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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **x**  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                           |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                   |
|   |       | **For the quarterly period ended October 31,  2009**                                                                                                                                                                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                   |
| **OR** |
|   |       |                                                                                                                                                                                                                                                                                                                                   |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                          |
|   |       |                                                                                                                                                                                                                                                                                                                                   |
|   |       | **For the  transition period  from                        to                        ** |

 

**Commissionfile number: 0-29939**

 

**OMNIVISION TECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

** **

| **Delaware**                      | ** ** | **77-0401990**         |
|-----------------------------------|------------|------------------------|
| (State or other jurisdiction      |       | (I.R.S. Employer       |
| of incorporation or organization) |       | Identification Number) |

 

**4275Burton Drive, Santa Clara, California 95054**

(Address ofPrincipal Executive Offices) (Zip Code)

 

Registrant’stelephone number, including area code:**  (408) 567-3000**

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities and Exchange Actof 1934 during the preceding 12 months (or for shorter period that theregistrant was required to file such reports); and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o                                                              | Accelerated filer x         |
|---------------------------------------------------------------------------------------------|----------------------------------|
| Non-accelerated filer   £(Do not check if a smaller  reporting company) | Smaller reporting company o |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x

 

At December 4, 2009, 51,253,446 shares of common stock of theregistrant were outstanding, exclusive of 12,541,000 shares of treasury stock.

 

 

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **                        | ** **                                                                                                                | **Page** |
|-----------------------------------|---------------------------------------------------------------------------------------------------------------------------|----------|
|                              |                                                                                                                      |     |
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                                                |
|                              |                                                                                                                      |     |
| **Item  1.**                      | Financial Statements:                                                                                                     | 3        |
|                              |                                                                                                                      |     |
|                              | Condensed Consolidated Balance Sheets (unaudited) — October  31, 2009 and April 30, 2009                             | 3        |
|                              |                                                                                                                      |     |
|                              | Condensed  Consolidated Statements of Operations (unaudited) — Three and Six Months  Ended October 31, 2009 and 2008 | 4        |
|                              |                                                                                                                      |     |
|                              | Condensed  Consolidated Statements of Cash Flows (unaudited) — Six Months Ended October 31,  2009 and 2008           | 5        |
|                              |                                                                                                                      |     |
|                              | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                         | 6        |
|                              |                                                                                                                      |     |
| **Item  2.**                      | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                               | 28       |
|                              |                                                                                                                      |     |
| **Item 3.**                       | Quantitative  and Qualitative Disclosures About Market Risk                                                               | 44       |
|                              |                                                                                                                      |     |
| **Item 4.**                       | Controls and  Procedures                                                                                                  | 45       |
|                              |                                                                                                                      |     |
| **PART  II. OTHER INFORMATION**   |                                                                                                                      |
|                              |                                                                                                                      |     |
| **Item 1.**                       | Legal Proceedings                                                                                                         | 46       |
|                              |                                                                                                                      |     |
| **Item 1A.**                      | Risk Factors                                                                                                              | 47       |
|                              |                                                                                                                      |     |
| **Item 2.**                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              | 62       |
|                              |                                                                                                                      |     |
| **Item 4.**                       | Submission  of Matters to a Vote of Security Holders                                                                      | 62       |
|                              |                                                                                                                      |     |
| **Item  6.**                      | Exhibits                                                                                                                  | 63       |
|                              |                                                                                                                      |     |
| Signatures                        | 64                                                                                                                        |
|                              |                                                                                                                      |
| Exhibit  Index                    |                                                                                                                      |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.    FINANCIALSTATEMENTS**

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**CONDENSED****CONSOLIDATED****BALANCE SHEETS**

**(inthousands, except per share amounts)**

**(unaudited)**

** **
| ** **                                                                                                                                                                                                    | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2009**        | ** ** | **2009 (1)**  | ** ** |
| **ASSETS**                                                                                                                                                                                                    |       |            |       |          |       |
| Current assets:                                                                                                                                                                                               |       |            |       |          |       |
| Cash and cash  equivalents                                                                                                                                                                                    |       | $               | 315,931    |          | $          | 257,808 |   |
| Short-term investments                                                                                                                                                                                        |       | 38,055          |       | 16,973        |       |
| Accounts receivable,  net of allowances for doubtful accounts and sales returns                                                                                                                               |       | 67,727          |       | 43,978        |       |
| Inventories                                                                                                                                                                                                   |       | 92,242          |       | 105,024       |       |
| Deferred income taxes                                                                                                                                                                                         |       | 1,391           |       | 1,092         |       |
| Prepaid expenses and  other current assets                                                                                                                                                                    |       | 8,467           |       | 7,779         |       |
| Total current assets                                                                                                                                                                                          |       | 523,813         |       | 432,654       |       |
| Property, plant and  equipment, net                                                                                                                                                                           |       | 117,652         |       | 119,071       |       |
| Long-term investments                                                                                                                                                                                         |       | 87,154          |       | 85,469        |       |
| Intangibles, net                                                                                                                                                                                              |       | 4,130           |       | 7,396         |       |
| Other long-term assets                                                                                                                                                                                        |       | 22,737          |       | 22,341        |       |
| Total assets                                                                                                                                                                                                  |       | $               | 755,486    |          | $          | 666,931 |   |
|                                                                                                                                                                                                          |       |            |       |          |       |
| **LIABILITIES  AND EQUITY**                                                                                                                                                                                   |       |            |       |          |       |
| Current liabilities:                                                                                                                                                                                          |       |            |       |          |       |
| Accounts payable                                                                                                                                                                                              |       | $               | 85,085     |          | $          | 28,775 |   |
| Accrued expenses and  other current liabilities                                                                                                                                                               |       | 20,913          |       | 12,153        |       |
| Income taxes payable                                                                                                                                                                                          |       | 3,264           |       | 692           |       |
| Deferred revenues, less  cost of revenues                                                                                                                                                                     |       | 9,415           |       | 7,176         |       |
| Current portion of  long-term debt                                                                                                                                                                            |       | 3,554           |       | 3,555         |       |
| Total current  liabilities                                                                                                                                                                                    |       | 122,231         |       | 52,351        |       |
| Long-term liabilities:                                                                                                                                                                                        |       |            |       |          |       |
| Long-term income taxes  payable                                                                                                                                                                               |       | 82,667          |       | 81,266        |       |
| Non-current portion of  long-term debt                                                                                                                                                                        |       | 37,681          |       | 32,867        |       |
| Other long-term  liabilities                                                                                                                                                                                  |       | 6,502           |       | 8,109         |       |
| Total long-term  liabilities                                                                                                                                                                                  |       | 126,850         |       | 122,242       |       |
| Total liabilities                                                                                                                                                                                             |       | 249,081         |       | 174,593       |       |
|                                                                                                                                                                                                          |       |            |       |          |       |
| Commitments and  contingencies (Note 16)                                                                                                                                                                      |       |            |       |          |       |
|                                                                                                                                                                                                          |       |            |       |          |       |
| Equity:                                                                                                                                                                                                       |       |            |       |          |       |
| OmniVision Technologies,  Inc. stockholders’ equity:                                                                                                                                                     |       |            |       |          |       |
| Common stock, $0.001  par value; 100,000 shares authorized; 63,345 shares issued and 50,804  outstanding at October 31, 2009 and 62,590 shares issued and 50,049  outstanding at April 30, 2009, respectively |       | 63              |       | 63            |       |
| Additional paid-in  capital                                                                                                                                                                                   |       | 418,917         |       | 403,159       |       |
| Accumulated other  comprehensive income                                                                                                                                                                       |       | 846             |       | 773           |       |
| Treasury stock, 12,541  at October 31, 2009 and April 30, 2009, respectively                                                                                                                                  |       | (178,683        | )          | (178,683      | )          |
| Retained earnings                                                                                                                                                                                             |       | 261,757         |       | 263,529       |       |
| Total OmniVision Technologies,  Inc. stockholders’ equity                                                                                                                                                |       | 502,900         |       | 488,841       |       |
| Noncontrolling interest                                                                                                                                                                                       |       | 3,505           |       | 3,497         |       |
| Total equity                                                                                                                                                                                                  |       | 506,405         |       | 492,338       |       |
| Total liabilities and  equity                                                                                                                                                                                 |       | $               | 755,486    |          | $          | 666,931 |   |

 

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(1)    As adjusted due to the adoption ofauthoritative accounting guidance for noncontrolling interests. See Note 1 — *“Basis of Presentation.”*

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements(unaudited).

 

3

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**OMNIVISION TECHNOLOGIES, INC.**

 

**CONDENSED****CONSOLIDATED****STATEMENTS OF OPERATIONS**

**(inthousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **                                                                                                                | ** ** | **2009**               | ** ** | **2008(1)**          | ** ** | **2009** | ** ** | **2008(1)** | ** ** |
| Revenues                                                                                                                  |       | $                      | 183,344    |                 | $          | 163,935 |   | $ | 288,904 |   | $ | 338,214 |   |
| Cost of revenues                                                                                                          |       | 139,382                |       | 123,018              |       | 221,272 |   | 253,404 |   |
| Gross profit                                                                                                              |       | 43,962                 |       | 40,917               |       | 67,632 |   | 84,810 |   |
|                                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Operating expenses:                                                                                                       |       |                   |       |                 |       |   |   |   |   |
| Research, development  and related                                                                                        |       | 18,853                 |       | 23,199               |       | 37,285 |   | 43,499 |   |
| Selling, general and  administrative                                                                                      |       | 16,209                 |       | 16,890               |       | 30,369 |   | 34,272 |   |
| Goodwill impairment                                                                                                       |       | —                 |       | 7,541                |       | — |   | 7,541 |   |
| Total operating  expenses                                                                                                 |       | 35,062                 |       | 47,630               |       | 67,654 |   | 85,312 |   |
|                                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Income (loss) from  operations                                                                                            |       | 8,900                  |       | (6,713               | )          | (22 | ) | (502 | ) |
| Interest income  (expense), net                                                                                           |       | (244                   | )          | 478                  |       | (448 | ) | 1,754 |   |
| Other income (expense),  net                                                                                              |       | 223                    |       | (854                 | )          | 791 |   | (805 | ) |
| Income (loss) before  income taxes                                                                                        |       | 8,879                  |       | (7,089               | )          | 321 |   | 447 |   |
|                                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Provision for (benefit  from) income taxes                                                                                |       | 961                    |       | (1,494               | )          | 2,149 |   | (81 | ) |
| Net income (loss)                                                                                                         |       | 7,918                  |       | (5,595               | )          | (1,828 | ) | 528 |   |
| Net loss attributable  to noncontrolling interest                                                                         |       | (166                   | )          | (287                 | )          | (56 | ) | (392 | ) |
| Net income (loss)  attributable to OmniVision Technologies, Inc.                                                          |       | $                      | 8,084      |                 | $          | (5,308 | ) | $ | (1,772 | ) | $ | 920 |   |
|                                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per  share attributable to OmniVision Technologies, Inc. common stockholders:                           |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                     |       | $                      | 0.16       |                 | $          | (0.10 | ) | $ | (0.03 | ) | $ | 0.02 |   |
| Diluted                                                                                                                   |       | $                      | 0.16       |                 | $          | (0.10 | ) | $ | (0.03 | ) | $ | 0.02 |   |
|                                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Shares used in computing  net income (loss) per share attributable to OmniVision Technologies, Inc.  common stockholders: |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                     |       | 50,763                 |       | 50,754               |       | 50,668 |   | 51,006 |   |
| Diluted                                                                                                                   |       | 51,769                 |       | 50,754               |       | 50,668 |   | 51,591 |   |

 

----

(1)    As adjusted due to the adoption of authoritative accountingguidance for noncontrolling interests. See Note 1*— “Basis ofPresentation.”*

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements(unaudited).

 

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**OMNIVISION TECHNOLOGIES, INC.**

**CONDENSED****CONSOLIDATED****STATEMENTS OF CASH FLOWS**

**(inthousands, unaudited)**

** **
| ** **                                                                                    | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                    | ** ** | **October 31,**      | ** ** |
| ** **                                                                                    | ** ** | **2009**             | ** ** | **2008 (1)** | ** ** |
| Cash flows from operating activities:                                                         |       |                 |       |   |   |
| Net income (loss)                                                                             |       | $                    | (1,828     | ) | $ | 528 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:     |       |                 |       |   |   |
| Depreciation and  amortization                                                                |       | 11,662               |       | 9,245 |   |
| Change in fair value of  interest rate swap                                                   |       | (645                 | )          | 165 |   |
| Stock-based  compensation                                                                     |       | 12,201               |       | 13,851 |   |
| Gain on equity  investments, net                                                              |       | (1,398               | )          | (1,198 | ) |
| Write-down of  inventories                                                                    |       | 10,149               |       | 11,641 |   |
| Loss on disposal of  property, plant and equipment                                            |       | 108                  |       | 505 |   |
| Goodwill impairment                                                                           |       | —               |       | 7,541 |   |
| Changes in assets and  liabilities:                                                           |       |                 |       |   |   |
| Accounts receivable,  net                                                                     |       | (23,735              | )          | 4,872 |   |
| Inventories                                                                                   |       | 7,696                |       | (21,887 | ) |
| Deferred income taxes                                                                         |       | (1,260               | )          | (2,582 | ) |
| Prepaid expenses and  other assets                                                            |       | 235                  |       | (2,288 | ) |
| Accounts payable                                                                              |       | 53,713               |       | 21,253 |   |
| Accrued expenses and other  current liabilities                                               |       | 2,957                |       | (1,768 | ) |
| Income taxes payable                                                                          |       | 3,975                |       | (1,194 | ) |
| Deferred revenues, less  cost of revenues                                                     |       | 2,233                |       | 4,455 |   |
| Deferred tax  liabilities                                                                     |       | (967                 | )          | (994 | ) |
| Net cash provided by  operating activities                                                    |       | 75,096               |       | 42,145 |   |
| Cash flows from investing  activities:                                                        |       |                 |       |   |   |
| Purchases of short-term  investments                                                          |       | (45,140              | )          | (45,393 | ) |
| Proceeds from sales or  maturities of short-term investments                                  |       | 23,916               |       | 53,186 |   |
| Purchases of property,  plant and equipment, net of sales                                     |       | (4,257               | )          | (21,289 | ) |
| Purchases of long-term  investments                                                           |       | —               |       | (1,376 | ) |
| Net cash used in  investing activities                                                        |       | (25,481              | )          | (14,872 | ) |
| Cash flows from  financing activities:                                                        |       |                 |       |   |   |
| Proceeds from long-term  borrowings                                                           |       | 6,590                |       | 6,000 |   |
| Repayment of long-term  borrowings                                                            |       | (1,778               | )          | (1,196 | ) |
| Cash contribution by  noncontrolling interest                                                 |       | 4                    |       | — |   |
| Affiliate cash dividend  paid to noncontrolling interest                                      |       | —               |       | (201 | ) |
| Proceeds from exercise  of stock options and from employee stock purchase plan                |       | 3,610                |       | 2,737 |   |
| Payments for  repurchases of common stock                                                     |       | —               |       | (12,915 | ) |
| Net cash provided by  (used in) financing activities                                          |       | 8,426                |       | (5,575 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                                 |       | 82                   |       | (110 | ) |
| Net increase in cash  and cash equivalents                                                    |       | 58,123               |       | 21,588 |   |
| Cash and cash  equivalents at beginning of period                                             |       | 257,808              |       | 217,340 |   |
| Cash and cash  equivalents at end of period                                                   |       | $                    | 315,931    |   | $ | 238,928 |   |
| Supplemental cash flow  information:                                                          |       |                 |       |   |   |
| Taxes paid                                                                                    |       | $                    | 472        |   | $ | 4,607 |   |
| Interest paid                                                                                 |       | $                    | 1,085      |   | $ | 714 |   |
| Supplemental schedule  of non-cash investing and financing activities:                        |       |                 |       |   |   |
| Additions to property,  plant and equipment included in accounts payable and accrued expenses |       | $                    | 2,592      |   | $ | 5,820 |   |
| Capitalized interest  and other costs                                                         |       | $                    | 46         |   | $ | 183 |   |

 

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(1)    As adjusted due to the adoption ofauthoritative accounting guidance for noncontrolling interests. See Note 1 — *“Basis of Presentation.”*

 

The accompanying notesare an integral part of these Condensed Consolidated Financial Statements(unaudited).

