of $10 and
$155 as of December 31, 1998 and 1999, respectively. The following table
presents a rollforward of the allowance for doubtful accounts for the indicated
periods:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Balance as of beginning of period............... $-- $ 10
Provision....................................... 10 160
Charge offs..................................... -- (15)
--- ----
Balance as of end of period..................... $10 $155
=== ====
</TABLE>

(d) INVENTORIES

Inventories consist of finished goods and are stated at the lower of
standard cost (approximates actual cost on a first-in, first-out basis) or
market (net realizable value).

(e) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. The cost of repairs and
maintenance is expensed as incurred.

Depreciation on computer equipment and software, tooling and leasehold
improvements is calculated on a straight-line basis over the estimated useful
lives of the assets, two years for computer equipment and software and the
estimated life of the product for tooling, generally two years. Amortization of
leasehold improvements is recognized over the shorter of the life of the
improvement or the remaining life of the lease.

As required by Statement of Financial Accounting Standards No. 121 (SFAS),
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted net cash flows of
the operation to which the assets relate, to the carrying amount including
associated intangible assets of the operation.

F-7
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the operation is determined to be unable to recover the carrying amount of
its assets, then intangible assets are written down first, followed by the other
long-lived assets of the operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets.

(f) STOCK-BASED COMPENSATION

SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a fair value
based method of accounting for an employee stock option or similar instrument.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. However, SFAS 123 also allows an entity to
continue to measure compensation cost using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25 (Opinion 25), ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. Under the intrinsic value based method, compensation cost
is the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Entities electing to remain with the accounting in Opinion 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method had been applied. Pixelworks has elected to continue
to apply the prescribed accounting in Opinion 25 and make the required
disclosures under SFAS 123.

Pixelworks accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force
consensus on Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED
TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING GOODS OR
SERVICES. There have been no equity instruments issued to non-employees during
the periods presented.

(g) REVENUE RECOGNITION

Pixelworks recognizes revenue for product sales to direct customers and
commissions on third party sales upon shipment of the underlying merchandise.
Revenue from product sales to distributors is recognized upon shipment if the
distributor has a firm sales commitment from an end customer. A reserve for
sales returns and allowances is recorded at the time of shipment. As of
December 31, 1998 and 1999, the reserve for sales returns and allowances was $3
and $236, respectively.

Pixelworks accrues a liability for the estimated future repair and
replacement costs to be incurred under the provisions of Pixelworks' warranty
agreements. As of December 31, 1998 and 1999, the reserve for warranty repairs
was $1 and $133, respectively.

Licensing and development fees represent revenue earned for the development
of certain technology and limited license granted to a third party.

(h) RESEARCH AND DEVELOPMENT

Research and development are charged to expense as incurred. However,
software development costs are capitalized beginning when a product's
technological feasibility has been established by completion of a working model
and ending when a product is available for general release to

F-8
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customers. Completion of a working model and general release has substantially
coincided. As a result, all such costs have been charged to research and
development as incurred.

(i) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. 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. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.

(j) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments. The carrying amount of amounts due under the line of credit
approximates fair value since the interest rate approximates current rates
available to Pixelworks.

(k) NET LOSS PER SHARE

Pixelworks reports net loss per share in accordance with SFAS 128, EARNINGS
PER SHARE, and SEC Staff Accounting Bulletin No. 98 (SAB 98), which requires the
presentation of both basic and diluted earnings per share. Basic earnings per
share is computed using the weighted average number of common shares outstanding
and diluted earnings per share is computed using the weighted average number of
common shares outstanding and dilutive potential common shares assumed to be
outstanding during the period using the treasury stock method. The following
weighted-average potential common shares have been excluded from the computation
of diluted loss per share for all periods presented because the effect would
have been anti-dilutive:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- -----------------------
1997 1998 1999 1999 2000
--------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issuable under stock
options............................ -- -- 1,696,175 948,946 2,556,996
Shares of restricted stock subject to
repurchase......................... 6,689,208 4,853,586 3,093,572 3,710,924 1,914,674
Shares of convertible preferred stock
on an as converted basis........... 3,108,857 9,955,293 15,012,882 12,750,588 17,789,504
</TABLE>

(l) COMPREHENSIVE INCOME

Pixelworks has had no items of comprehensive income.

F-9
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expense during the reporting period. Actual
results could differ from those estimates.

(n) CONCENTRATION OF SUPPLIERS

Pixelworks does not own or operate a semiconductor fabrication facility and
does not have the resources to manufacture its products internally. Pixelworks
relies on two, third party foundries to produce all its products. In light of
these dependencies, it is reasonably possible that failure to perform by one of
these suppliers could have a severe impact on Pixelworks growth and results of
operations.

