Conference Call at 2 p.m. PDT, July 27, 2005 – Pixelworks will host a conference call at 2 p.m. PDT, July 27, 2005, which can be accessed at (719) 457-2633 and using pass code 6358643.  The conference call will also be available through a Web broadcast that can be accessed by visiting the Investor Relations section at www.pixelworks.com.  A replay of the conference call will be available through July 30, 2005, and can be accessed by calling (719) 457-0820 using pass code 6358643.  A replay of the Web broadcast will be available through August 28, 2005.

Pixelworks Reports Second Quarter 2005 Financial Results

• The second quarter financial results include the results of operations of Equator Technologies from June 15, 2005 through the end of the second quarter.

• Revenue of $41.3 million in the second quarter increased 3% from $40.3 million in the first quarter and decreased 15% from $48.5 million in the second quarter of 2004.  Revenue contribution in the second quarter from Equator Technologies products was negligible.

• Projector revenue increased 18% sequentially while LCD monitor and advanced TV revenue decreased 6% and 3%, respectively. 

• GAAP net loss in the second quarter was ($2.3) million, or ($0.05) per share,pro forma* net loss was ($1.6) million, or ($0.03) per share. 

• The total purchase price of Equator Technologies was $117.9 million, which includes $8.3 million representing the fair value of 1.3 million Pixelworks stock options that were exchanged for outstanding Equator stock options.

*Pro forma gross profit, income (loss) before income taxes, and net income (loss), which differs from gross profit, income (loss) before income taxes, and net income (loss) in accordance with accounting principles generally accepted in the United States of America (GAAP), excludes non-cash expenses for the amortization of various acquired intangible assets, amortization of adjustments to the value of inventory acquired in acquisitions, amortization of stock-based compensation, and a loss on the sale of marketable securities used to fund the acquisition of Equator Technologies.  A schedule reconciling these amounts for the three and six months ended June 30, 2005 and 2004 is included in this news release.  Pixelworks’ management believes the presentation of these non-GAAP financial measures provides useful information to investors regarding Pixelworks’ results of operations allowing investors to better evaluate ongoing business performance. Pixelworks’ management also uses these non-GAAP financial measures internally to monitor performance of the business. Pixelworks, however, cautions investors to consider these non-GAAP financial measures in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP.

Tualatin, Ore., July 27, 2005 — Pixelworks, Inc. (NASDAQ:PXLW), a leading provider of system-on-chip ICs for the advanced display industry, today announced financial results for the second quarter ended June 30, 2005.  As a result of the acquisition of Equator Technologies, which closed June 14, 2005, second quarter financial results include the results of operations from Equator Technologies from June 15, 2005 through June 30, 2005.

Revenue for the second quarter of 2005 was $41.3 million, a 15 percent decrease from $48.5 million in the second quarter of 2004 and a 3 percent increase from $40.3 million in the first quarter of 2005.  Revenue in the second quarter of 2005 from Equator Technologies was negligible. 

“Overall, revenue in the second quarter came in as expected, although the mix was a little different than we had anticipated.  Projectors were a bright spot, experiencing robust growth, up 18 percent sequentially.  On the other hand, following several strong quarters of growth, our advanced television business came in weaker than we expected, down 3 percent sequentially.  This was largely due to unanticipated softness from TV customers serving the European market,” said Allen Alley, President, CEO and Chairman of Pixelworks.    

Net loss in accordance with generally accepted accounting principles (GAAP) in the second quarter of 2005 was ($2.3) million, or ($0.05) per share, compared with net income of $5.8 million or $0.12 per diluted share, in the second quarter of 2004 and net income of $836,000, or $0.02 per diluted share, in the first quarter of 2005.  GAAP results include non-cash expenses for the amortization of various acquired intangible assets, amortization of adjustments to the value of inventory acquired from Equator Technologies, amortization of stock-based compensation, and the loss on the sale of marketable securities used to fund the acquisition of Equator Technologies.  These non-cash and acquisition-related expenses, which are excluded when reporting pro forma financial results, totaled approximately $1.7 million in the second quarter of 2005 compared to $345,000 in the second quarter of 2004. 

Pro forma net loss in the second quarter of 2005 was ($1.6) million, or ($0.03) per share, which compared to pro forma net income of $6.1 million, or $0.12 per diluted share in the second quarter of 2004 and pro forma net income of $1.1 million, or $0.02 per diluted share, in the first quarter of 2005. 

The purchase price of Equator Technologies of $117.9 million was allocated as follows for accounting purposes (in millions):

Business Outlook for Third Quarter 2005

The following statements are based on current expectations.  These statements are forward-looking, subject to risks and uncertainties, and actual results may differ materially.  These statements do not include the potential impact of any investments outside the ordinary course of business, or mergers or acquisitions that may be completed after June 30, 2005.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The inclusion of any statement in this release does not constitute a suggestion by the Company or any other person that the events or circumstances described in such statements are material.  The Company does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied in this release will not be realized.

The Company estimates the net loss per share in the third quarter of 2005 will be ($0.10) to ($0.13) on a GAAP basis and ($0.01) to ($0.02) on a pro forma basis, based on the following estimates:

• Revenue of $47 to $51 million. Revenue is highly dependent on a number of factors including, but not limited to, general economic conditions, timely new product introductions, the Company’s ability to secure additional design wins with customers, growth rates in the flat panel monitor, multimedia projector, advanced television, set-top box, and videoconferencing markets, levels of inventory at distributors and customers, and increased supply of products from the Company’s third party foundries.  
• GAAP gross profit margin of 29 to 31 percent. Pro forma gross profit margin of 41 to 43 percent, which excludes an estimated $5.5 to $6.0 million in non-cash expenses for the amortization of acquired inventory mark-up and amortization of various intangibles.  Gross profit margin may be higher or lower than expected due to many factors including, but not limited to, competitive pricing actions, changes in estimated product costs, revenue levels, and changes in estimated product mix.    
• R&D and SG&A expenses, combined, of $23.5 to $24.5 million.
• Non-cash operating expenses for stock-based compensation and amortization of purchased intangible assets of approximately $1.1 million (excluded for pro forma reporting purposes).
• Interest income, net of approximately $225,000.
• Effective tax rate of 40 to 50 percent of net loss before income taxes on a GAAP basis and 75 to 85 percent of pro forma net loss before taxes on a pro forma basis.  Both the GAAP and pro forma effective tax rates are subject to significant variation on an ongoing basis due to changes in the level of income before taxes, research and development tax credits, and other factors.

About Pixelworks, Inc.