 

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**OMNIVISIONTECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

 

**Note 1 — Basis of Presentation**

 

## ***Overview***

## *** ***

The accompanyinginterim unaudited condensed consolidated financial statements as of October 31,2009 and April 30, 2009 and for the three and six months ended October 31,2009 and 2008 have been prepared by OmniVision Technologies, Inc., and itssubsidiaries (“OmniVision” or the “Company”) in accordance with the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”). Except forthe retrospective adjustments related to the adoption of an authoritativeaccounting guidance for noncontrolling interests as discussed in further detailbelow, the amounts as of April 30, 2009 come from the Company’s auditedannual financial statements. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted in accordancewith such rules and regulations. In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments, consisting only of normal recurring adjustments, necessary tostate fairly the financial position of the Company and its results ofoperations and cash flows as of and for the periods presented. These condensedconsolidated financial statements should be read in conjunction with theaudited annual financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended April 30, 2009(the “Form 10-K”).

 

On May 1,2009, the Company adopted authoritative accounting guidance that requires theownership interests in subsidiaries held by parties other than the parent, andincome attributable to those parties, be clearly identified and distinguishedin the parent’s condensed consolidated financial statements. Consequently, theCompany’s noncontrolling interest is now disclosed as a separate component ofthe Company’s consolidated equity on the balance sheet, rather than a “mezzanine”item between liabilities and equity. Further, earnings and other comprehensiveincome are now separately attributed to both the controlling and noncontrollinginterests. Earnings per share continues to be calculated based on net incomeattributable to the Company’s controlling interest. The impact on the Company’sfinancial position as of April 30, 2009, results of operations for thethree and six months ended October 31, 2008, and cash flows for the sixmonths ended October 31, 2008 from the adoption of this authoritativeaccounting guidance is presented in the tables below (in thousands):

 
| ** **                                                            | ** ** | **April 30, 2009  Condensed Consolidated  Balance Sheet**                                 | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **As Reported**                                                                                | ** ** | **As Adjusted** | ** ** |
| Minority interest                                                     |       | $                                                                                              | 3,497      |   | $ | — |   |
| Noncontrolling interest                                               |       | —                                                                                         |       | 3,497 |   |
| ** **                                                            | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Three months ended  October 31, 2008  Condensed Consolidated  Statement of Operations** | ** ** | **Six months ended  October 31, 2008  Condensed Consolidated  Statement of Operations** | ** ** |
| ** **                                                            | ** ** | **As Reported**                                                                                | ** ** | **As Adjusted** | ** ** | **As Reported** | ** ** | **As Adjusted** | ** ** |
| Minority interest                                                     |       | $                                                                                              | (287       | ) | $ | — |   | $ | (392 | ) | $ | — |   |
| Net income (loss)                                                     |       | (5,308                                                                                         | )          | (5,595 | ) | 920 |   | 528 |   |
| Net loss attributable to noncontrolling interest                      |       | —                                                                                         |       | (287 | ) | — |   | (392 | ) |
| Net income (loss) attributable to OmniVision  Technologies, Inc. |       | —                                                                                         |       | (5,308 | ) | — |   | 920 |   |
| ** **                                                            | ** ** | ** **                                                                                     | ** ** |
| ** **                                                            | ** ** | **Six months ended  October 31, 2008  Condensed Consolidated  Statement of Cash flows**   | ** ** |
| ** **                                                            | ** ** | **As Reported**                                                                                | ** ** | **As Adjusted** | ** ** |
| Net income                                                            |       | $                                                                                              | 920        |   | $ | 528 |   |
| Minority interest in net loss of consolidated  affiliates             |       | (392                                                                                           | )          | — |   |
|                                                                       |            |                                                                                                |            |  |  |  |  |  |  |  |  |  |  |

 

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**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

 

The results ofoperations for the three and six months ended October 31, 2009 are notnecessarily indicative of the results that may be expected for the fiscal yearending April 30, 2010 or any other future period.

 

## ***Use of Estimates***

## *** ***

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States of America (“GAAP”) requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The Company bases its estimates and judgments on itshistorical experience, knowledge of current conditions and beliefs of whatcould occur in the future considering available information. Actual resultscould differ from these estimates.

 

**Note 2 — Summary of SignificantAccounting Policies**

 

## ***Principles of Consolidation***

## *** ***

The condensedconsolidated financial statements include the accounts of the Company, itswholly-owned subsidiaries and its consolidated affiliate. All significantinter-company accounts and transactions have been eliminated.

 

## ***Foreign Currency Translation***

## *** ***

Certain of theCompany’s subsidiaries or consolidated affiliates have functional currenciesother than the U.S. dollar and the assets and liabilities of thesubsidiaries are translated into U.S. dollars at the rates of exchangeprevailing on the balance sheet date. Revenue and expense items are translatedinto U.S. dollars at the average rate of exchange for the period.Unrealized gains and losses from foreign currency translation are included in “Accumulatedother comprehensive income,” a component of stockholders’ equity. Forsubsidiaries with the U.S. dollar as the functional currency, and withassets or liabilities denominated in currencies other than theU.S. dollar, non-monetary assets are remeasured into U.S. dollarsusing historical rates of exchange. Monetary assets are remeasured intoU.S. dollars using exchange rates prevailing on the balance sheet date.The remeasurement gains or losses are included in “Other income (expense), net.”For the three and six months ended October 31, 2009, the Company recordedremeasurement losses of $25,000 and $43,000, respectively. For the three andsix months ended October 31, 2008, the Company recorded remeasurementlosses of $0.7 million and $368,000, respectively.

 

## ***Cash and Cash Equivalents***

## *** ***

The Companyconsiders all highly liquid investments purchased with a maturity at the dateof purchase of three months or less to be cash equivalents. Cash equivalentsconsist principally of government bonds, certificates of deposit and moneymarket funds. (See Note 10.)

 

The Companymaintains the majority of its cash and cash equivalent balances with majorfinancial institutions in the United States. These balances are subject to aconcentration of credit risk and only a small proportion of these balances arecovered by Federal Deposit Insurance Corporation (“FDIC”) insurance. TheCompany places its cash investments in instruments that meet high creditquality standards, as specified in the Company’s investment policy guidelines.

 

## ***Inventories***

## *** ***

Inventoriesare stated at the lower of cost, determined on a first-in, first-out (“FIFO”)basis, or market.

 

The Companyrecords a provision to reduce the carrying value of inventories to their netrealizable value when the Company believes that the net realizable value isless than cost. The Company also records a provision for the cost ofinventories when the number of units on hand exceeds the number of units thatthe Company forecasts will be sold over a certain period of time, generally12 months. Where necessary, these provisions take into account theinventories owned and not yet sold by certain of the Company’s distributors.The recording of these provisions establishes a new and lower cost basis foreach specifically identified inventory item, and the Company does not restorethe cost basis to its original level regardless of any subsequent changes infacts or circumstances. Recoveries are only recognized upon the sale ofpreviously written-down inventories.

 

7

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

 

## ***Goodwill***

## *** ***

The Companyrecords goodwill when the consideration paid for an acquisition exceeds thefair value of net tangible and intangible assets acquired, including relatedtax effects. Goodwill is not amortized; instead goodwill is tested forimpairment on an annual basis, or more frequently if the Company believesindicators of impairment exist. During the second quarter of fiscal 2009, basedon a combination of factors, including the significant decline in the Company’smarket capitalization and the global economic downturn then, the Companyconcluded that there were sufficient factual circumstances for interimimpairment analyses. Based on the analyses, the Company wrote off the carryingvalue of goodwill and recorded an impairment charge of $7.5 million, whichwas included in “Goodwill impairment” for the three and six months ended October 31,2008.

 

## ***Comprehensive Income (Loss)***

## *** ***

Comprehensiveincome (loss) is defined as the change in the equity of a company during aperiod from transactions and other events and circumstances excludingtransactions resulting from investments by owners and distributions to owners.The following table sets forth the calculation of comprehensive income (loss)for all periods presented (in thousands):

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
|                                                                            | ** ** | **2009**               | ** ** | **2008 (1)**         | ** ** | **2009** | ** ** | **2008 (1)** | ** ** |
| Net income (loss)                                                               |       | $                      | 7,918      |                 | $          | (5,595 | ) | $ | (1,828 | ) | $ | 528 |   |
| Translation gains  (losses)                                                     |       | 54                     |       | (615                 | )          | 125 |   | (666 | ) |
| Unrealized gains on  available-for-sale securities, net                         |       | 5                      |       | 133                  |       | 8 |   | 67 |   |
| Comprehensive income  (loss)                                                    |       | 7,977                  |       | (6,077               | )          | (1,695 | ) | (71 | ) |
| Comprehensive income  (loss) attributable to noncontrolling interest            |       | (135                   | )          | (287                 | )          | 4 |   | (392 | ) |
| Comprehensive income  (loss) attributable to OmniVision Technologies, Inc. |       | $                      | 8,112      |                 | $          | (5,790 | ) | $ | (1,699 | ) | $ | 321 |   |

 

----

(1)    As adjusted due to the adoption ofauthoritative accounting guidance for noncontrolling interests. See Note 1 — “*Basis of Presentation.”*

 

The followingtable reconciles equity attributable to noncontrolling interest (in thousands):

 
| ** **                                        | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **October 31,** | ** ** |
|                                              | ** ** | **2009**             | ** ** | **2008 (1)** | ** ** |
| Noncontrolling  interest, May 1              |       | $                    | 3,497      |   | $ | 4,444 |   |
| Cash contribution by  noncontrolling interest     |       | 4                    |       | — |   |
| Dividend distributed to  noncontrolling interest  |       | —               |       | (201 | ) |
| Net loss attributable  to noncontrolling interest |       | (56                  | )          | (392 | ) |
| Translation gain                                  |       | 60                   |       | 1 |   |
| Noncontrolling  interest, October 31         |       | $                    | 3,505      |   | $ | 3,852 |   |

 

----

(1)    As adjusted due to the adoption ofauthoritative accounting guidance for noncontrolling interests. SeeNote 1 — “*Basis of Presentation.”*

 

8

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

 

## ***Revenue Recognition***

## *** ***

For shipments tocustomers without agreements that allow for returns or credits, principallyoriginal equipment manufacturers (“OEMs”) and value added resellers (“VARs”),the Company recognizes revenue using the “sell-in” method. Under this method,the Company recognizes revenue upon the shipment of products to the customerprovided that the Company has received a signed purchase order, the price isfixed or determinable, title and risk of loss has transferred to the customer,collection of resulting receivables is considered reasonably assured, productreturns are reasonably estimable, there are no customer acceptance requirementsand there are no remaining material obligations. At the time revenue isrecognized, the Company provides for future returns of potentially defectiveproduct based on historical experience. For cash consideration given tocustomers for which the Company does not receive a separately identifiablebenefit or cannot reasonably estimate fair value, the Company records theamounts as reductions of revenue.

 

For shipment ofproducts sold to distributors under agreements allowing for returns or credits,title and the risk of ownership to the products transfer to the distributorupon shipment, and the distributor is obligated to pay for the products whetheror not the distributor has sold them at the time payment is due. Under theterms of the Company’s agreements with such distributors and subject to theCompany’s prior approval, distributors are entitled to reclaim from the Companyas price adjustments the difference, if any, between the prices at which theCompany sold the product to the distributors and the prices at which theproduct is subsequently sold by the distributor. In addition, distributors havelimited rights to return inventory that they determine is in excess of their requirements,and accordingly, in determining the appropriate level of provision for excessand obsolete inventory, the Company takes into account the inventories held byits distributors. For these reasons, prices and revenues are not fixed ordeterminable until the distributor resells the products to the Company’send-user customers and the distributor notifies the Company in writing of thedetails of such sales transactions. Accordingly, the Company recognizes revenueusing the “sell-through” method. Under the “sell-through” method, the Companydefers the revenue, adjustments to revenue and the related costs of revenueuntil the final resale of such products to end customers. The amounts billed tothese distributors and adjustments to revenue and the cost of inventory shippedto, but not yet sold by, the distributors are shown net on the ConsolidatedBalance Sheets as “Deferred revenues, less cost of revenues.”

 

In addition, theCompany recognizes revenue from the performance of services to a limited numberof customers, under either the completed-contract or thepercentage-of-completion methods. The percentage-of-completion method ofaccounting is used for cost reimbursement-type contracts, where revenuesrecognized are that portion of the total contract price equal to the ratio ofcosts expended to date to the anticipated final total costs based on currentestimates of the costs to complete the projects. The amount of service-relatedrevenue has not been material in any of the periods presented. At its consolidatedaffiliate, Silicon Optronics, Inc. (“SOI”), the Company recognizes thelimited amount of SOI-related service revenue on a completed-contract basis.

 

## ***Recent Accounting Pronouncements***

## *** ***

In August 2009,the Financial Accounting Standards Board (“FASB”) updated the authoritativeguidance for fair value measurements as it pertains to liabilities. The updateclarifies what valuation technique a company should use when quoted prices inan active market for an identical liability is not available. The Company isrequired to adopt the guidance in its third quarter of fiscal 2010. The Companydoes not expect the adoption of this guidance to have any material impact onits financial position, results of operations or cash flows.

 

In October 2009,the FASB revised the authoritative guidance for revenue recognition forarrangements with multiple deliverables. The new guidance modifies therequirements for determining whether a deliverable can be treated as a separateunit of accounting by removing the criteria that verifiable and objectiveevidence of fair value exists for the undelivered elements. In allocatingtransaction consideration among the deliverables, the guidance also introducedthe concept of using management’s best estimate of a standalone selling price asan alternate basis for allocation. The guidance is effective in fiscal yearsbeginning on or after June 15, 2010, and the Company is required to adoptthis guidance in its first quarter of fiscal 2012. The Company is currentlyevaluating the impact this guidance may have on its financial position, resultsof operations and cash flows.

 

In October 2009,the FASB issued authoritative guidance addressing certain revenue arrangementsthat include software elements. This guidance states that tangible productswith hardware and software components that work together to deliver the productfunctionality are considered non-software products, and the accounting guidanceunder the revenue arrangements with multiple deliverables is to be followed.The guidance is effective in fiscal years beginning on or after June 15,2010, and the Company is required to adopt this guidance in its first quarterof fiscal 2012. The Company is currently evaluating the impact thisguidance may have on its financial position, results of operations and cashflows.