(o) RISK OF TECHNOLOGICAL CHANGE

The markets in which Pixelworks competes or seeks 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 Pixelworks' products less desirable or obsolete
which could harm its business.

(p) CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject Pixelworks to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Pixelworks limits its exposure to credit risk associated with cash
and cash equivalents by placing its cash and cash equivalents with various high
credit quality financial institutions. Cash and cash equivalents consist of
deposits and money market funds. As of December 31, 1999, Pixelworks had
accounts receivable from two customers representing approximately 75% of
accounts receivable. Loss or non-performance by these significant customers
could adversely affect Pixelworks financial position or results from operations.

(q) PRO FORMA SHAREHOLDERS EQUITY (UNAUDITED)

Upon consummation of Pixelworks' initial public offering, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 19,708,835 shares of common
stock based on the shares of convertible preferred stock outstanding as of March
31, 2000. Unaudited pro forma shareholders' equity as of March 31, 2000, as
adjusted for the conversion of the redeemable convertible preferred stock, is
disclosed on the balance sheet.

(r) UNAUDITED QUARTERLY INFORMATION

The financial information included herein as of March 31, 2000 and for the
three-month periods ended March 31, 1999 and 2000 is unaudited. However, such
information reflects all adjustments, consisting of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim period.

F-10
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited interim financial statements should be read together with the
financial statements and the notes included in the financial statements. The
results of operations for the interim period presented are not necessarily
indicative of the results to be expected for the full year.

(s) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE

Internal use software development costs are accounted for in accordance with
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary
project stage are expensed as incurred and costs incurred in the application and
development stage, which meet the capitalized criteria, are capitalized and
amortized on a straightline basis over three years, the estimated useful life of
the asset.

(2) BALANCE SHEET COMPONENTS

(a) PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software......................................... $ 808 $1,658 $1,964
Computer equipment............................... 371 981 1,197
Tooling.......................................... 427 576 720
Leasehold improvements........................... -- 91 91
------ ------ ------
1,606 3,306 3,972

Less accumulated depreciation and amortization... 486 1,576 2,000
------ ------ ------
$1,120 $1,730 $1,972
====== ====== ======
</TABLE>

(b) ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and related liabilities.................... $166 $ 751 $ 854
Reserve for sales returns.......................... 3 236 212
Royalties.......................................... -- 197 234
Other.............................................. 72 334 2,759
---- ------ ------
$241 $1,518 $4,059
==== ====== ======
</TABLE>

F-11
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(3) LINE OF CREDIT

Pixelworks has a line of credit for cash borrowings and letters of credit up
to $3,000. Pixelworks may borrow up to 80% of eligible accounts receivable and
as of December 31, 1999, approximately $1,485 was available for borrowing. The
line of credit bears interest at prime (8.5% at December 31, 1999) plus .25%,
which is payable monthly. The line of credit expires March 2000, when the
principal balance outstanding becomes due and payable. The line of credit is
secured by substantially all assets of Pixelworks.

Under the agreement, Pixelworks is required to maintain certain financial
covenants. Pixelworks was in compliance with the covenants as of December 31,
1999.

(4) LONG-TERM DEBT

Long-term debt consists of a line of credit converted into a term loan after
a six month draw-down period. The loan is payable in monthly principal
installments of approximately $41, plus interest at prime (8.5% as of
December 31, 1999) plus .5%. Scheduled repayments on long-term debt are:
2000--$492; 2001--$492; 2002--$99. Long-term debt is secured by substantially
all assets of Pixelworks.

(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK

Pixelworks has designated shares of authorized preferred stock as redeemable
convertible preferred stock. The title and number of shares issued and
outstanding are as follows:

<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
----------------------
DECEMBER 31,
DESIGNATED ----------------------
SHARES DATE ISSUED 1998 1999
---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Series C redeemable convertible preferred
stock, $4.68 per share liquidation
preference................................ 2,493,026 May 28, 1999 -- 2,493,026
Series B redeemable convertible preferred
stock, $1.20 per share liquidation
preference................................ 5,500,005 April 29, 1998 5,500,005 5,500,005
Series A redeemable convertible preferred
stock, $0.43 per share liquidation
preference................................ 3,000,000 April 25, 1997 2,906,976 2,906,976
---------- --------- ----------
10,993,031 8,406,981 10,900,007
========== ========= ==========
</TABLE>

(a) VOTING

The Series A, Series B and Series C redeemable convertible preferred stock
(Series A, Series B and Series C) vote together with all other classes and
series of stock of Pixelworks as a single class on all actions to be taken by
the shareholders of Pixelworks. The Series A, Series B and Series C, voting as a
separate series, each have the right to elect one member to the Board of
Directors.

(b) LIQUIDATION PREFERENCES

Upon liquidation, dissolution or winding up of Pixelworks, whether voluntary
or involuntary, the holders of the shares of Series C shall be paid an amount
equal to the issue price for that series plus, in the case of each share, an
amount equal to any dividends accrued but unpaid thereon, computed to

F-12
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
the date payments thereof is made available, before any payment shall be made to
the holders of Series B and Series A and common stock.

With the approval of the holders of the majority of the then outstanding
shares of preferred stock of a particular series, one or more holders of shares
of Series A, Series B and Series C may, by giving notice to Pixelworks at any
time after March 1, 2002, 2003 and 2004, respectively, require Pixelworks to
redeem all of the outstanding preferred stock of that series in two
installments, with up to one-half of the shares redeemed sixty days after
receipt of notice stating the number of shares of preferred stock of the series
being redeemed. The second installment is due on the first anniversary of the
first installment. The preferred stock to be redeemed shall be redeemed by
paying for each share in cash an amount equal to the greater of (i) the then
fair market value per share or (ii) $0.43 per share, $1.20 per share and $4.68
per share for Series A, Series B and Series C, respectively, plus, in the case
of each share, an amount equal to all dividends accrued and unpaid thereon.

On or after March 1, 2005, 2006 and 2007, Pixelworks may at its option
establish a redemption date as of which Pixelworks shall redeem all, but not
less than all, of the then outstanding Series A, Series B and Series C,
respectively. The preferred stock to be redeemed shall be redeemed by paying for
each share in cash an amount equal to the greater of (i) the then fair market
value per share or (ii) $0.43 per share, $1.20 per share and $4.68 per share for
Series A, Series B and Series C, respectively, plus, in the case of each share,
an amount equal to all dividends accrued and unpaid thereon.

The carrying amount of Series A, Series B and Series C have been increased
by periodic accretions, based on the deemed fair value of the preferred stock at
the balance sheet date and using the interest method. Each increase has been
effected by charges against common stock in the absence of retained earnings.

(d) CONVERSION

The holder of any share or shares of preferred stock shall have the right,
at its option at any time, to convert any such shares of preferred stock into
such number of fully paid and nonassessable shares of common stock as is
obtained by (i) multiplying the number of shares of preferred stock of each
series so to be converted by the issue price applicable to that series and
(ii) dividing the result by the conversion price then applicable to that series.
If at any time a majority of the total number of preferred stock has been
converted into common stock, all outstanding shares of preferred stock of a
given series shall likewise automatically convert to shares of common stock. As
a result of the three-for-two common stock split effective as of March 31, 2000,
the conversion rate of the preferred stock into common stock is two-for-three.
The Series A, Series B and Series C is convertible into 4,360,465, 8,250,010 and
3,739,541 shares of common stock, respectively.

All outstanding shares of preferred stock shall automatically convert to
shares of common stock if at any time Pixelworks shall effect a firm commitment
underwritten public offering of shares of common stock in which (i) the
aggregate net proceeds from such offering to Pixelworks shall be at least
$10,000 and (ii) the price paid by the public for such shares shall be at least
$7.00 per share

F-13
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
(appropriately adjusted to reflect the occurrence of stock splits, combinations,
common stock dividends and distributions).

Pixelworks is required at all times to reserve and keep available out of its
authorized common stock, solely for the purpose of issuance upon the conversion
of the preferred stock, such number of shares of common stock as shall then be
issuable upon the conversion of all outstanding shares of preferred stock.

If Pixelworks effectuates a stock split or reverse stock split of common
stock without a corresponding stock split or reverse stock split of any given
series of preferred stock, the conversion price for that series of preferred
stock in effect immediately preceding the stock split or reverse stock split of
the common stock shall be proportionately decreased or increased respectively.

If Pixelworks at any time subsequent to the effective date of its Third
Amended and Restated Articles of Incorporation issues any additional common
stock without consideration or for a consideration per share less than the
conversion price for any given series of preferred stock then in effect, the
conversion price applicable to each such series shall be adjusted or readjusted
in accordance with Pixelworks' Third Amended and Restated Articles of
Incorporation.

(e) DIVIDENDS

The Series A, B, and C shareholders are entitled to receive dividends, when
and if declared by the Board, in amounts per share not less than those paid on
common stock per share, and in preference to and before any dividends are paid
on common stock.

(6) SHAREHOLDERS' EQUITY

(a) SHAREHOLDERS' AGREEMENT

The founding common shareholders (Founders) are subject to an amended
shareholders' agreement which provides, among other things, the restriction of
the transfer of shares.