 

9

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

 

**Note 3 — Short-Term Investments**

 

Available-for-salesecurities at October 31, 2009 and April 30, 2009 were as follows (inthousands):

 
| ** **                                                          | ** ** | **As of October 31, 2009** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **Amortized**                   | ** ** | **Gross  Unrealized** | ** ** | **Gross  Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                             |       | $                               | 4,778      |   | $ | — |   | $ | — |   | $ | 4,778 |   |
| U.S. government debt  securities with maturities less than one year |       | 14,992                          |       | 7 |   | — |   | 14,999 |   |
| U.S. government debt  securities with maturities over one year      |       | 13,265                          |       | 24 |   | — |   | 13,289 |   |
| Commercial paper and  bond fund                                     |       | 4,987                           |       | 2 |   | — |   | 4,989 |   |
|                                                                |       | $                               | 38,022     |   | $ | 33 |   | $ | — |   | $ | 38,055 |   |
| Contractual maturity  dates, less than one year                     |       |                            |       |   |   |   |   | $ | 24,766 |   |
| Contractual maturity  dates, one year to two years                  |       |                            |       |   |   |   |   | 13,289 |   |
|                                                                |       |                            |       |   |   |   |   | $ | 38,055 |   |
|                                                                |       |                            |       |   |   |   |   |   |   |
| ** **                                                          | ** ** | **As of April 30, 2009**   | ** ** |
| ** **                                                          | ** ** | **Amortized**                   | ** ** | **Gross  Unrealized** | ** ** | **Gross  Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                                          | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| Certificates of deposit                                             |       | $                               | 3,602      |   | $ | — |   | $ | — |   | $ | 3,602 |   |
| U.S. government debt  securities with maturities less than one year |       | 5,111                           |       | 6 |   | — |   | 5,117 |   |
| U.S. government debt  securities with maturities over one year      |       | 5,000                           |       | 11 |   | — |   | 5,011 |   |
| Commercial paper and  bond funds                                    |       | 3,242                           |       | 1 |   | — |   | 3,243 |   |
|                                                                |       | $                               | 16,955     |   | $ | 18 |   | $ | — |   | $ | 16,973 |   |
| Contractual maturity  dates, less than one year                     |       |                            |       |   |   |   |   | $ | 11,962 |   |
| Contractual maturity  dates, one year to two years                  |       |                            |       |   |   |   |   | 5,011 |   |
|                                                                |       |                            |       |   |   |   |   | $ | 16,973 |   |

 

10

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**Table of Contents**

** **

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

** **

**Note 4 — SupplementalBalance Sheet Account Information (in thousands)**

 
| ** **                                                        | ** **                       | **October 31,** | ** ** | **April 30,** | ** ** |
|-------------------------------------------------------------------|----------------------------------|----------------------|------------|--------------------|------------|
| ** **                                                        | ** **                       | **2009**             | ** ** | **2009**           | ** ** |
| Cash  and cash equivalents:                                       |                             |                 |       |               |       |
| Cash                                                              |                             | $                    | 209,349    |               | $          | 120,754 |   |
| Money  market funds, certificates of deposit and government bonds |                             | 106,582              |       | 137,054            |       |
|                                                              |                             | $                    | 315,931    |               | $          | 257,808 |   |
| Accounts  receivable, net:                                        | ** **                       | ** **           | ** ** | ** **         | ** ** |
| Accounts  receivable                                              |                             | $                    | 70,995     |               | $          | 48,105 |   |
| Less:                                                             | Allowance  for doubtful accounts |                 | (671       | )                  | (691       | ) |
|                                                              | Allowance  for sales returns     |                 | (2,597     | )                  | (3,436     | ) |
|                                                              |                             | $                    | 67,727     |               | $          | 43,978 |   |
| Inventories:                                                      |                             |                 |       |               |       |
| Work  in progress                                                 |                             | $                    | 55,097     |               | $          | 26,860 |   |
| Finished  goods                                                   |                             | 37,145               |       | 78,164             |       |
|                                                              |                             | $                    | 92,242     |               | $          | 105,024 |   |
| Prepaid  expenses and other current assets:                       |                             |                 |       |               |       |
| Prepaid  expenses                                                 |                             | $                    | 5,673      |               | $          | 5,254 |   |
| Deposits  and other                                               |                             | 1,262                |       | 2,439              |       |
| Employee  loan receivable                                         |                             | 1,000                |       | —             |       |
| Interest  receivable                                              |                             | 532                  |       | 86                 |       |
|                                                              |                             | $                    | 8,467      |               | $          | 7,779 |   |
| Property,  plant and equipment, net:                              |                             |                 |       |               |       |
| Land                                                              |                             | $                    | 13,000     |               | $          | 13,000 |   |
| Buildings  and land use right                                     |                             | 39,428               |       | 39,428             |       |
| Buildings/leasehold  improvements                                 |                             | 17,306               |       | 17,110             |       |
| Machinery  and equipment                                          |                             | 63,226               |       | 58,641             |       |
| Furniture  and fixtures                                           |                             | 4,807                |       | 4,825              |       |
| Software                                                          |                             | 5,839                |       | 6,188              |       |
| Construction  in progress                                         |                             | 13,890               |       | 11,878             |       |
|                                                              |                             | 157,496              |       | 151,070            |       |
| Less:  Accumulated depreciation and amortization                  |                             | (39,844              | )          | (31,999            | )          |
|                                                              |                             | $                    | 117,652    |               | $          | 119,071 |   |
| Other  long-term assets:                                          |                             |                 |       |               |       |
| Deferred  income tax assets — non-current          |                             | $                    | 18,519     |               | $          | 17,233 |   |
| Prepaid  wafer credits                                            |                             | 2,990                |       | 2,990              |       |
| Long-term  employee loan receivable                               |                             | —               |       | 1,000              |       |
| Other  long-term assets                                           |                             | 1,228                |       | 1,118              |       |
|                                                              |                             | $                    | 22,737     |               | $          | 22,341 |   |
| Accrued  expenses and other current liabilities:                  |                             |                 |       |               |       |
| Employee  compensation                                            |                             | $                    | 7,211      |               | $          | 4,848 |   |
| Third  party commissions                                          |                             | 1,154                |       | 1,532              |       |
| Professional  services                                            |                             | 1,997                |       | 1,269              |       |
| Noncancelable  purchase commitments                               |                             | 6,096                |       | 411                |       |
| Distributor  pricing adjustments                                  |                             | 2,435                |       | 2,399              |       |
| Deferred  income tax liabilities — current         |                             | 12                   |       | 8                  |       |
| Other                                                             |                             | 2,008                |       | 1,686              |       |
|                                                              |                             | $                    | 20,913     |               | $          | 12,153 |   |
| Other  long-term liabilities:                                     |                             |                 |       |               |       |
| Deferred  income tax liabilities — non-current     |                             | $                    | 2,684      |               | $          | 3,646 |   |
| Interest  rate swaps                                              |                             | 3,818                |       | 4,463              |       |
|                                                              |                             | $                    | 6,502      |               | $          | 8,109 |   |

 

11

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Tableof Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

**For the Three and Six Months Ended October 31,2009 and 2008**

**(unaudited)**

 

 

**Note 5 — Long-term Investments**

 

Long-terminvestments as of October 31, 2009 and April 30, 2009 consisted ofthe following (in thousands):

 
| ** ** | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|
| ** ** | ** ** | **2009**             | ** ** | **2009**           | ** ** |
| VisEra     |       | $                    | 69,220     |               | $          | 67,619 |   |
| WLCSP      |       | 11,693               |       | 10,996             |       |
| XinTec     |       | 4,661                |       | 4,661              |       |
| ImPac      |       | 1,580                |       | 2,193              |       |
| Total      |       | $                    | 87,154     |               | $          | 85,469 |   |

 

## ***VisEra Technologies Company, Ltd.***

## *** ***

On October 29,2003, the Company and Taiwan Semiconductor Manufacturing Company Limited (“TSMC”)entered into an agreement to form VisEra Technologies Company, Ltd. (“VisEra”),a joint venture in Taiwan, for the purposes of providing certain manufacturingand automated final testing services related to complementary metal oxidesemiconductor (“CMOS”) image sensors. In August 2005, under an amendmentto the original 2003 joint-venture agreement, the Company and TSMC formed VisEraHolding Company (“VisEra Cayman”), a company incorporated in the CaymanIslands, and VisEra became a subsidiary of VisEra Cayman. The Company and TSMChave equal interests in VisEra Cayman.

 

Through April 2007,the Company’s contribution to VisEra and VisEra Cayman totaled $51.6 million,effectively meeting its commitment under the terms of a January 2007amendment to the joint-venture agreement, in which the Company and TSMC haveagreed to commit a total of $112.9 million to the joint venture. The Companyhas not made any subsequent contributions into VisEra and VisEra Cayman.

 

The Companyinitially accounted for its investment in VisEra under the equity method.Between August 1, 2005 and December 31, 2006, VisEra was considered avariable interest entity (“VIE”), and the Company was the primary beneficiary,as defined under the accounting guidance for consolidating VIEs. Accordingly,the Company consolidated VisEra’s operating results. On January 1, 2007,VisEra ceased to meet the definition of a VIE. Consequently, the Companydeconsolidated VisEra on January 1, 2007, and has accounted for itsinvestment in VisEra under the equity method. (See Note 17.)

 

## ***China WLCSP Limited***

## *** ***

China WLCSPLimited (“WLCSP”) is in the business of designing, manufacturing, packaging andselling certain wafer level chip scale packaging related services. In May 2007,the Company acquired 4,500,000 units of WLCSP’s equity interests, or 20.0% ofWLCSP’s registered capital on a fully-diluted basis, for an aggregate purchaseamount of $9.0 million. The Company has appointed a member to WLCSP’sboard of directors and a supervisor to monitor the actions of WLCSP’s board ofdirectors and officers.

 

At the date of thetransaction, the Company’s $9.0 million investment in WLCSP exceeded itsshare of the book value of WLCSP’s assets by $5.7 million. Of this$5.7 million difference, $4.1 million represents equity methodgoodwill that is not subject to amortization. This amount is recorded as aportion of the Company’s investment in WLCSP. The Company is amortizing theremaining basis difference of $1.6 million, which is attributable tointangible assets of WLCSP, over various periods up to a maximum of five years.

 

The Company accounts for its investment in WLCSP underthe equity method. For the three and six months ended October 31, 2009,the Company recorded equity income of $245,000 and $0.7 million,respectively, in “Other income (expense), net,” consisting of its portion ofthe net income recorded by WLCSP during those periods, partially offset byequity method investment adjustments. For the three and six months ended October 31,2008, the Company recorded equity income of $405,000 and $412,000,respectively, in “Other income (expense), net,” consisting of its portion ofthe net income recorded by WLCSP during the periods, partially offset by equitymethod investment adjustments. (See Note 17.)

 

12

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Table of Contents

 

**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

## ***XinTec, Inc.***

## *** ***

XinTec, Inc. (“XinTec”)is a Taiwan-based supplier of chip scale packaging services. The Company firstmade investments in XinTec in April 2003, for $2.8 million. As of October 31,2009, the Company’s direct ownership percentage in XinTec was 4.3%. Separately,VisEra owns a 16.2% interest in XinTec. Consequently, the Company’s beneficialownership percentage in XinTec was approximately 12.2%. The Company accountsfor XinTec as a cost method investment.

 

## ***ImPac Technology Co., Ltd.***

## *** ***

In June 2003, inorder to enhance its access to plastic and ceramic packaging services, theCompany invested $2.0 million in ImPac Technology Co., Ltd. (“ImPac”), aprivately-held company based in Taiwan. After additional cash contributions ofapproximately $0.8 million in December 2003 and $1.4 million in July 2008, theCompany owns 25.7% of ImPac. The Company accounts for this investment using theequity method.

 

In August 2009,ImPac’s board of directors accepted a merger proposal from a listed company in Taiwan,Tong Hsing Electronic Industries, Limited (“Tong Hsing”). Tong Hsing is acurrent investor in ImPac, and will become the surviving entity afterconsummation of the transaction. Subsequently, in September 2009, ImPac’sshareholders approved the merger proposal. According to the merger agreementbetween ImPac and Tong Hsing, the parties will complete the transaction on December31, 2009. In return for its ownership in ImPac, the Company will receiveapproximately 996,000 shares of common stock of Tong Hsing, representingapproximately 0.8% of Tong Hsing.

 

The Companyrecorded equity income of $317,000 and an equity loss of $0.6 million,respectively, in “Other income (expense), net,” as its portion of ImPac’s netincome and loss for the three and six months ended October 31, 2009. TheCompany recorded an equity loss of $140,000 and $0.5 million, respectively, in “Otherincome (expense), net,” as its portion of ImPac’s net loss for the three andsix months ended October 31, 2008.

 

The followingtable presents the summary combined financial information of ImPac, VisEra andWLCSP, as derived from their financial statements for the three and six monthsended October 31, 2009 and 2008, and prepared under GAAP (in thousands):

 
| ** **             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***Operating data:***  |       |                   |       |                 |       |   |   |   |   |
| Revenues               |       | $                      | 32,736     |                 | $          | 31,658 |   | $ | 53,063 |   | $ | 57,994 |   |
| Gross profit           |       | 8,350                  |       | 6,986                |       | 9,380 |   | 13,086 |   |
| Income from operations |       | 4,770                  |       | 3,590                |       | 2,875 |   | 6,374 |   |
| Net income             |       | $                      | 4,828      |                 | $          | 1,349 |   | $ | 3,470 |   | $ | 2,579 |   |

 

The Company’sshare of undistributed earnings of the investees accounted for by the equitymethod totaled $15.4 million and $14.1 million at October 31, 2009 and April 30,2009, respectively.

 

**Note 6 — Consolidated Affiliate — SiliconOptronics, Inc.**

 

In May 2004, theCompany entered into an agreement with Powerchip Semiconductor Corporation (“PSC”),a Taiwan based company that produces memory chips and provides semiconductorfoundry services, to establish SOI, a joint venture in Taiwan. The purpose ofSOI is to conduct manufacturing, marketing and selling of certain of theCompany’s legacy products. Toward the end of fiscal 2009, SOI began toinvestigate the market potential of touch panels that track touches withoptical sensors. These devices compete with the current resistive andcapacitive touch panels. The Company contributed approximately $2.1 million toSOI in exchange for an ownership percentage of 49.0%. In March 2005, theCompany assumed control of the board of directors of SOI and the Company hasconsolidated SOI since April 30, 2005. As of October 31, 2009, the Companyowned 43.9% of SOI. (See Note 17.)

 

13

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

**Note 7 — Intangible Assets**

 

Intangible assetsas of October 31, 2009 consist of the following (in thousands):

 
| ** **                 | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 16,020              |       | $ | 1,780 |   |
| Patents and licenses       |       | 13,487   |       | 11,277                        |       | 2,210               |       |
| Trademarks and  tradenames |       | 1,400    |       | 1,260                         |       | 140                 |       |
| Customer relationships     |       | 100      |       | 100                           |       | —              |       |
| Intangible assets, net     |       | $        | 32,787     |                          | $          | 28,657              |       | $ | 4,130 |   |

 

Intangible assetsas of April 30, 2009 consist of the following (in thousands):

 
| ** **                 | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|----------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
| Core technology            |       | $        | 17,800     |                          | $          | 14,240              |       | $ | 3,560 |   |
| Patents and licenses       |       | 13,487   |       | 9,931                         |       | 3,556               |       |
| Trademarks and  tradenames |       | 1,400    |       | 1,120                         |       | 280                 |       |
| Customer relationships     |       | 100      |       | 100                           |       | —              |       |
| Intangible assets, net     |       | $        | 32,787     |                          | $          | 25,391              |       | $ | 7,396 |   |

 

For each of thethree and six months ended October 31, 2009 and 2008, the Company amortized$1.6 million and $3.3 million, respectively, of its intangible assets. Thetotal expected future annual amortization of these intangible assets is asfollows (in thousands):

 
| **Years Ending April 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------|------------|
| 2010                       |       | $          | 3,120      |   |
| 2011                       |       | 973        |       |
| 2012                       |       | 37         |       |
| Total                      |       | $          | 4,130      |   |

 

**Note 8 — Borrowing Arrangements**

 

Thefollowing table shows the Company’s debt and capital lease obligations (inthousands):

 
| ** **                             | ** ** | **October 31,  2009** | ** ** | **April 30,  2009** | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                             | ** ** | ** **            | ** ** | ** **          | ** ** |
| Mortgage loan                          |       | $                     | 26,145     |                | $          | 26,421 |   |
| Term loan                              |       | 8,500                 |       | 10,000              |       |
| Construction loan                      |       | 6,590                 |       | —              |       |
| Capital lease  obligations             |       | —                |       | 1                   |       |
|                                   |       | 41,235                |       | 36,422              |       |
| Less: amount due within  one year      |       | (3,554                | )          | (3,555              | )          |
| Non-current portion of  long-term debt |       | $                     | 37,681     |                | $          | 32,867 |   |

 

14

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

At October31, 2009, aggregate debt maturities were as follows (in thousands):

 
| **Years  Ending April 30,** | ** ** | **Mortgage  and Term  Loan** | ** ** | **Construction  Loan** | ** ** | **Total** | ** ** |
|-----------------------------|------------|------------------------------|------------|------------------------|------------|-----------|------------|
| 2010                        |       | $                            | 1,777      |                   | $          | —    |       | $ | 1,777 |   |
| 2011                        |       | 3,554                        |       | 732                    |       | 4,286     |       |
| 2012                        |       | 3,554                        |       | 732                    |       | 4,286     |       |
| 2013                        |       | 1,554                        |       | 1,465                  |       | 3,019     |       |
| 2014                        |       | 554                          |       | 2,929                  |       | 3,483     |       |
| Thereafter                  |       | 23,652                       |       | 732                    |       | 24,384    |       |
| Total                       |       | $                            | 34,645     |                   | $          | 6,590     |       | $ | 41,235 |   |

 

## ***Mortgage Loan and Term Loan***

## *** ***

On March 16, 2007,the Company entered into a Loan and Security Agreement with a domestic bank forthe purchase of a complex of four buildings located in Santa Clara, California(the “Santa Clara Property”). The Loan and Security Agreement provides for amortgage loan in the principal amount of $27.9 million (the “Mortgage Loan”)and a secured line of credit with an aggregate maximum principal amount of upto $12.0 million (the “Term Loan”). In March 2008, the Company borrowed $6.0 millionunder the Term Loan to finance improvements to the Santa Clara Property. TheCompany drew down the remaining $6.0 million under the Term Loan in July 2008.