As provided in the amended shareholders' agreement, Pixelworks has the right
to buy back from the Founders, the share or shares of common stock outstanding
in the event the Founder or Founders terminates employment prior to their fourth
anniversary for the same price originally paid. This right diminishes ratably
over the four-year employment history of the respective common shareholder. This
right lapses upon an initial public offering.

As of December 31, 1999, there were 1,953,107 common shares subject to the
shareholders' agreement.

(b) WARRANTS

In connection with the Series A redeemable convertible preferred stock
offering, Pixelworks issued warrants, at a nominal value, for the purchase of up
to an aggregate of 1,853,198 shares of Pixelworks' common stock at an exercise
price of $0.674 per share. The warrants were exercised in 1999.

The fair value of the warrants issued of $71 was determined by applying the
Black-Scholes methodology using the issuance date for Series A redeemable
convertible preferred stock as the

F-14
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(6) SHAREHOLDERS' EQUITY (CONTINUED)
measurement date. The per share weighted average fair market value was $0.06 on
the date of grant, with the following weighted average assumptions: Risk-free
interest rate of 6%, expected dividend yield of -0-%, a two-year term and an
expected volatility of 100%.

During 1999, 305,937 of stock options were exchanged for 305,937 shares of
common stock subject to vesting in exchange for a note receivable. The note
receivable is due and payable the earlier of 1) August 31, 2008 or 2) upon
termination of the borrower's employment and bears interest at 6% per year,
payable annually. The note receivable is secured by the shares of common stock
issued thereunder. As of December 31, 1999, there were 284,691 shares of
unvested common stock.

(d) STOCK OPTIONS

Pixelworks has a stock option plan under which a total of 6,340,116 stock
options may be granted to key employees. Options granted under the plan must
generally be exercised while the individual is an employee and within ten years
of the date of grant. On the standard vesting schedule, each option shall become
exercisable at a rate of 25% on the first anniversary date of the grant and on
the last day of every month thereafter for a total of thirty-six additional
increments unless otherwise specifically stated at the time of grant. On the
alternative vesting schedule, options become exercisable monthly for a period of
four years, with 10% becoming exercisable in the first year, 20% becoming
exercisable in the second year, 30% becoming exercisable in the third year, and
40% becoming exercisable in the fourth year. Had Pixelworks accounted for its
stock-based compensation plan in accordance with SFAS 123, Pixelworks' net loss
would approximate the pro forma disclosure as follows:

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16,
1997 (DATE OF YEARS ENDED
INCEPTION) TO DECEMBER 31,
DECEMBER 31, -------------------
1997 1998 1999
------------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common shareholders:
As reported................................. $ (376) $(1,613) $ (9,165)
Pro forma................................... (379) (1,663) (10,082)

Basic and diluted net loss per share:
As reported................................. (0.45) (0.61) (1.53)
Pro forma................................... (0.46) (0.63) (1.69)
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts and additional awards are anticipated in future
years.

F-15
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(6) SHAREHOLDERS' EQUITY (CONTINUED)

The fair value of compensation costs reflected in the above pro forma
amounts were determined using the Black-Scholes option pricing model and the
following weighted average assumptions for grants used in the calculation are as
follows:

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........... 6.3% 5.0% 5.5%
Expected dividend yield........... 0% 0% 0%
Expected life..................... 7 years 6 years 5 years
Volatility........................ 100% 100% 100%
</TABLE>

Under the Black-Scholes option pricing model the weighted-average fair value
of options granted during 1997, 1998 and 1999 was approximately $0.14, $0.13 and
$2.18, respectively.

The following is a summary of stock option activity:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding as of January 16, 1997............... -- $ --
Granted.................................................. 105,750 .166
---------
Options outstanding as of December 31, 1997.............. 105,750 .166
Granted.................................................. 1,167,000 .166
Canceled................................................. (750) .166
---------
Options outstanding as of December 31, 1998.............. 1,272,000 .166
Granted.................................................. 2,181,375 1.306
Exercised................................................ (215,182) .266
Canceled................................................. (323,937) .333
---------
Options outstanding as of December 31, 1999.............. 2,914,256 .992
Granted (unaudited)...................................... 267,000 3.975
Exercised (unaudited).................................... (170,424) .22
---------
Options outstanding as of March 31, 2000 (unaudited)..... 3,010,832 $ 1.30
=========
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
- -------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$.166-.326 1,111,632 8.8 $ .193 230,336 $ .166
.500-.966 724,950 9.5 .82 -- --
1.486-2.426 1,077,674 9.8 1.926 58,468 2.413
------------ --------- --- ------ ------- ------
$.166-2.426 2,914,256 9.3 $ .993 288,804 $ .62
========= =======
</TABLE>

F-16
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(6) SHAREHOLDERS' EQUITY (CONTINUED)
As of March 31, 2000, 2,637,741 (unaudited) shares were available for grant.

Pixelworks has recorded deferred stock compensation of $2,795 through
December 31, 1999. This deferred stock compensation is based on the difference
between the deemed fair market value of common stock and the exercise price of
the option or stock on the grant date. Deferred stock compensation is being
amortized on an accelerated basis over the vesting period, generally four years,
consistent with the method described in FASB Interpretation No. 28. Pixelworks
recognized compensation expense of $565 during the year ended December 31, 1999
related to these grants. Amortization of the December 31, 1999 balance of
deferred stock compensation for the years ending December 31, 2000, 2001, 2002
and 2003 would approximate $1,113, $640, $346 and $131, respectively.

(7) INCOME TAXES

Components of the provision for income taxes for the years ended
December 31, 1998 and 1999 is comprised of current foreign taxes in the amount
of $14 and $3, respectively, and none during the period from January 16, 1997
(date of inception) to December 31, 1997.

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

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16, 1997 YEARS ENDED
(DATE OF INCEPTION) DECEMBER 31,
TO DECEMBER 31, -------------------
1997 1998 1999
------------------- -------- --------
<S> <C> <C> <C>
Computed "expected" income tax benefit........ (34)% (34)% (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax
benefit................................... (4) (4) (4)
Increase in valuation allowance............. 41 42 39
Research and experimentation credit......... (3) (3) (4)
Other....................................... -- -- 3
--- --- ---
Actual tax expense............................ -- % 1 % -- %
=== === ===
</TABLE>

F-17
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax assets and
deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 665 $ 1,920
Research and experimentation credit....................... 63 273
Accrued vacation.......................................... 27 54
Allowance for doubtful accounts........................... 4 59
Depreciation and amortization............................. 52 221
Other..................................................... 3 201
----- -------
Total gross deferred tax assets......................... 814 2,728
Less valuation allowance.................................... (814) (2,728)
----- -------
Net deferred tax assets................................. $ -- $ --
===== =======
</TABLE>

The valuation allowance for the deferred tax assets as of January 16, 1997
(date of inception) was $-0-. The net change in the total valuation allowance
for the period ended December 31, 1997 and the years ended December 31, 1998 and
1999 was an increase of approximately $154, $660 and $1,914, respectively.

A provision of the Tax Reform Act of 1986 requires the utilization of net
operating losses and credits be limited when there is a change of more than 50%
in ownership of Pixelworks. Such changes occurred with the sale of preferred
stock in 1998. Accordingly, the utilization of the net operating loss and credit
carryforwards generated from periods prior to April 28, 1998 is limited; the
federal net operating loss carryforwards subject to the limitation are
approximately $351.

As of December 31, 1999, Pixelworks has net operating loss and research
credit carryforwards of approximately $5,007 and $305, respectively, which will
expire between 2012-2018.

(8) SEGMENT INFORMATION

In accordance with SFAS 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, Pixelworks has identified a single operating segment: the
design and development of integrated circuits for electronic display devices.

(a) SIGNIFICANT CUSTOMERS

Sales to one distributor represented 51% of total revenue for the year ended
December 31, 1998. Sales to two distributors represented 55% and 24%,
separately, of total revenue for the year ended December 31, 1999. No other
customer represented more than 10% of revenue.

F-18
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(8) SEGMENT INFORMATION (CONTINUED)
(b) GEOGRAPHIC INFORMATION

Revenue by geographic region was as follows:

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16, 1997 YEARS ENDED
(DATE OF INCEPTION) DECEMBER 31,
TO DECEMBER 31, -------------------
1997 1998 1999
------------------- -------- --------
<S> <C> <C> <C>
Japan........................................ $ -- $500 $ 7,136
Taiwan....................................... -- -- 3,126
Korea........................................ -- -- 1,230
United States................................ 400 478 923
Other........................................ -- -- 397
---- ---- -------
Total revenue........................ $400 $978 $12,812
==== ==== =======
</TABLE>

(9) COMMITMENTS AND CONTINGENCIES

(a) ROYALTIES

During 1999, Pixelworks agreed to pay certain suppliers a per unit royalty
based on a certain number of chips sold. Royalties are paid monthly and expire
through November 6, 2006. Royalties are charged to cost of goods sold in the
statement of operations. Pixelworks has recorded $383 in royalty expense for the
year ended December 31, 1999.

(b) 401(k) PLAN

Effective January 1, 1999, Pixelworks implemented a profit-sharing plan for
eligible employees under the provisions of Internal Revenue Code
Section 401(k). Participants may defer a percentage of their annual compensation
on a pre-tax basis, not to exceed the dollar limit which is set by law. A
discretionary matching contribution by Pixelworks 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 Pixelworks. Pixelworks made no
contributions to the 401(k) plan during 1999.