 

Borrowings underthe Mortgage Loan accrue interest at the London Interbank Borrowing Rate (“LIBOR”)plus 90 basis points. Borrowings under the Term Loan accrue interest at theLIBOR rate plus 125 basis points. The Mortgage and Term Loans mature on March 31,2017 and July 31, 2012, respectively.

 

Interest ratesunder the Mortgage Loan were 1.1% and 1.4% at October 31, 2009 and April 30,2009, respectively. Interest rates under the Term Loan were 1.5% and 1.8% at October31, 2009 and April 30, 2009, respectively. The Company was in compliance withthe financial covenants of the Loan and Security Agreement as of October 31,2009.

 

In conjunctionwith the Mortgage Loan, the Company entered into an interest rate swap with thesame bank to effectively convert the variable interest rate described above toa fixed rate. The swap is for a period of ten years, and the notional amount ofthe swap approximates the principal outstanding under the Mortgage Loan. TheCompany is the fixed rate payer under the swap and the rate is fixed at 5.3%per annum and the effective rate on the Mortgage Loan is fixed at approximately6.2%. In July 2008, in connection with the Term Loan, the Company entered intoa second interest rate swap with the bank to effectively convert the variableinterest rate described above to a fixed rate. This second swap is for a periodof four years. The Company is the fixed rate payer and the rate is fixed at4.3% per annum and the effective rate on the Term Loan is fixed atapproximately 5.5%.

 

## ***Construction Loan***

## *** ***

On August 3, 2009,OmniVision Technologies (Shanghai) Co., Ltd., a wholly-owned subsidiary of theCompany, entered into a Fixed Assets Loan Agreement with a bank in China. TheFixed Assets Loan Agreement provides for a fixed asset loan in the principalamount of Chinese Yuan 159.0 million, which is equal to approximately $23.3 million(the “Construction Loan”). The purpose of the Construction Loan is to constructa research center for the Company in Pudong Development Zone, the Zhang JiangScience Park in Shanghai, China. Subsequently, on August 27, 2009, theConstruction Loan was approved by the Chinese government and the final loanamount was modified to Chinese Yuan 140.0 million or approximately $20.5 million.As of October 31, 2009, the Company borrowed Chinese Yuan 45.0 million, orapproximately $6.6 million, under the Construction Loan. The Company isscheduled to draw down the remaining $13.9 million by December 2011. TheConstruction Loan matures on June 30, 2016.

 

Interest rateunder the Construction Loan is based on an indicative rate as published by theChinese government, and will be adjusted every September to the then currentpublished rate. Interest rate under the Construction Loan was 5.3% at October 31,2009. The Company was in compliance with the financial covenants of the FixedAssets Loan Agreement as of October 31, 2009.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

## ***Lines of Credit at SOI***

## *** ***

SOI maintains fourunsecured lines of credit with three commercial banks, which provide a total ofapproximately $3.5 million in available credit. All borrowings under theselines of credit bear interest at the market interest rate prevailing at thetime of borrowing. There are no financial covenant requirements for thesefacilities. At October 31, 2009 and April 30, 2009, there were no borrowingsoutstanding under these facilities.

 

## ***Derivative Instruments and Hedging Activities***

## *** ***

As indicatedabove, the Company holds two separate interest rate swaps in connection withthe Mortgage Loan and the Term Loan. The Company utilizes the swaps to reducethe effect of interest rate variability on the two loans’ interest payments.The Company has not designated the two interest rate swaps as hedging instruments.Consequently, the Company remeasures the two interest rate swaps at fair valueat each balance sheet date, and immediately recognizes any changes to the fairvalues in earnings. On the balance sheet, the Company records the swaps aseither assets or liabilities, depending on whether the fair value representsnet gains or net losses.

 

Thetable below presents the location of the swaps on the Condensed ConsolidatedStatements of Operations and Condensed Consolidated Balance Sheets, and therelated effects on the Company’s results of operations and financial positions(in thousands):

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **                                                                                                              | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***Location of  amounts recognized in Condensed Consolidated Statements of Operations and  amount of gains (losses):*** |       |                   |       |                 |       |   |   |   |   |
| Other income (expense), net                                                                                             |       | $                      | (236       | )                    | $          | (598 | ) | $ | 645 |   | $ | (165 | ) |
|                                                                                                                         |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **2009**        | ** ** | **2009**      | ** ** |
| ***Location of  amounts on Condensed Consolidated Balance Sheets and fair values:*** |       |       |       |       |       |            |       |          |       |
| Other long-term liabilities                                                          |       |       |       |       |       | $               | 3,818      |          | $          | 4,463 |   |
|                                                                                      |            |            |            |            |            |                 |            |               |            |  |  |

 

**Note 9 — Net Income (Loss) Per Share Attributableto OmniVision Technologies, Inc. Common Stockholders**

 

Basic net income(loss) per share attributable to OmniVision common stockholders is computed bydividing net income (loss) attributable to OmniVision by the weighted averagenumber of common shares outstanding during the period.

 

Diluted net incomeper share attributable to OmniVision common stockholders is computed accordingto the treasury stock method using the weighted average number of common andpotentially dilutive common shares outstanding during the period. Potentiallydilutive common shares represent the effect of stock options. For the threemonths ended October 31, 2009, 11,012,000 shares of common stock subject tooutstanding options were not included in the calculation of diluted net incomeper share because they were antidilutive. For the six months ended October 31,2009, the Company excluded all options and restricted stock units outstandingas the Company recorded a net loss of $1.8 million. For the three months ended October31, 2008, the Company excluded all options and restricted stock unitsoutstanding as the Company recorded a net loss of $5.3 million. For the sixmonths ended October 31, 2008, 12,261,000 shares of common stock subject tooutstanding options were not included in the calculation of diluted net incomeper share because they were antidilutive.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

The Company takesinto account the effect on consolidated earnings per share of options, warrantsand convertible securities issued by its subsidiaries. The effect onconsolidated earnings per share depends on whether the securities issued by thesubsidiary enable their holders to obtain common stock of the subsidiarycompany or common stock of the parent company. Securities issued by asubsidiary that enable their holders to obtain the subsidiary’s common stockare included in computing the subsidiary’s earnings per share data. The dilutedper-share earnings of the subsidiary are included in the Company’s consolidatedearnings per share computations based on the consolidated group’s holding ofthe subsidiary’s securities. Through October 31, 2009, SOI issued options tovarious of its employees exercisable for 3,300,000 shares of its common stock.In the calculation of its earnings per share for the three and six months endedOctober 31, 2009 and 2008, the Company included the effect of SOI’s options inits consolidated earnings per share, if dilutive.

 

The followingtable sets forth the computation of basic and diluted earnings (loss) per sharefor the periods indicated (in thousands, except per share data):

 
| ** **                                                                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                         | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **                                                                                                                         | ** ** | **2009**               | ** ** | **2008 (1)**         | ** ** | **2009** | ** ** | **2008 (1)** | ** ** |
| ***Basic:***                                                                                                                       |       |                   |       |                 |       |   |   |   |   |
| Numerator:                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Net income (loss)  attributable to OmniVision Technologies, Inc.                                                                   |       | $                      | 8,084      |                 | $          | (5,308 | ) | $ | (1,772 | ) | $ | 920 |   |
|                                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Denominator:                                                                                                                       |       |                   |       |                 |       |   |   |   |   |
| Weighted average common  shares for net income (loss) per share attributable to OmniVision  Technologies, Inc. common stockholders |       | 50,763                 |       | 50,754               |       | 50,668 |   | 51,006 |   |
|                                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Basic net income (loss)  per share attributable to OmniVision Technologies, Inc. common stockholders                               |       | $                      | 0.16       |                 | $          | (0.10 | ) | $ | (0.03 | ) | $ | 0.02 |   |
|                                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| ***Diluted:***                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| Numerator:                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Net income (loss)  attributable to OmniVision Technologies. Inc.                                                                   |       | $                      | 8,084      |                 | $          | (5,308 | ) | $ | (1,772 | ) | $ | 920 |   |
|                                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Denominator:                                                                                                                       |       |                   |       |                 |       |   |   |   |   |
| Denominator for basic  net income (loss) per share attributable to OmniVision Technologies, Inc.  common stockholders              |       | 50,763                 |       | 50,754               |       | 50,668 |   | 51,006 |   |
| Weighted average effect  of dilutive securities:                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Stock options,  restricted stock units and employee stock purchase plan shares                                                     |       | 1,006                  |       | —               |       | — |   | 585 |   |
| Weighted average common  shares for diluted net income (loss) per share                                                            |       | 51,769                 |       | 50,754               |       | 50,668 |   | 51,591 |   |
|                                                                                                                               |       |                   |       |                 |       |   |   |   |   |
| Diluted net income  (loss) per share attributable to OmniVision Technologies, Inc. common  stockholders                            |       | $                      | 0.16       |                 | $          | (0.10 | ) | $ | (0.03 | ) | $ | 0.02 |   |

 

----

(1)   As adjusted due to the adoption ofauthoritative accounting guidance for noncontrolling interests. See Note 1 — *“Basis of Presentation.”*

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

**Note 10 —****Fair Value Measurements**

 

Theauthoritative guidance for fair value measurements specifies a hierarchy ofvaluation techniques based upon whether the inputs to those valuationtechniques reflect assumptions other market participants would use based uponmarket data obtained from independent sources (observable inputs) or reflectthe Company’s own assumption of market participant valuation (unobservableinputs). The fair value hierarchy consists of the following three levels:

 

·                  *Level 1 —*Inputs are quoted prices in activemarkets for identical assets or liabilities.

 

·                  *Level 2* — Inputs are quoted prices for similarassets or liabilities in an active market, quoted prices for identical orsimilar assets or liabilities in markets that are not active, inputs other thanquoted prices that are observable and market-corroborated inputs which arederived principally from or corroborated by observable market data.

 

·                  *Level 3* — Inputs are derived from valuationtechniques in which one or more significant inputs or value drivers areunobservable.

 

Thefollowing table presents the Company’s financial assets and liabilities thatare measured at fair value on a recurring basis which were comprised of thefollowing types of instruments as of October 31, 2009 (in thousands):

 
| ** **                                                              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Money market funds                                                      |       | $         | 89,244     |        | $          | 89,244      |       | $           | —     |   | $ | — |   |
| Certificates of deposit                                                 |       | 6,795     |       | —      |       | 6,795       |       | —      |       |
| Debt securities issued  by U.S. government and U.S. government agencies |       | 43,307    |       | —      |       | 43,307      |       | —      |       |
| Corporate debt  securities/commercial paper                             |       | 5,291     |       | —      |       | 5,291       |       | —      |       |
| Total assets                                                            |       | $         | 144,637    |        | $          | 89,244      |       | $           | 55,393     |   | $ | — |   |
| Interest rate swaps                                                     |       | $         | (3,818     | )           | $          | —      |       | $           | (3,818     | ) | $ | — |   |
| Total liabilities                                                       |       | $         | (3,818     | )           | $          | —      |       | $           | (3,818     | ) | $ | — |   |

 

Thefollowing table presents the Company’s financial assets and liabilities thatare measured at fair value on a recurring basis which were presented on theCompany’s Condensed Consolidated Balance Sheets as of October 31, 2009 (inthousands):

 
| ** **             | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Cash equivalents       |       | $         | 106,582    |        | $          | 89,244      |       | $           | 17,338     |   | $ | — |   |
| Short-term investments |       | 38,055    |       | —      |       | 38,055      |       | —      |       |
| Total assets           |       | $         | 144,637    |        | $          | 89,244      |       | $           | 55,393     |   | $ | — |   |
| Interest rate swaps    |       | $         | (3,818     | )           | $          | —      |       | $           | (3,818     | ) | $ | — |   |
| Total liabilities      |       | $         | (3,818     | )           | $          | —      |       | $           | (3,818     | ) | $ | — |   |

 

Due to their shortmaturities, the reported amounts of the Company’s financial instruments,including cash and cash equivalents, short-term investments, accountsreceivable, accounts payable and other current liabilities approximate fairvalue. The fair values of the Company’s mortgage loan and term loan approximatebook values as the underlying interest rates are based on risk-adjusted marketrates.

 

**Note 11 — Segment and Geographic Information**

 

The Companyidentifies its business segments based on business activities, managementresponsibility and geographic location. For all periods presented, the Companyoperated in a single reportable business segment.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

The Company sellsits image-sensor products either directly to OEMs and VARs or indirectlythrough distributors. The following table illustrates the percentage ofrevenues from sales to OEMs and VARs and to distributors for the three and sixmonths ended October 31, 2009 and 2008, respectively:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|------------------------|------------|----------------------|------------|
| ** **    | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 53.4                   | %          | 60.0                 | %          | 52.1 | % | 59.1 | % |
| Distributors  |       | 46.6                   |       | 40.0                 |       | 47.9 |   | 40.9 |   |
| Total         |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |

 

Since the Company’send-user customers market and sell their products worldwide, its revenues bygeographic location are not necessarily indicative of the geographicdistribution of end-user sales, but rather indicate where their components aresourced. The revenues by geography in the following table are based on thecountry or region in which the Company’s customers issue their purchase orders(in thousands):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|------------------------|------------|----------------------|------------|
| ** **    | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| China         |       | $                      | 154,027    |                 | $          | 129,074 |   | $ | 242,443 |   | $ | 257,100 |   |
| Malaysia      |       | 6,784                  |       | 12,123               |       | 11,136 |   | 30,657 |   |
| United States |       | 883                    |       | 7,027                |       | 1,552 |   | 17,271 |   |
| Taiwan        |       | 16,095                 |       | 11,177               |       | 25,817 |   | 25,515 |   |
| All other     |       | 5,555                  |       | 4,534                |       | 7,956 |   | 7,671 |   |
| Total         |       | $                      | 183,344    |                 | $          | 163,935 |   | $ | 288,904 |   | $ | 338,214 |   |

 

The Company’slong-lived assets, including its equity method investments, are located in thefollowing countries (in thousands):

 
| ** **    | ** ** | **October 31,** | ** ** | **April 30,** | ** ** |
|---------------|------------|-----------------|------------|---------------|------------|
| ** **    | ** ** | **2009**        | ** ** | **2009**      | ** ** |
| Taiwan        |       | $               | 88,436     |          | $          | 88,814 |   |
| United States |       | 61,987          |       | 65,276        |       |
| China         |       | 57,637          |       | 54,166        |       |
| All other     |       | 964             |       | 392           |       |
| Total         |       | $               | 209,024    |          | $          | 208,648 |   |

 

**Note 12 —Employee Stock Purchase, Equity Incentive and Stock Option Plans**

 

## ***2007 Equity Incentive Plan***

## *** ***

In September 2007,on the recommendation of the Company’s board of directors, the stockholders ofthe Company approved the 2007 Equity Incentive Plan (the “2007 Plan”). The 2007Plan replaced the Company’s 2000 Stock Plan. The Company has reserved 6,000,000shares of common stock for issuance under the 2007 Plan. The 2007 Plan providesfor the grant of the following types of incentive awards: (i) stock options; (ii)stock appreciation rights; (iii) restricted stock; (iv) restricted stock units;(v) performance shares and performance units; and (vi) other stock or cashawards. In general, stock option and stock appreciation right awards under the2007 Plan will be granted at a price not less than 100% of the fair marketvalue of the Company’s common stock on the date of grant. With the approval ofthe Company’s stockholders in September 2009, the Company modified certainterms of the 2007 Plan. Under the modified 2007 Plan, the Company’s stockoption awards generally have a maximum contractual term of seven years and vestover four years. Restricted stock units granted under the 2007 Plan generallyvest over three years. The 2007 Plan also covers grants of equity-basedcompensation to the Company’s directors.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

The Company’sequity incentive and stock-based compensation plans as of October 31, 2009 aresummarized as follows (in thousands):

 
| ** **                 | ** ** | ** **     | ** ** | **Shares**    | ** ** | ** **      | ** ** | **Restricted**  | ** ** | **Performance** | ** ** |
|----------------------------|------------|----------------|------------|---------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                 | ** ** | **Shares**     | ** ** | **Available** | ** ** | **Options**     | ** ** | **Stock Units** | ** ** | **Shares**      | ** ** |
| **Name  of Plan**          | ** ** | **Authorized** | ** ** | **for Grant** | ** ** | **Outstanding** | ** ** | **Outstanding** | ** ** | **Outstanding** | ** ** |
| 1995 Stock Plan            |       | —         |       | —        |       | —          |       | —          |       | —          |       |
| 2000 Stock Plan            |       | —         |       | —        |       | 11,721          |       | —          |       | —          |       |
| 2000 Director Option  Plan |       | —         |       | —        |       | 287             |       | —          |       | —          |       |
| 2007 Plan                  |       | 6,000          |       | 2,622         |       | 973             |       | 1,046           |       | —          |       |
| Total                      |       | 6,000          |       | 2,622         |       | 12,981          |       | 1,046           |       | —          |       |

 

## ***2009 Employee Stock Purchase Plan***

## *** ***

The 2009 EmployeeStock Purchase Plan (the “2009 Purchase Plan”) was adopted by the board ofdirectors in July 2009 and was approved by the stockholders of the Company in September2009. The 2009 Purchase Plan will replace the Company’s 2000 Employee StockPurchase Plan (the “2000 Purchase Plan”) in December 2009. The board ofdirectors has reserved a total of 2,500,000 shares of common stock for issuanceunder the 2009 Purchase Plan. Each offering period under the 2009 Purchase Planwill have a duration of approximately 24 months, commencing on the firsttrading day on or after June 1 and December 1 of each year and terminating onthe last trading day in the period ending 24 months later. Each offering periodwill generally consist of four six-months purchase periods in which shares maybe purchased on a participant’s behalf. The purchase price will be 85% of thelesser of the fair market value of the common stock on the first trading day ofthe offering period or on the last day of the purchase period. If the fairmarket value of the common stock on the last day of the purchase period islower than the fair market value of the common stock on the enrollment date ofthe associated offering period, all participants in such offering period willautomatically be rolled over to the immediately following offering period. Employeesmay end their participation in an offering period at any time, and theirparticipation ends automatically on termination of employment with the Company.The first offering period under the 2009 Purchase Plan will begin on December 1,2009.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

## ***Stock-Based Compensation Award Activity***

 

The followingtable summarizes the equity award activities under the 2000 Stock Plan,the 2000 Director Option Plan and the 2007 Plan, for the six monthsended October 31, 2009:

 
| ** **                                                                          | ** ** | ** **                        | ** ** | **Options Outstanding** | ** ** | **Restricted  Stock Units  Outstanding**          | ** ** | **Performance  Shares  Outstanding** | ** ** | **Restricted Stock  Units and  Performance  Shares** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **Shares  Available  For  Grant** | ** ** | **Number  of Shares**   | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Number of  Shares**                | ** ** | **Number of  Shares**                                | ** ** | **Weighted  Average  Grant Date  Fair Market  Value Per  Share** | ** ** |
| ** **                                                                          | ** ** | **(in  thousands)**               | ** ** | **(in  thousands)**     | ** ** | ** **                                        | ** ** | **(in  thousands)**                  | ** ** | **(in  thousands)**                                  | ** ** | ** ** | ** ** |
| Balance at April 30, 2009                                                      |       | 4,376                             |       | 13,501                  |       | $                                                 | 17.98      |                                 | 520        |                                                 | —     |   | $ | 11.37 |   |
| Stock options granted                                                               |       | (413                              | )          | 413                     |       | 10.41                                             |       | —                               |       | —                                               |       | — |   |
| Stock options exercised                                                             |       | —                            |       | (148                    | )          | 8.76                                              |       | —                               |       | —                                               |       | — |   |
| Stock options expired or forfeited                                                  |       | 21                                |       | (785                    | )          | 16.41                                             |       | —                               |       | —                                               |       | — |   |
| Restricted stock units granted (1)                                                  |       | (1,460                            | )          | —                  |       | —                                            |       | 732                                  |       | —                                               |       | 10.47 |   |
| Restricted stock units exercised (1)                                                |       | —                            |       | —                  |       | —                                            |       | (157                                 | )          | —                                               |       | 11.92 |   |
| Restricted stock units expired or forfeited (1)                                     |       | 98                                |       | —                  |       | —                                            |       | (49                                  | )          | —                                               |       | 10.55 |   |
| Performance shares granted (1) (2)                                             |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Performance shares expired or forfeited (1) (2)                                |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Balance at October 31, 2009 — shares available  for grant                 |       | 2,622                             |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Balance at October 31, 2009 — options                                     |       |                              |       | 12,981                  |       | 17.94                                             |       | —                               |       | —                                               |       | — |   |
| Balance at October 31, 2009 — restricted stock  units                     |       | —                            |       | —                  |       | —                                            |       | 1,046                                |       | —                                               |       | 10.70 |   |
| Balance at October 31, 2009 — performance  shares                         |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | — |   |
| Exercisable at October 31, 2009                                                |       | —                            |       | 10,640                  |       | 18.38                                             |       | —                               |       | —                                               |       | — |   |
| Vested and expected to vest at October 31, 2009  — options                |       | —                            |       | 12,817                  |       | $                                                 | 18.00      |                                 | —     |                                                 | —     |   | — |   |
| Vested and expected to vest at October 31, 2009  — restricted stock units |       | —                            |       | —                  |       | —                                            |       | 850                                  |       | —                                               |       | $ | 10.70 |   |
| Vested and expected to vest at October 31, 2009  — performance shares     |       | —                            |       | —                  |       | —                                            |       | —                               |       | —                                               |       | $ | — |   |

 

----

(1)   Shares subject to awardsgranted for less than fair market value on the date of grant count against theshare reserve as two shares for every one share subject to such an award. Whena share is returned to the plan, two shares will be credited back to thereserve. With the approval of the Company’s stockholders in September 2009,the Company modified certain terms of the 2007 Plan. Specifically, forrestricted stock units granted after September 2009, the grant will countagainst the share reserve as 1.6 shares for every one share granted. When ashare is returned to the plan which was granted after September 2009, 1.6shares will be credited back to the reserve.

(2)   Represents targeted issuance. The actualnumber of shares of common stock that will be issued in connection with the performanceshares will be determined at the end of a one-year performance period.

 

The totalintrinsic value of options exercised during the three and six months ended October 31,2009 was $0.6 million and $0.9 million, respectively. The totalintrinsic value of restricted stock units vested during the three and sixmonths ended October 31, 2009 was $116,000 and $1.7 million,respectively. The total intrinsic value of options exercised during the threeand six months ended October 31, 2008 was $78,000 and $486,000,respectively. Total cash received from employees as a result of employee stockoption exercises during the three and six months ended October 31, 2009was approximately $1.2 million and $1.3 million, respectively.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

As of October 31,2009, net of forfeitures, there was $15.6 million of unrecognizedcompensation expense related to unvested stock options, which the Companyexpects to recognize over a weighted average period of 1.8 years. As of October 31,2009, net of forfeitures, there was $9.0 million of unrecognizedcompensation expense related to unvested restricted stock units, which theCompany expects to recognize over a weighted average period of 2.4 years.For the Company’s 2000 Purchase Plan, as of October 31, 2009, therewas $90,000 of unrecognized compensation expense which the Company expects torecognize over a weighted average period of 0.1 years. As of April 30,2009, net of forfeitures, there was $23.5 million of unrecognizedcompensation cost related to unvested stock options, which the Company expectsto recognize over a weighted average period of 1.8 years. As of April 30,2009, net of forfeitures, there was $4.0 million of unrecognizedcompensation expense related to unvested restricted stock units, which theCompany expects to recognize over a weighted average period of 2.4 years.For the 2000 Purchase Plan, as of April 30, 2009, there was$1.8 million of unrecognized compensation cost which the Company expectedto be recognized over a weighted average period of 0.8 years. The Company’scurrent policy is to issue new shares to settle the exercise of stock optionsand prospectively, the vesting of restricted stock units.

 

## ***Valuation Assumptions***

## *** ***

The authoritativeguidance for stock-based compensation requires companies to estimate the fairvalue of stock-based compensation awards on the grant date. The value of theportion of the award that is ultimately expected to vest is recognized asexpense over the requisite service period in the Company’s CondensedConsolidated Statements of Operations.

 

For restrictedstock unit awards, the per-share fair value is the closing market price of theCompany’s common stock as reported on the NASDAQ Global Market on the grantdate. For performance share awards, the per share fair value is also theclosing market price of the Company’s common stock as reported on NASDAQ.However, the related stock-based compensation is adjusted by the estimatedprobable outcome of the predetermined performance conditions. The compensationwill be adjusted for subsequent changes in the estimated and actual outcome.For stock option awards and rights issued under the 2000 Purchase Plan, theCompany measures the fair value using the Black-Scholes option pricing model.Black-Scholes was developed to estimate the fair value of freely tradable,fully transferable options without vesting restrictions. These assumptionsdiffer significantly from the characteristics of the Company’s stock-basedcompensation awards. Black-Scholes also requires the use of highly subjective,complex assumptions, including expected term and the price volatility of theCompany’s stock.

 

The fair value forthese options was estimated using the Black-Scholes option pricing model. TheCompany did not grant any employee options in the three months ended October 31,2009. The per share weighted average estimated grant date fair value foremployee options granted was $4.49 in the six months ended October 31,2009. The Company did not grant any employee options in the three months ended October 31,2008. The per share weighted average estimated grant date fair value foremployee options granted was $5.27 in the six months ended October 31,2008. The following weighted average assumptions are included in the estimatedfair value calculations for stock options granted in the three six months endedOctober 31, 2009 and 2008:

 
| ** **                           | ** ** | **Employee Stock Option Plans** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**          | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **October 31,**            | ** ** | **October 31,** | ** ** |
| ** **                           | ** ** | **2009**                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate              |       | —                          | %          | — | % | 2.00 | % | 3.11 | % |
| Expected term of  options (in years) |       | —                          |       | — |   | 4.2 |   | 4.0 |   |
| Expected volatility                  |       | —                          | %          | — | % | 56.0 | % | 48.2 | % |
| Expected dividend yield              |       | —                          | %          | — | % | 0 | % | 0 | % |

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

UsingBlack-Scholes, the per share weighted average estimated fair value of rightsissued pursuant to the Company’s 2000 Purchase Plan during the three andsix months ended October 31, 2009 was $2.28 and $2.14, respectively. UsingBlack-Scholes, the per share weighted average estimated fair value of rightsissued pursuant to the Company’s 2000 Purchase Plan during the three andsix months ended October 31, 2008 was $5.97 and $5.77, respectively.

 

The followingweighted average assumptions are included in the estimated grant date fairvalue calculations for rights to purchase stock under the 2000 Purchase Plan:

 
| ** **                           | ** ** | **Employee Stock Purchase Plan** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**           | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **October 31,**             | ** ** | **October 31,** | ** ** |
| ** **                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate              |       | 1.90                             | %          | 2.21 | % | 1.90 | % | 3.90 | % |
| Expected term of  options (in years) |       | 0.5                              |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility                  |       | 56.0                             | %          | 49.2 | % | 56.0 | % | 42.8 | % |
| Expected dividend yield              |       | 0                                | %          | 0 | % | 0 | % | 0 | % |

 

The definitions ofthe terms used to determine the above values are as follows:

 

·                  *Expected term:* The expected term represents the period that the Company’s stock-basedawards are expected to be outstanding and is estimated based on historicalexperience.

·                  *Risk-free interest rate:* The risk-free interest rate assumption is based uponobserved interest rates appropriate for the expected term of the Company’sstock-based awards.

·                  *Expected volatility:* The Company determined expected volatility based onan average between the historical volatility of the Company’s common stock andthe implied volatility based on the Company’s traded options with lives of sixmonths or more. Averaging two data sources may provide a better proxy to whatmarket place participants would use to value the Company’s options. Previously,the Company determined expected volatility based on the historical volatilityof the Company’s common stock.

·                  *Dividend yield:* The dividend yield assumption reflects the Company’s intention not topay a cash dividend under its dividend policy.

·                  *Estimated pre-vesting forfeitures:* When estimating pre-vesting forfeitures, the Companyconsiders forfeiture behavior based on actual historical information.

 

**Note 13 — Additional Paid-inCapital**

 

The followingtable shows the amounts recorded to “Additional paid-in capital” for the sixmonths ended October 31, 2009 (in thousands):

 
| ** **                                          | ** ** | **Additional** | ** ** |
|-----------------------------------------------------|------------|----------------|------------|
| ** **                                          | ** ** | **Paid-in**    | ** ** |
| ** **                                          | ** ** | **Capital**    | ** ** |
| Balance at May 1, 2009                         |       | $              | 403,159    |   |
| Employee stock-based compensation                   |       | 12,201         |       |
| Employee stock purchase plan                        |       | 2,321          |       |
| Exercise of common stock options                    |       | 1,289          |       |
| Withholding tax deduction on restricted stock units |       | (53            | )          |
| Balance at October 31, 2009                    |       | $              | 418,917    |   |

 

**Note 14 — Treasury Stock**

 

In June 2005,the Company’s board of directors authorized the repurchase in an open-marketprogram of up to an aggregate of $100 million of the Company’s commonstock. At the time that the program expired in June 2006, the Company hadcumulatively repurchased 5,870,000 shares of its common stock for anaggregate cost of approximately $79.6 million.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

In February 2007,the Company’s board of directors approved an additional stock repurchaseprogram that provides for the repurchase of up to $100 million of itsoutstanding common stock in an open-market program. As of October 31,2009, the Company had cumulatively repurchased 6,671,000 shares of itscommon stock under this open-market program for an aggregate cost ofapproximately $99.1 million. The Company did not repurchase any additionalshares after October 31, 2009, and the Company’s board of directors endedthe program in November 2009.

 

**Note 15 — IncomeTaxes**

 

TheCompany recorded a provision for income taxes of approximately$1.0 million and a benefit from income taxes of $1.5 million for thethree months ended October 31, 2009 and 2008, respectively, resulting ineffective tax rates of 10.8% and 21.1% for the respective periods. The Companyexcluded from the current fiscal year’s overall estimation of the annualeffective tax rate one jurisdiction with losses for which no benefit can berealized. During the three months ended October 31, 2009, the Companyaccrued an additional $0.4 million of interest related to the Company’sunrecognized tax benefits.