F-19
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) LEASES

Pixelworks leases office space under various operating leases which expire
at various dates through 2004. Future minimum payments under the leases are as
follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- -------------------------
<S> <C>
2000...................................................... $ 448
2001...................................................... 498
2002...................................................... 514
2003...................................................... 509
2004...................................................... 212
------
Total............................................... $2,181
======
</TABLE>

Rent expense for the period from January 16, 1997 (date of inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999 was $36, $80
and $243, respectively.

During 1999, Pixelworks entered into a noncancelable sublease agreement
which expires in August 2002. Future minimum payments to be received under the
sublease are as follows: 2000--$33; 2001--$33; and 2002--$21. Sublease income
was $19 during the year ended December 31, 1999, which was included in rent
expense.

(d) CONTINGENCIES

From time to time, Pixelworks may be a party to various lawsuits and claims
incidental to its business. The Company is not currently subject to any lawsuit
or claim which it believes will have a material adverse effect on its financial
position, results of operations or liquidity.

(E) CONTRACT MANUFACTURERS

Pixelworks generally commits to purchase products from its contract
manufacturers to be delivered within the most recent 90 days covered by
forecasts with cancellation fees. As of December 31, 1999, Pixelworks had
committed to make purchases totaling $5.4 million from the contract
manufacturers in the next 90 days. In addition, in specific instances,
Pixelworks may agree to assume liability for limited quantities of specialized
components with lead times beyond this 90-day period.

(10) SUBSEQUENT EVENTS (UNAUDITED)

(a) SERIES D OFFERING

On February 22, 2000, Pixelworks issued a total of 2,239,212 at $12.75 per
share shares of Series D preferred stock. The Series D preferred stock was
issued with a beneficial conversion feature totalling $10.0 million measured as
the difference between the estimated fair value of the underlying common stock
and the conversion price of $8.50 per share. The Series D preferred stock may,
at the option of the holder, at any time be converted into shares of common
stock and will automatically convert into common stock upon consummation of
Pixelworks' initial public offering. The conversion ratio is 1.5 shares of
common stock for each share of Series D preferred stock converted.

F-20
<PAGE>
PIXELWORKS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(10) SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
(b) LICENSE PURCHASE

In February of 2000, Pixelworks entered into a perpetual license agreement
with InFocus Systems, Inc. for the use of its proprietary automatic pixel clock
phase and frequency correction technology specified in two patents held by
InFocus in exchange for 156,863 shares of Series D preferred stock, valued at
$12.75 per share, and $2.4 million in cash, payable in four equal quarterly
installments beginning March 31, 2000. In addition, approximately $753,000 of
the patent settlement expense recorded in connection with the issuance of
Series D Preferred Stock to InFocus was based on the difference between the
estimated fair value of the underlying common stock and the Series D conversion
price of $8.50 per share. Pixelworks also received a release of any claims
InFocus may have against Pixelworks relating to these patents.

The 2000 Employee Stock Purchase Plan was adopted by the board in February
2000, subject to shareholder approval. A total of 1,500,000 shares of common
stock has been reserved for issuance under the employee stock purchase plan.

(d) STOCK SPLIT

On March 16, 2000, the board of directors approved a three-for-two split of
common stock effective March 31, 2000. The conversion ratio of preferred stock
into common stock has been adjusted from a pre-stock split rate of one-for-one
to a post-split conversion rate of two-for-three. All share and per share data
have been restated accordingly.

F-21
<PAGE>
[PIXELWORKS
SEE THE FUTURE]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

5,750,000 SHARES

PIXELWORKS, INC.

COMMON STOCK

[LOGO]
</TABLE>

---------

PROSPECTUS

, 2000

---------

SALOMON SMITH BARNEY

DEUTSCHE BANC ALEX. BROWN

SG COWEN

E*OFFERING

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses expected to be
incurred by the Registrant in connection with the offering described in this
Registration Statement. All amounts are estimates except the SEC registration
fee.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 24,440
NASD Filing fee............................................. 8,000
Nasdaq National Market listing fee.......................... 95,000
Printing Expenses........................................... 200,000*
Accounting Fees and Expenses................................ 250,000*
Legal Fees and Expenses..................................... 275,000*
Blue sky qualification fees and expenses.................... 10,000*
Transfer Agent and Registrar Fees........................... 15,000*
Miscellaneous Expenses...................................... 22,600*
--------
Total................................................... $900,000
========
</TABLE>

- ------------------------

* Estimate.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As an Oregon corporation, we are subject to the Oregon Business Corporation
Act ("OBCA") and the exculpation from liability and indemnification provisions
contained therein. Pursuant to Section 60.047(2)(d) of the OBCA, Article IV of
our Fifth Restated Articles of Incorporation (the "Restated Articles")
eliminates the liability of our directors to us or our shareholders, except for
any liability related to breach of the duty of loyalty, actions not in good
faith and certain other liabilities.

Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with such claims. Corporations may not indemnify against
breaches of the duty of loyalty. The OBCA provides for mandatory indemnification
of directors against all reasonable expenses incurred in the successful defense
of any claim made or threatened whether or not such claim was by or in the right
of the corporation. Finally, a court may order indemnification if it determines
that the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances whether or not the
director or officer met the good faith and reasonable belief standards of
conduct set out in the statute. Article IV of the Restated Articles requires us
to indemnify our directors and officers to the fullest extent not prohibited by
law.

II-1
<PAGE>
We also have entered into indemnity agreements with each of our executive
officers and each member of our Board of Directors. These indemnity agreements
provide for indemnification of the indemnitee to the fullest extent allowed by
law.

ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES.

In the three years prior to the effective date of this Registration
Statement, we have issued and sold the following unregistered securities:

- On April 25, 1997, we issued and sold 2,906,976 shares of Series A
preferred stock to investors for an aggregate consideration of $1,250,000
in cash.

- On April 29, 1998, we issued and sold 5,500,005 shares of Series B
preferred stock to investors for an aggregate consideration of $6,000,006
in cash.

- On May 28, 1999, we issued and sold 2,493,026 shares of Series C preferred
stock to investors for an aggregate consideration of $11,667,360 in cash.

- On August 31, 1999, we granted 250,000 shares of common stock from our
stock incentive plan to an employee for an aggregate consideration of
$115,700.

- On February 22, 2000, we issued and sold 2,239,212 shares of Series D
preferred stock to investors for an aggregate consideration of $26,550,000
in cash and, in the case of one of the investors, rights under a patent
license agreement.

- In the last three years, Pixelworks has granted 3,721,125 options for
shares of common stock to our employees, consultants and other service
providers. As of March 31, 2000, 385,606 of those options have been
exercised for an aggregate consideration of $94,854.32 and 324,687 have
been canceled, leaving 3,010,832 options outstanding. This information
gives effect to 3-for-2 split of the common stock of Pixelworks effective
March 31, 2000.

Upon completion of the offering covered by this Registration Statement, all
outstanding shares of Series A, Series B, Series C and Series D preferred stock
will automatically convert into 19,708,835 shares of common stock.

The sale of the above securities was deemed to be exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated thereunder or Rule 701 promulgated
under Section 3(b) of the Securities Act of 1933 as transactions by an issuer
not involving any public offering or transactions pursuant to compensation
benefit plans and contracts relating to compensation as provided under
Rule 701. These sales were made without general solicitation or advertising. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment.

II-2
<PAGE>
ITEM 16. EXHIBITS.

(a) The following exhibits as filed herewith:

NO.__DESCRIPTION

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
1.1 * Form of Underwriting Agreement.

3.1 * Fifth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.

3.2 * Sixth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.

3.3 * First Restated Bylaws of Pixelworks, Inc.

4.1 * Reference is made to Exhibit 3.1.

4.2 * Third Amended Registration Rights Agreement dated February
22, 2000.

5.1 * Opinion of Ater Wynne LLP as to the legality of the Common
Stock being registered.

10.1 * Form of Indemnity Agreement between Pixelworks, Inc. and
each of its Officers and Directors.

10.2 * Pixelworks, Inc. 1997 Stock Incentive Plan.

10.3 * Loan and Security Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.

10.4 * Loan Modification Agreement (modification to Exhibit 10.3)
dated April 9, 1999 between Silicon Valley Bank and
Pixelworks, Inc.

10.5 * Negative Pledge Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.

10.6 * Pixelworks, Inc. 2000 Employee Stock Purchase Plan.

10.7 * Lease Agreement dated April 14, 1999 between
Southcenter III and IV Investors LLC and Pixelworks, Inc.

10.8 *+ VAutomation Incorporated Synthesizable Soft Core Agreement
dated November 4, 1997 between VAutomation Incorporated and
Pixelworks, Inc.

10.9 *+ Intellectual Property Sublicense Agreement dated March 30,
1999 between VAutomation Incorporated and Pixelworks, Inc.

10.10* License Agreement dated February 22, 2000 between
Pixelworks, Inc. and InFocus Systems, Inc.

10.11* Employment Agreement between Jeffrey B. Bouchard and
Pixelworks, Inc.

23.1 * Consent of Ater Wynne LLP. Reference is made to Exhibit 5.1.