 

OnSeptember 3, 2009, one of the foreign jurisdictions in which the Companyoperates published new legislation that changed the computation of incomeattributable to that jurisdiction. This new legislation does not affect theCompany’s computation of unrecognized tax benefits and has no impact on theCompany’s financial position, results of operations and cash flows.

 

**Note 16 — Commitments andContingencies**

 

## ***Commitments***

## *** ***

The Companymaintains a wholly-owned subsidiary in Shanghai, China, OmniVision Technologies(Shanghai) Co. Ltd. (“OTC”) which provides assistance to the Company in variousproduct design projects and in marketing and sales support. On January 10,2007, OTC entered into a Land-Use-Right Purchase Agreement (the “PurchaseAgreement”) with the Construction and Transportation Commission of the PudongNew District, Shanghai. The Purchase Agreement has an effective date of December 31,2006. Under the terms of the Purchase Agreement, the Company agreed to pay anaggregate amount of approximately $0.6 million (the “Purchase Price”) inexchange for the right to use approximately 323,000 square feet of landlocated in Shanghai for a period of 50 years. Construction of thefacilities on the land has commenced and according to the Purchase Agreement,construction must be completed by June 30, 2010. The Company may use theland solely for the purposes of industrial use and/or scientific research. Asof October 31, 2009, the Company has already contributed $15.6 million of an estimated$33.7 million total investment. The remaining investment amount will befinanced via the Construction Loan. (See Note 8.)

 

During the threemonths ended October 31, 2008, the Company formed Shanghai OmniVisionSemiconductor Technology, Co. Ltd, a new wholly-owned subsidiary in Shanghai,China, for the purpose of expanding its testing capabilities. As of October 31,2009, the Company had contributed $1.5 million, as required under theterms of its capital commitment. The Company is required to contribute theremaining $8.5 million of a $10.0 million commitment by October 2010.

 

## ***Litigation***

## *** ***

From time to time,the Company has been subject to legal proceedings and claims with respect tosuch matters as patents, product liabilities and other actions arising out ofthe normal course of business.

 

On November 29,2001, a complaint captioned *McKee v. OmniVisionTechnologies, Inc., et. al., Civil Action No. 01 CV 10775*,was filed in the United States District Court for the Southern District of NewYork against OmniVision, some of the Company’s directors and officers, andvarious underwriters for the Company’s initial public offering. Plaintiffsgenerally allege that the named defendants violated federal securities lawsbecause the prospectus related to the Company’s offering failed to disclose,and contained false and misleading statements regarding, certain commissionspurported to have been received by the underwriters, and other purportedunderwriter practices in connection with their allocation of shares in theCompany’s offering. The complaint seeks unspecified damages on behalf of apurported class of purchasers of the Company’s common stock between July 14,2000 and December 6, 2000. Substantially similar actions have been filedconcerning the initial public offerings for more than 300 differentissuers, and the cases have been coordinated as *In reInitial Public Offering Securities Litigation, 21 MC 92*. Claimsagainst the Company’s directors and officers have been dismissed withoutprejudice pursuant to a stipulation. On February 19, 2003, the Courtissued an order dismissing all claims against the Company except for a claimbrought under Section 11 of the Securities Act of 1933.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six Months EndedOctober 31, 2009 and 2008**

**(unaudited)**

 

In 2007, asettlement that had been pending with the Court since 2004, was terminated bystipulation of the parties to the settlement, after a ruling by the SecondCircuit Court of Appeals in six “focus” cases in the coordinated proceeding(the action involving the Company is not one of the six focus cases) made itunlikely that the settlement would receive final court approval. Plaintiffsfiled amended master allegations and amended complaints in the six focus cases.In 2008, the Court largely denied the focus case defendants’ motion to dismissthe amended complaints.

 

The parties havereached a global settlement of the coordinated litigation.  Under thesettlement, the insurers will pay the full amount of settlement shareallocated to the Company, and the Company will bear no financialliability. The Company, as well as the officer and director defendants whowere previously dismissed from the action pursuant to tolling agreements,will receive complete dismissals from the case. On October 5,2009, the Court entered an order granting final approval of the settlement.Certain objectors are seeking to appeal.  If for any reason thesettlement does not become effective, and litigation against the Companyproceeds, the Company believes that it has meritorious defenses to plaintiffs’claims and intends to defend the action vigorously.

 

On October 12,2007, a purported OmniVision stockholder filed a complaint against certain ofthe Company’s underwriters for its initial public offering. The complaint, *Vanessa Simmonds v. Bank of America Corporation, et al.*,Case No. C07-1668, filed in District Court for the Western District ofWashington, makes similar allegations to those made in *In reInitial Public Offering Securities Litigation* and seeks the recoveryof short-swing trading profits under Section 16(b) of the SecuritiesExchange Act of 1934. The Company is named as a nominal defendant, and norecovery was sought from it. The plaintiff filed an amended complaint in February 2008.On March 12, 2009, the Court granted the motion to dismiss withoutprejudice, filed by 30 of the issuer defendants, including the Company, and themotion to dismiss with prejudice, filed by all of the underwriter defendants.The plaintiff timely appealed the Court’s Order to the United States Court ofAppeals for the Ninth Circuit, which remains pending. In accordance with thebriefing schedule set by the Ninth Circuit on August 18, 2009, plaintifffiled her opening brief on August 26, 2009. On October 2, 2009, theunderwriter defendants/appellees/cross-appellants filed their answering brief,and the moving issuers/appellees filed their principal brief as well.  Plaintiff/appellant/cross-appellee filed herresponse and reply briefs on November 2, 2009.  The Ninth Circuit Court of Appeals has notset a hearing date. No discovery has taken place.

 

At the end of May 2009,plaintiff sent a Demand for Inspection of Books and Records to certain of thenominal defendants named in the Section 16(b) litigation seeking thecompanies to produce any tolling agreements entered into with the companies’respective underwriters. Plaintiff’s counsel has agreed to an open-endedextension for certain nominal defendants who received such a demand. As of thedate of this filing, the Company has not received a demand for inspection ofbooks and records from the plaintiff.

 

On March 6,2009, Panavision Imaging, LLC (“Panavision”) filed a complaint against theCompany alleging patent infringement in the District Court for the CentralDistrict of California. The case is entitled Panavision Imaging, LLC v.OmniVision Technologies, Inc., Canon U.S.A., Inc., Micron Technology, Inc.and Aptina Imaging Corporation, Case No. CV09-1577. In its complaint,Panavision asserts that the Company makes, has made, uses, sells and/or importsproducts that infringe U.S. Patent Nos. 6,818,877 (“Pre-charging a WideAnalog Bus for CMOS Image Sensors”), 6,663,029 (“Video Bus for High SpeedMulti-resolution Imagers and Method Thereof”) and 7,057,150 (“Solid StateImager with Reduced Number of Transistors per Pixel”). The complaint seeksunspecified monetary damages, fees and expenses and injunctive relief againstthe Company. The Company expects to vigorously defend itself against Panavision’sallegations. At this time, the Company cannot estimate any possible loss orpredict whether this matter will result in any material expense to the Company.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

**Note 17 — Related PartyTransactions**

 

In May 2006,the Company consummated a loan agreement with one of its employees. Under theterms of the agreement, which the board of directors approved infiscal 2004, the Company extended to the employee a three-year$1.0 million loan with an imputed interest rate of approximately fivepercent per annum which carried an original maturity date of May 12, 2009.The loan is secured by a deed of trust and may be extended, subject to mutualconsent of the parties. In April 2009, the Company extended the terms ofthe loan for one additional year. The loan has a nominal imputed interest rateand will mature on May 12, 2010.

 

The Company paidImPac approximately $4.1 million and $5.5 million formanufacturing services for the three and six months ended October 31,2009, respectively. For the three and six months ended October 31, 2008,the Company paid ImPac approximately $3.2 million and$5.9 million, respectively, for manufacturing services. Duringfiscal 2008, the Company loaned $1.3 million to ImPac for the purposeof expanding its manufacturing capacities for a term of one year, which hasbeen extended upon mutual consent of the parties for one year. The loan isfully collateralized by assets held by ImPac. During the three months ended October 31,2009, ImPac repaid the loan amount in full. In August 2008, the Companyentered into an additional agreement with ImPac under which the Company agreedto place certain manufacturing equipment with ImPac on a consignment basis fora period of up to five years.

 

For the three andsix months ended October 31, 2009, the Company paid $19.5 million and$30.5 million, respectively, to VisEra for color filter and othermanufacturing services. For the three and six months ended October 31,2008, the Company paid $19.3 million and $36.4 million, respectively,to VisEra for color filter and other manufacturing services.

 

For the three andsix months ended October 31, 2009, the Company did not make any paymentsto WLCSP for chip scale packaging services. For the three and six months ended October 31,2008, the Company paid zero and $433,000, respectively, to WLCSP for suchservices.

 

The followingtable summarizes the transactions that the Company’s consolidated affiliate,SOI, and its affiliate, VisEra, engaged with related parties in the three andsix months ended October 31, 2009 and 2008 (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **October 31,**   | ** ** | **October 31,** | ** ** |
| ** **                             | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***SOI  transactions with:***          | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ImPac:                                 |       |                   |       |                 |       |   |   |   |   |
| Purchases of manufacturing services    |       | $                      | 120        |                 | $          | 204 |   | $ | 240 |   | $ | 501 |   |
| Balance payable at  period end, net    |       | 35                     |       | 123                  |       | 35 |   | 123 |   |
| PSC:                                   |       |                   |       |                 |       |   |   |   |   |
| Purchases of wafers                    |       | 181                    |       | 833                  |       | 272 |   | 1,869 |   |
| Rent and other services                |       | 7                      |       | 19                   |       | 26 |   | 35 |   |
| Balance payable at  period end, net    |       | 8                      |       | 152                  |       | 8 |   | 152 |   |
| VisEra:                                |       |                   |       |                 |       |   |   |   |   |
| Purchases of manufacturing services    |       | 38                     |       | —               |       | 102 |   | — |   |
| Balance payable at  period end         |       | —                 |       | —               |       | — |   | — |   |
|                                   |       |                   |       |                 |       |   |   |   |   |
| ***VisEra  transactions with:***       |       |                   |       |                 |       |   |   |   |   |
| TSMC:                                  |       |                   |       |                 |       |   |   |   |   |
| Sales to TSMC                          |       | 303                    |       | 444                  |       | 572 |   | 1,102 |   |
| Balance receivable at  period end, net |       | 169                    |       | 245                  |       | 169 |   | 245 |   |
| SOI:                                   |       |                   |       |                 |       |   |   |   |   |
| Sales to SOI                           |       | 38                     |       | —               |       | 102 |   | — |   |
| Balance receivable at  period end      |       | $                      | —     |                 | $          | — |   | $ | — |   | $ | — |   |

 

The Companypurchases a substantial portion of its wafers from TSMC. The Company alsopurchases a portion of its wafers from PSC.

 

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**OMNIVISION TECHNOLOGIES, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

**For the Three and Six MonthsEnded October 31, 2009 and 2008**

**(unaudited)**

 

**Note 18 — Subsequent Events**

 

The Companyevaluated events that occurred subsequent to October 31, 2009, forrecognition or disclosure in the Company’s financial statements. The Companyperformed its subsequent event review through December 10, 2009, the datethese financials were issued.

 

At the Company’sannual meeting of stockholders held on September 24, 2009, thestockholders of the Company approved a one-time stock option exchange programfor employees to exchange eligible stock options for restricted stock units.Under the option exchange program, eligible employees may exchange theiroutstanding options granted before November 1, 2008 under the Company’s2000 Stock Plan or the 2007 Plan with an exercise price greater thanor equal to $23.01 per share, for new restricted stock units. The Company willissue one restricted stock unit for every 3.4 stock options tendered forexchange. The vesting schedule for these restricted stock units will bedetermined by the remaining vesting period of the exchanged options. The optionexchange program commenced on November 18, 2009, and will expire on December 16,2009, unless extended by the Company.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing information should be read in conjunction with our unauditedcondensed interim financial statements and the notes thereto included in Item 1of this Quarterly Report on Form 10-Q. The following discussion**containsforward-looking statements, within the meaning of**Section27A of the Securities Act of 1933 and Section 21E of the Securities**Exchange Act of 1934, which involve risks anduncertainties.**Forward-looking statementsgenerally include words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “outlook,”“plans,” “seeks,” “will” and words of similar import as well as the negative ofthose terms. In addition, any statements that refer to expectations,projections or other characterizations of future events or circumstances,including any underlying assumptions, are forward-looking statements. All forward-looking statements included inthis Quarterly Report on Form 10-Q, including, but not limited to, statementsregarding our projected results ofoperations for future reporting periods, the extent of future salesthrough original equipment manufacturers,or OEMs, and distributors, future growth trends and opportunities incertain markets, the capabilities of new products, the increasing competitionin our industry, the continued importance of the mobile phone market to ourbusiness, continued price competition and the consequent reduction in theaverage selling prices of our products, anticipated benefits of our jointventures and alliances, the development of our business and manufacturingcapacity, future expenses we expect to incur, our future investments, ourfuture working capital requirements, the effect of a change in market interest rates,the geographic distribution of our sales and end users of our products and thesufficiency of our available cash, cash equivalents and short-term investmentsare based on current expectations and are subject to important factors thatcould cause actual results to differ materially from those projected in theforward-looking statements. Suchimportant factors include, but are not limited to, those set forth under thecaption “Item 1A. Risk Factors,” beginning on page 47 of this QuarterlyReport and elsewhere in this Quarterly Report and in other documents we filewith the U.S. Securities and Exchange Commission, or SEC. All subsequentwritten and oral forward-looking statements by or attributable to us or personsacting on our behalf are expressly qualified in their entirety by such factors.*

 

*OmniVision, OmniPixel and TrueFocus are registeredtrademarks of OmniVision Technologies, Inc. the OmniVision logo, CameraChip,CameraCube, OmniBSI, OmniPixel2, OmniPixel3, OmniPixel3-HS, OmniQSP and SquareGAare trademarks of OmniVision Technologies, Inc. Wavefront Coded is a registeredtrademark of OmniVision CDM Optics, Inc., a wholly-owned subsidiary ofOmniVision Technologies, Inc. Wavefront Coding is a trademark of OmniVision CDMOptics, Inc.*

 

**Overview**

 

We design, developand market high performance, highly integrated and cost efficient semiconductorimage-sensor devices. Our main products, image-sensing devices which we referto as CameraChipTM image sensors, capture an image electronically and are usedin a number of consumer and commercial mass-market applications. Our CameraChipimage sensors are manufactured using the complementary metal oxidesemiconductor, or CMOS, fabrication process and are predominantly single-chipsolutions that integrate several distinct functions including image capture,image processing, color processing, signal conversion and output of a fullyprocessed image or video stream. Recently, we have also integrated ourCameraChip image sensors with wafer-level optics, which we refer to asCameraCubeTM imaging devices. Our CameraCube imaging device is a smallfootprint, total camera solution that we believe will enable the furtherminiaturization of camera products. We believe that our highly integrated imagesensors and imaging devices enable camera device manufacturers to build highquality camera products that are smaller, less complex, more reliable, morecost effective and more power efficient than cameras using traditionalcharge-coupled devices, or CCDs.

 

## ***Technology***

## *** ***

In May 2007, we announcedthe introduction of our OmniPixel3TM architecture. The OmniPixel3 architecturerepresents a further refinement and pixel size reduction of our OmniPixel2TM andOmniPixel® architectures, which we introduced in September 2005 and August 2004,respectively.

 

In February 2008,we announced our new OmniPixel3-HSTM architecture, which incorporates a newpixel design that doubles the sensitivity of our 1.75 μm OmniPixel3architecture. The performance of the new OmniPixel3-HS architecturesignificantly enhances image capture under very low lighting conditions, andthereby, we believe, allows for a new generation of compact camera solutionsfor mobile phones, notebook computers and other applications that requireexceptional low-light performance.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

In May 2008, we announced a new approach to CMOS image sensor design wecall OmniBSITM technology. OmniBSI technologyis based on an idea called back side illumination, orBSI. Our first OmniBSI product, an 8-megapixel image sensor, is built using anadvanced 1.4 μm pixel. We believe we are the first image sensor company toannounce a viable process for the mass production of BSI sensors.