23.2 Consent of KPMG LLP.

24.1 * Powers of Attorney. Reference is made to the signature page
hereof.

27.1 * Financial Data Schedule.
</TABLE>

- ------------------------

* Previously filed.

+ Confidential treatment requested as to certain portions of this exhibit.

(b) Schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statement or
related notes.

II-3
<PAGE>
ITEM 17. UNDERTAKINGS.

We hereby undertake that, for the purpose of determining any liability under
the Securities Act each filing of our annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act) that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than our payment of expenses incurred or paid by
a director, officer or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

We hereby undertake:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
this offering.

(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(5) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-1 and has duly caused this Amendment No. 4 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tualatin, State of Oregon, on May 16, 2000.

<TABLE>
<S> <C> <C>
PIXELWORKS, INC.

By: /s/ ALLEN H. ALLEY
------------------------------------
Allen H. Alley
PRESIDENT
</TABLE>

Witness our hands on the date set forth below. Pursuant to the requirements
of the Securities Act, this Amendment No. 4 to Registration Statement has been
duly signed by the following persons in the capacities indicated on May 16,
2000.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ALLEN H. ALLEY
------------------------------------------- Director, President and Chief Executive
Allen H. Alley Officer (Principal Executive Officer)

/s/ JEFFREY B. BOUCHARD Vice President, Finance and Chief Financial
------------------------------------------- Officer (Principal Financial and Accounting
Jeffrey B. Bouchard Officer)

/s/ OLIVER D. CURME*
------------------------------------------- Director
Oliver D. Curme

/s/ MARK A. STEVENS*
------------------------------------------- Director
Mark A. Stevens

/s/ FRANK GILL*
------------------------------------------- Director
Frank Gill

-------------------------------------------
Michael Yonker Director

*By: /s/ ALLEN H. ALLEY
-------------------------------------------
Allen H. Alley
ATTORNEY-IN-FACT
</TABLE>

II-5
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
1.1 * Form of Underwriting Agreement.

3.1 * Fifth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.

3.2 * Sixth Amended and Restated Articles of Incorporation of
Pixelworks, Inc.

3.3 * First Restated Bylaws of Pixelworks, Inc.

4.1 * Reference is made to Exhibit 3.1.

4.2 * Third Amended Registration Rights Agreement dated February
22, 2000.

5.1 * Opinion of Ater Wynne LLP as to the legality of the Common
Stock being registered.

10.1 * Form of Indemnity Agreement between Pixelworks, Inc. and
each of its Officers and Directors.

10.2 * Pixelworks, Inc. 1997 Stock Incentive Plan.

10.3 * Loan and Security Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.

10.4 * Loan Modification Agreement (modification to Exhibit 10.3)
dated April 9, 1999 between Silicon Valley Bank and
Pixelworks, Inc.

10.5 * Negative Pledge Agreement dated August 14, 1998 between
Silicon Valley Bank and Pixelworks, Inc.

10.6 * Pixelworks, Inc. 2000 Employee Stock Purchase Plan.

10.7 * Lease Agreement dated April 14, 1999 between
Southcenter III and IV Investors LLC and Pixelworks, Inc.

10.8 *+ VAutomation Incorporated Synthesizable Soft Core Agreement
dated November 4, 1997 between VAutomation Incorporated and
Pixelworks, Inc.

10.9 *+ Intellectual Property Sublicense Agreement dated March 30,
1999 between VAutomation Incorporated and Pixelworks, Inc.

10.10* License Agreement dated February 22, 2000 between
Pixelworks, Inc. and InFocus Systems, Inc.

10.11* Employment Agreement between Jeffrey B. Bouchard and
Pixelworks, Inc.

23.1 * Consent of Ater Wynne LLP. Reference is made to Exhibit 5.1.

23.2 Consent of KPMG LLP.

24.1 * Powers of Attorney. Reference is made to the signature page
hereof.

27.1 * Financial Data Schedule.
</TABLE>

- ------------------------

* Previously filed.

+ Confidential treatment requested as to certain portions of this exhibit.

<PAGE>
EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Pixelworks, Inc.:

We consent to the use of our Independent Auditors' Report dated January 26, 2000
relating to the balance sheets of Pixelworks, Inc. as of December 31, 1998 and
1999, and the related statements of operations, redeemable convertible preferred
stock and shareholders' equity (deficit) and cash flows for the period from
January 16, 1997 (date of inception) through December 31, 1997 and for each of
the years in the two-year period ended December 31, 1999 which report is
included in the Registration Statement and Prospectus, dated May 17, 2000, of
Pixelworks, Inc., and to the reference to our firm under the heading "Experts"
in the Prospectus.

/s/ KPMG LLP

Portland, Oregon
May 16, 2000