 

All traditionally designed CMOS image sensors capture light on thefront side of the chip, so the photo-sensitive portion has to share the surfaceof the image sensor with the metal wiring of the transistors in the pixel andthe metal wiring acts to limit the amount of image light that reaches thephoto-sensitive portion of the image sensor. With our OmniBSI architecture, theimage sensor receives light through the back side of the chip. As a result,there is no metal wiring to block the image light, and the entire backside ofthe image sensor can be photo-sensitive. Not only does this enable us toproduce a superior image, it also permits the front of the chip surface area tobe devoted entirely to processing, and permits an increase in the number ofmetal layers, both of which result in greater functionality. Capturing light onthe back side of the image sensor also allows us to reduce the distance thelight has to travel to the pixels, and thus provide a wider angle of lightacceptance. Widening the angle of acceptance in turn makes it possible toreduce the height of the camera module, and thus the height of the device whichincorporates the camera.

 

In February 2009,we announced the introduction of our CameraCube technology. This is athree-dimensional, reflowable, total camera solution that combines the fullfunctionality of our CameraChip image sensors and wafer-level optics in onecompact, small-footprint package. Our CameraCube devices can be soldereddirectly to printed circuit boards, with no socket or insertion requirements.We believe our CameraCube solution can streamline the mobile phonemanufacturing process, thus resulting in lower cost and faster time-to-marketfor our customers.

 

Given the rapidlychanging nature of our technology, there can be no assurance that we will notencounter delays or other unexpected production or performance issues withfuture products. During the early stages of production, production yields andgross margins for products based on new technology are typically lower thanthose of established products.

 

## ***New Products***

## *** ***

In November 2008, we introduced two new devices based on ourOmniPixel3-HS architecture. The first device is the OV6930, a SquareGA (400 x400 pixels) CameraChip image sensor with a 1/10-inch form factor. It uses 3 μmOmniPixel3-HS pixels, which enables it to achieve low-light performance of3,300 mV/(Lux-sec). OV6930 is positioned for the medical device market. The seconddevice is the OV9710 in quad flat package, or QFP. It is a 1-megapixel imagesensor designed specifically for advanced automotive vision and sensingsystems.

 

In January 2009, we introduced the OV7740, a 1/5-inch VGA CameraChipimage sensor with 4.2 μm pixels based on the OmniPixel3-HS architecture. It iscapable of operating at 60 FPS in VGA resolution, and 120 FPS in QVGAresolution. OV7740 is appropriate for leading-edge notebook computer and webcamdesigns. OV7740 is also an ideal solution for security, surveillance,automotive and games and toy applications.

 

In February 2009, as part of our CameraCube technology announcement, weintroduced two new CameraCube imaging devices. The first product is theOVM6680. It has a SquareGA resolution. The second product is the OVM7680, andit has a VGA resolution.

 

In February 2009, we also introduced the OV3650, a 1⁄4-inch 3-megapixelimage sensor with 1.75 μm OmniPixel3-HS pixels. This image sensor is designedfor mobile phones, notebook, webcam and other applications that requireexceptional low-light performance without the need for flash.

 

In March 2009, weintroduced the OV9810, a new 1/2.3-inch 9-megapixel image sensor with 1.75 μmOmniPixel3-HS pixels. This sensor is designed for the digital still camera, orDSC, and HD camcorder markets. It combines 9-megapixel photography with 1080pHD video on a single chip, eliminating the trade-offs between high qualitystill photography and high performance HD video. The OV9810 is capable ofoperating at 8.9 FPS in full 9-megapixel resolution, and offers true HDquality, or 1080p, video at 30 FPS.

 

In April 2009, weintroduced the OV7960, a 1/4-inch VGA image sensor with 6 μm OmniPixel3-HSpixels. It has a low-light sensitivity of 12V/(Lux-sec) and is optimized for interlacedNTSC/PAL formats to directly interface with TVs and LCD screens. With theability to capture images in the most challenging lighting conditions, OV7960can be used in both professional closed-circuit TV applications and automobiledriver assistance applications.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

In June 2009, weintroduced three new devices based on the OmniBSI architecture. The firstdevice is the OV5650, a 1/4-inch 5-megapixel image sensor with 1.75 μm OmniBSIpixels. The OV5650 is designed specifically to address consumer demand for DSCquality imaging in a mobile phone. It’s low-light sensitivity exceeds 1,400 mV/(Lux-sec)and its signal-to-noise ratio is less than 70 lux. The second device is theOV2665, a 2-megapixel image sensor with the same 1.75 μm OmniBSI architecture.It has an integrated ISP with features such as lens correction, auto exposure,auto white balance, and auto flicker. The last device is the OV5653. It is alsobased on our latest 1.75 μm OmniBSI architecture, but designed specifically forthe DSC and digital video market. In video mode, OV5653 can deliver 720p at 60FPS and full HD 1080p at 30 FPS.

 

In July 2009, weintroduced the OV9715, a 1/4-inch 1-megapixel image sensor with OmniPixel3-HSpixels. The OV9715 is specifically designed for advanced automotive imagingapplications, such as advanced forward-looking, 360 degree bird’s eye view, andparking assistance systems. It is also optimized for use in automotive visionand sensing system combinations, such as rear view and trajectory based lanedeparture warning systems.

 

In July 2009, wealso introduced the OV7739, a 1/7.5-inch VGA image sensor with OmniPixel3-HSpixels. The OV7739 is designed to address the low-light sensitivity demands ofthe notebook PC market. It supports high quality video conferencing andrecording at 30 FPS in VGA resolution and 60 FPS in QVGA resolution.

 

In August 2009, weintroduced the OV2710, a 1/3-inch 2-megapixel image sensor with 3 μmOmniPixel3-HS pixels. The OV2710 is a native 1080p HD image sensor with alow-light performance of 3,300 mV/(Lux-sec), dark current of 20 mV/sec and adynamic range of 72dB. This allows the OV2710 to operate in low-lightsituations down to 15 lux and below, enabling it to deliver high-end videoconferencing and recording capabilities in a wide variety of applicationsincluding notebooks, netbooks, PC cameras, digital video camcorders, DSCs,mobile phones and other ultra portable devices.

 

In September 2009,we introduced the OV2715, a 1/3-inch 1080p HD image sensor with OmniPixel3-HSpixels. The OV2715 is designed for the mainstream IP camera and HD closedcaption television markets. It offers the HD video format with a displayresolution of 1920 x 1080 pixels, and operates at 30 FPS.

 

In October 2009,we introduced the OV7675, a 1/9-inch VGA image sensor with 2.5 μm OmniPixel3-HSpixels. This image sensor is designed for the entry-level and mainstream mobilephone markets. The OV7676’s small form factor also enables ultra-thin cameramodules that notebook, netbook and webcam manufacturers require. This devicehas a low-light sensitivity of 1,800 mV/(Lux-sec) and is capable of operatingat 30 FPS in full resolution.

 

## ***Joint Venture with Taiwan Semiconductor ManufacturingCompany Limited***

## *** ***

On October 29,2003, we entered into an agreement with Taiwan Semiconductor ManufacturingCompany Limited , or TSMC, to form VisEra Technologies Company, Ltd., orVisEra, a joint venture in Taiwan, for the purposes of providing certainmanufacturing and automated final testing services related to CMOS imagesensors. In August 2005, under an amendment to the original 2003 joint-ventureagreement, we and TSMC formed VisEra Holding Company, or VisEra Cayman, acompany incorporated in the Cayman Islands, and VisEra became a subsidiary ofVisEra Cayman. We and TSMC have equal interests in VisEra Cayman.

 

Through April 2007,our contribution to VisEra and VisEra Cayman totaled approximately $51.6million, effectively meeting our commitment under the terms of a January 2007amendment to the joint-venture agreement, in which we and TSMC have agreed tocommit a total of $112.9 million to the joint venture. We have not made anysubsequent contributions into VisEra and VisEra Cayman.

 

Weinitially accounted for our investment in VisEra under the equity method.Between August 1, 2005 and December 31, 2006, VisEra was considered a variableinterest entity, or VIE, and we were the primary beneficiary, as defined underthe accounting guidance for consolidating VIEs. Accordingly, we consolidatedVisEra’s operating results. On January 1, 2007, VisEra ceased to meet thedefinition of a VIE. Consequently, we deconsolidated VisEra on January 1, 2007,and has accounted for our investment in VisEra under the equity method. SeeNote 5 — “*Long-Term Investments”* and Note 17 — “*Related Party Transactions”* to our condensed consolidatedfinancial statements.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

## ***Joint Venture with Powerchip Semiconductor Corporation***

## *** ***

In May 2004, weentered into an agreement with Powerchip Semiconductor Corporation, or PSC, aTaiwan based company that produces memory chips and provides semiconductorfoundry services, to establish Silicon Optronics, Inc., or SOI, a joint venturein Taiwan. The purpose of SOI is to conduct manufacturing, marketing andselling of certain of our legacy products. Toward the end of fiscal 2009, SOIbegan to investigate the market potential of touch panels that track toucheswith optical sensors. These devices compete with the current resistive andcapacitive touch panels. We contributed approximately $2.1 million to SOI inexchange for an ownership percentage of 49.0%. In March 2005, we assumedcontrol of the board of directors of SOI and we have consolidated SOI since April30, 2005. As of October 31, 2009, we owned 43.9% of SOI. See Note 6 — “*Consolidated Affiliate — Silicon Optronics, Inc.”*and Note 17— “*Related Party Transactions”* to ourcondensed consolidated financial statements.

 

## ***Capital Resources***

## *** ***

As of October 31,2009, we held approximately $315.9 million in cash and cash equivalents andapproximately $38.1 million in short-term investments. To mitigate market riskrelated to short-term investments, we have an investment policy designed topreserve the value of capital and to generate interest income from theseinvestments without material exposure to market fluctuations. Market risk is thepotential loss due to the change in value of a financial instrument as a resultof changes in interest rates or bond prices, and changes in market liquidityand in the pricing of risk. Our policy is to invest in financial instrumentswith short maturities, limiting interest rate exposure, and to measureperformance against comparable benchmarks. We maintain our portfolio of cashequivalents and short-term investments in a variety of securities, includingboth government and corporate obligations with ratings of “A” or better andmoney market funds. We do not believe that the value of our cash and short-terminvestments will be significantly affected by recent instability in the globalfinancial markets.

 

In June 2005, ourboard of directors authorized us to use up to $100.0 million of our availablecash under an open-market program to repurchase our common stock. At theexpiration of the program in June 2006, we had cumulatively repurchased5,870,000 shares of our common stock for an aggregate cost of approximately$79.6 million.

 

In February 2007,our board of directors approved an additional stock repurchase program thatprovides for the repurchase of up to $100.0 million of our outstanding commonstock. As of October 31, 2009, we had cumulatively repurchased 6,671,000 sharesof our common stock under this open-market program for an aggregate cost ofapproximately $99.1 million. Our board of directors ended this program in November2009. See Note 14  *— “Treasury Stock”*to our condensedconsolidated financial statements.

 

## ***Current Economic Environment***

## *** ***

We operate in a challenging economic environment that has undergonesignificant changes in technology and in patterns of global trade. We remain aleader in the development and marketing of image-sensing devices based on theCMOS fabrication process and have benefited from the growing market demand forand acceptance of this technology.

 

Within the past twelve months, general domestic and global economicconditions have been negatively impacted by several factors, including, amongothers, the subprime-mortgage crisis in the housing market, going concernthreats to investment and commercial banks, other financial institutions andmajor automobile companies, reduced corporate and consumer spending, anddecreased consumer confidence. These economic conditions have resulted in ourfacing one of the most challenging periods in our history. In particular, webelieve consumers and businesses in markets into which we sell our productshave reduced spending in response to the tightening of lending standards byfinancial institutions, negative financial news and the continued uncertaintyin the global economy. This has negatively affected demand for all consumerelectronic products, security products and products for the automotiveindustry. Consequently, the overall demand for image sensors also decreasedrelative to the prior year levels. This decrease in demand has had asignificant impact on our revenues, results of operations and cash flows andoverall business.

 

These conditionscould also have a number of additional effects on our business, includinginsolvency of key suppliers or manufacturers, resulting in product delays,inability of customers to obtain credit to finance purchases of our products,customer insolvencies, increased pricing pressures, restructuring expenses andassociated diversion of management’s attention, excess inventory and increaseddifficulty in accurately forecasting product demand and planning futurebusiness activities.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

We saw early signssuggesting that some major economies are returning to positive growth. However,it is uncertain whether the current resumption of economic growth will besustained. If the economic recovery slows down or even dissipates, ourbusiness, financial condition and results of operations and cash flows could befurther materially and adversely affected.

 

## ***Market Environment***

## *** ***

We sell ourproducts worldwide directly to original equipment manufacturers, or OEMs, whichinclude branded customers and contract manufacturers, and value addedresellers, or VARs, and indirectly through distributors. In order to ensurethat we address all available markets for our image sensors, we organize ourmarketing efforts into end-use market groups, each of which concentrates on aparticular product or, in some cases, customer within a product group. Thus wehave marketing teams that address the mobile phone market, the notebook andwebcam market, the DSC market, the security and surveillance market, theentertainment market, and the automotive and medical markets.

 

In the mobile phone market in particular, future revenues depend to alarge extent on design wins where, on the basis of an exhaustive evaluation ofavailable products, a particular mobile phone maker determines which imagesensor to design into one or more specific models. The time lag between designwin and volume shipments varies from as little as three months to as much astwelve months, which could cause an unexpected delay in generating revenues,especially during periods of product transitions. Design wins are also animportant driver in the many other markets that we address, and in some cases,such as automotive or medical applications, the time lag between a particulardesign win and revenue generation can be longer than one year.

 

The overwhelming majority of our sales depend on decisions by theengineering designers for manufacturers of products that incorporate imagesensors to specify one of our products rather than one made by a competitor. Inmost cases, the decision to specify a particular image sensor requiresconforming other specifications of the product to the chosen image sensor andmakes subsequent changes both difficult and expensive. Accordingly, the abilityto timely produce and deliver reliable products in large quantities is a keycompetitive differentiator. Since our inception, we have shipped more than 1.5 billionimage sensors, including approximately 145 million in the three months ended October31, 2009. We believe that these quantities demonstrate the continuingcapabilities of our production system, including our sources of offshorefabrication.

 

We currentlyoutsource the wafer fabrication and packaging of our image-sensor products tothird parties. We outsource the color filter and micro-lens phases ofproduction to an investee joint venture company. With our new CameraCubeproducts, we also collaborated with the industry’s leading wafer-level lenssuppliers, and outsourced the assembly process. This approach allows us tofocus our resources on the design, development, marketing and testing of ourproducts and significantly reduces our capital requirements.

 

To increase andenhance our production capabilities, we work closely with TSMC, our principalwafer supplier and one of the largest wafer fabrication companies in the world,to increase, as necessary, the number of its fabrication facilities, at whichour products can be produced. VisEra, our joint venture with TSMC, and ourinvestments in two key back-end packaging suppliers are part of a broad strategyto ensure that we have sufficient back-end capacity for the processing of ourimage sensors in the various formats required by our customers.

 

We currently perform the final testing of the majority of our productsat our own facility in China. As necessary, we will make further investments toexpand our testing and production capacity as well as our overall capability todesign additional custom products for our customers.

 

Since our end-usercustomers market and sell their products worldwide, our revenues by geographiclocation are not necessarily indicative of the geographic distribution ofend-user sales, but rather indicate where the products and/or their componentsare manufactured or sourced. The revenues we report by geography are based onthe country or region in which our customers issue their purchase orders to us.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

Many of theproducts using our image sensors, such as mobile phones, notebook and webcams,DSCs and cameras for entertainment applications, are consumer electronicsgoods. These mass-market camera devices generally have seasonal cycles whichhistorically have caused the sales of our customers to fluctuatequarter-to-quarter. In addition,****since a verylarge number of the manufacturers who use our products are located in China,Hong Kong and Taiwan, the pattern of demand for our image sensors has beenincreasingly influenced by the timing of the extended lunar or Chinese New Yearholiday, a period in which the factories which use our image sensors generallyclose. Consequently, demand for our image sensors has historically beenstronger in the second and third quarters of our fiscal year and weaker in thefirst and fourth quarters of our fiscal year. However, because of the globaleconomic downturn, we experienced weaker than normal conditions in all of ourmarkets in the third and fourth quarters of fiscal 2009. Recently, with the improvement in ourbusiness during the second fiscal quarter of 2010, we believe the historicalseasonal cycle to our business has returned.

 

We believe thatthe market opportunity represented by mobile phones remains very large,although the opportunities presented will be deferred until the current globaleconomic conditions improve. We also believe that, like the DSC market, mobilephone and notebook and webcam demand will not only continue to shift towardhigher resolutions, but also will increasingly fragment into multiple marketsegments with differing product attributes. For example, we see the furtherexpansion of the smartphone segment within the mobile phone market and therecent introduction of the netbook product segment within the notebook computermarket. In addition, there is increased demand for customization, and severaldifferent interface standards are coming to maturity. All of these trends willrequire the development of an increasing variety of products.

 

As the markets for image sensors have grown, we have experiencedcompetition from manufacturers of CMOS and CCD image sensors. Our principalcompetitors in the market for CMOS image sensors include Aptina Imaging,Samsung, Sharp, Sony, STMicroelectronics and Toshiba. We expect to seecontinued price competition in the image-sensor market for mobile phones,notebook and webcams and digital cameras as those markets continue to grow.Although we believe that we currently compete effectively in those markets, ourcompetitive position could be impaired by companies that have greaterfinancial, technical, marketing, manufacturing and distribution resources,broader product lines, better access to large customer bases, greater namerecognition, longer operating histories and more established strategic andfinancial relationships than we do. Such companies may be able to adapt morequickly to new or emerging technologies and customer requirements or devotegreater resources to the promotion and sale of their products. Many of these competitors own and operatetheir own fabrication facilities, which in certain circumstances may give themthe ability to price their products more aggressively than we can or may allowthem to respond more rapidly than we can to changing market opportunities.

 

In addition, from time to time, other companies enter the CMOSimage-sensor market by using obsolete and available manufacturing equipment.While these efforts have rarely had any long-term success, the new entrants dosometimes manage to gain market share in the short term by pricing theirproducts significantly below current market levels which puts additionaldownward pressure on the prices we can obtain for our products.

 

In common withmany other semiconductor products and as a response to competitive pressures,the average selling prices, or ASPs, of image-sensor products have declinedsteadily since their introduction, and we expect ASPs to continue to decline inthe future. Some of this ASP decline may be offset by the adoption of some ofour newer and higher resolution products. Also, we recently introduced our newCameraCube products. Depending on the adoption rate and unit volume, we believethese products may partially mitigate the rate of ASP decline. In order tomaintain our gross margins, we and our suppliers must work continuously tolower our manufacturing costs and increase our production yields, and in orderto maintain or grow our revenues, we need to increase the number of units wesell by a large enough amount to offset the effect of declining ASPs. Inaddition, if we are unable to timely introduce new products that can takeadvantage of smaller process geometries or new products that incorporate more advancedtechnology and include more advanced features that can be sold at higher ASPs,our gross margin will decline.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

Given the rapidlychanging nature of our technology, there can be no assurance that we will notencounter delays or other unexpected yield issues with future products. Duringthe early stages of production, production yields and gross margins for newproducts are typically lower than those of established products. We canencounter unexpected manufacturing issues, such as unexpected back-end yieldproblems. In addition, in preparation for new product introductions, wegradually decrease production of established products. Due to our 12-14 weekproduction cycle, it is extremely difficult to predict precisely how many unitsof established products we will need. It is also difficult to accuratelypredict the speed of the ramp of new products. Given the current economicuncertainty, the visibility of our business outlook is extremely limited andforecasting is even more difficult than under normal market conditions. As aresult, it is possible that we could suffer from shortages for certain productsand build inventories in excess of demand for other products. We carefullyconsider the risk that our inventories may be excess to expected future demandand record appropriate reserves. If, as sometimes happens, we are subsequentlyable to sell these reserved products, the sales have little or no associatedcost and consequently, they have a favorable impact on gross margins.

 

## ***Sources of Revenues***

## *** ***

For shipments tocustomers without agreements that allow for returns or credits, principallyOEMs and VARs, we recognize revenue using the “sell-in” method. Under thismethod, we recognize revenue when title passes to the customer provided that wehave received a signed purchase order, the price is fixed or determinable,title and risk of loss has transferred to the customer, collection of resultingreceivables is considered reasonably assured, product returns are reasonablyestimable, there are no customer acceptance requirements and there are noremaining material obligations. We provide for future returns of potentiallydefective products based on historical experience at the time we recognizerevenue. For cash consideration given to customers for which we do not receivea separately identifiable benefit or cannot reasonably estimate fair value, werecord the amounts as reductions of revenue.

 

For shipment ofproducts sold to distributors under agreements allowing for returns or credits,title and the risk of ownership to the products transfer to the distributorupon shipment, and the distributor is obligated to pay for the products whetheror not the distributor has sold them at the time payment is due. Under theterms of our agreements with such distributors and subject to our priorapproval, distributors are entitled to reclaim from us as price adjustments thedifference, if any, between the prices at which we sold the product to thedistributors and the prices at which the product is subsequently sold by thedistributor. In addition, distributors have limited rights to return inventorythat they determine is in excess of their requirements, and accordingly, indetermining the appropriate level of provision for excess and obsoleteinventory, we take into account the inventories held by our distributors. Forthese reasons, prices and revenues are not fixed or determinable until thedistributor resells the products to our end-user customers and the distributornotifies us in writing of the details of such sales transactions. Accordingly,we recognize revenue using the “sell-through” method. Under the “sell-through”method, we defer the revenue, adjustments to revenue and the related costs ofrevenue until the final resale of such products to end customers. The amountsbilled to these distributors and adjustments to revenue and the cost ofinventory shipped to, but not yet sold by, the distributors are shown net onthe Consolidated Balance Sheets as “Deferred revenues, less cost of revenues.”

 

In order todetermine whether collection is probable, we assess a number of factors,including our past transaction history with the customer and thecreditworthiness of the customer. If we determine that collection is notreasonably assured, we defer the recognition of revenue until collectionbecomes reasonably assured or upon receipt of payment.

 

In addition, werecognize revenue from the performance of services to a limited number of ourcustomers, under either the completed-contract or the percentage-of-completionmethods. The percentage-of-completion method of accounting is used for costreimbursement-type contracts, where revenues recognized are that portion of thetotal contract price equal to the ratio of costs expended to date to theanticipated final total costs based on current estimates of the costs tocomplete the projects. The amount of service-related revenue has not beenmaterial in any of the periods presented. At SOI, we recognize the limitedamount of SOI-related service revenue on a completed-contract basis.

 

## ***Critical Accounting Policies and Estimates***

## *** ***

For a discussionof our critical accounting policies, please refer to the discussion in ourAnnual Report on Form 10-K for the fiscal year ended April 30, 2009. There havebeen no material changes in any of our critical accounting policies since April30, 2009.

 

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**ITEM 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —(Continued)**

 

**Results of Operations**

 

The followingtable sets forth the results of our operations as a percentage of revenues. Ourhistorical operating results are not necessarily indicative of the results wecan expect for any future period.

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **October 31,**        | ** ** | **October 31,**      | ** ** |
| ** **                                                       | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                         |       | 100.0                  | %          | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                                 |       | 76.0                   |       | 75.0                 |       | 76.6 |   | 74.9 |   |
| Gross margin                                                     |       | 24.0                   |       | 25.0                 |       | 23.4 |   | 25.1 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Operating expenses:                                              |       |                   |       |                 |       |   |   |   |   |
| Research, development  and related                               |       | 10.3                   |       | 14.2                 |       | 12.9 |   | 12.9 |   |
| Selling, general and  administrative                             |       | 8.9                    |       | 10.3                 |       | 10.5 |   | 10.1 |   |
| Goodwill impairment                                              |       | —                 |       | 4.6                  |       | — |   | 2.2 |   |
| Total operating  expenses                                        |       | 19.2                   |       | 29.1                 |       | 23.4 |   | 25.2 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Income (loss) from  operations                                   |       | 4.8                    |       | (4.1                 | )          | — |   | (0.1 | ) |
| Interest income  (expense), net                                  |       | (0.1                   | )          | 0.3                  |       | (0.2 | ) | 0.5 |   |
| Other income (expense),  net                                     |       | 0.1                    |       | (0.5                 | )          | 0.3 |   | (0.2 | ) |
| Income (loss) before  income taxes                               |       | 4.8                    |       | (4.3                 | )          | 0.1 |   | 0.2 |   |
|                                                             |       |                   |       |                 |       |   |   |   |   |
| Provision for (benefit from)  income taxes                       |       | 0.5                    |       | (0.9                 | )          | 0.7 |   | — |   |
| Net income (loss)                                                |       | 4.3                    |       | (3.4                 | )          | (0.6 | ) | 0.2 |   |
| Net loss attributable  to noncontrolling interest                |       | (0.1                   | )          | (0.2                 | )          | — |   | (0.1 | ) |
| Net income (loss)  attributable to OmniVision Technologies, Inc. |       | 4.4                    | %          | (3.2                 | )%         | (0.6 | )% | 0.3 | % |

 

*Three Months Ended October 31,2009 as Compared to Three Months Ended October 31, 2008*

 

### **Revenues**

### ** **

We derivesubstantially all of our revenues from the sale of our image-sensor productsfor use in a wide variety of consumer and commercial mass-market applicationsincluding mobile phones, notebooks and personal computers, security andsurveillance cameras, DSCs, entertainment devices, automotive and medicalproducts. Revenues for the three months ended October 31, 2009 increased by11.8% to approximately $183.3 million from $163.9 million for the three monthsended October 31, 2008. The increase in revenues was due to an increase in unitsales of our image-sensor products in nearly all product categories, which morethan offset a 23% decrease in our ASPs.

 

## ***Revenues from Sales to OEMs and VARs as Compared toDistributors***

## *** ***

Wesell our image-sensor products either directly to OEMs and VARs or indirectlythrough distributors. The percentage of revenues from sales to OEMs and VARswas lower in the three months ended October 31, 2009 than in the prior-yearperiod. We expect that the percentage of revenues from sales through OEMs andVARs will vary from year to year in response to changes in the make-up of ourcustomer list. The gross margin that we earn on sales to OEMs and VARs orthrough distributors is not significantly different. The following table showsthe percentage of revenues from sales to OEMs and VARs and distributors in thethree months ended October 31, 2009 and 2008:

 
| ** **    | ** ** | **Three Months Ended** | ** ** |
|---------------|------------|------------------------|------------|
| ** **    | ** ** | **October 31,**        | ** ** |
| ** **    | ** ** | **2009**               | ** ** | **2008** | ** ** |
| OEMs and VARs |       | 53.4                   | %          | 60.0 | % |
| Distributors  |       | 46.6                   |       | 40.0 |   |
| Total         |       | 100.0                  | %          | 100.0 | % |

 

*OEMs andVARs.*   In the three months ended October 31, 2009,one OEM customer accounted for 10.3% of our revenues. In the three months endedOctober 31, 2008, two OEM customers accounted for approximately 11.3% and 10.2%of our revenues. For the three months ended October 31, 2009 and 2008, no otherOEM or VAR customer accounted for 10% or more of our revenues.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

*Distributors.*   In the threemonths ended October 31, 2009, one distributor customer accounted forapproximately 27.5% of our revenues. In the three months ended October 31,2008, one distributor customer accounted for approximately 26.2% of ourrevenues. For the three months ended October 31, 2009 and 2008, no otherdistributor customer accounted for 10% or more of our revenues.

 

## ***Revenues from Domestic Sales as Compared to ForeignSales***

 

The following table shows the percentage of ourrevenues derived from sales of our image-sensor products to domestic customersas compared to foreign customers for the three months ended October 31, 2009and 2008:

 
| ** **      | ** ** | **Three Months Ended** | ** ** |
|-----------------|------------|------------------------|------------|
| ** **      | ** ** | **October 31,**        | ** ** |
| ** **      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Domestic  sales |       | 0.5                    | %          | 4.3 | % |
| Foreign  sales  |       | 99.5                   |       | 95.7 |   |
| Total           |       | 100.0                  | %          | 100.0 | % |

 

We derive the majority of our foreign sales fromcustomers in Asia and, to a lesser extent, in Europe. Over time, our sales toAsia-Pacific customers have increased primarily as a result of the continuingtrend of outsourcing the production of consumer electronics products to Asia-Pacificmanufacturers and facilities and to the increasing markets in Asia for consumerproducts. Because of the preponderance of Asia-Pacific manufacturers and thefact that virtually all products incorporating our image-sensor products aresold globally, we believe that the geographic distribution of our sales doesnot accurately reflect the geographic distribution of sales into end-usermarkets of products which incorporate our image sensors.

 

### **GrossProfit**

 

Our gross margin in the three months ended October 31,2009 decreased to 24.0% from 25.0% for the three months ended October 31, 2008.The year-over-year decrease in gross margin reflected a general price declineas a result of usual competitive pressures, and an unfavorable mix shiftbetween VGA and 1-megapixel products. The year-over-year decrease was partiallyoffset by the decline in the write-down of inventories which totaledapproximately $6.4 million duringthe three months ended October31, 2009, as compared to$9.2 million in the similarprior year period, and the increase in the sales of previously written-down products in the three monthsended October 31, 2009 which totaled $4.1 million, as compared to $1.1 millionduring the same period in the prior fiscal year. We recorded approximately $0.6million in stock-based compensation expense to cost of revenues during thethree-month period ended October 31, 2009, as compared to approximately $0.7 million in the similar prior yearperiod.

 

**Research,Development and Related Expenses**

 

Research, development and related expenses consistprimarily of compensation and personnel-related expenses, non-recurringengineering costs related principally to the costs of the masks we buy when werelease new product designs to the manufacturing foundry, costs for purchasedmaterials, designs, tooling, depreciation of computers and workstations, andamortization of acquired intangible intellectual property and computer aideddesign software. Because the number of new designs we release to the foundrycan fluctuate from period to period, research, development and related expensesmay fluctuate significantly. Research, development and related expenses for thethree months ended October 31, 2009 decreased to approximately $18.9 millionfrom approximately $23.2 million for the three months ended October 31, 2008.As a percentage of revenues, research, development and related expenses for thethree months ended October 31, 2009 and 2008 represented 10.3% and 14.2%,respectively.

 

The decrease in research, development and relatedexpenses of approximately $4.3 million, or 18.7%, for the three months ended October31, 2009 from the similar period in the prior year resulted primarily from a$2.0 million decrease in non-recurring engineering expenses related to newproduct development, a $0.7 million decrease in salary and payroll-relatedexpenses, a $0.6 million decrease in patent-related legal expenses, a $478,000 decreasein stock-based compensation expense, a $307,000 decrease in office and facilityexpenses and a $210,000 decrease in travel-related expenses. We anticipate thatresearch, development and related expenses will increase slightly as we developand introduce new products, including those employing our CameraCube andOmniBSI technologies and as we develop other new technologies related to imagesensors.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

**Selling,General and Administrative****Expenses**

 

Selling, general and administrative expenses consistprimarily of compensation and personnel related expenses, commissions paid todistributors and manufacturers’ representatives and insurance and legalexpenses. Selling, general and administrative expenses for the three monthsended October 31, 2009 decreased to approximately $16.2 million from $16.9 millionfor the three months ended October 31, 2008. As a percentage of revenues,selling, general and administrative expenses for the three months ended October31, 2009 and 2008 represented 8.9% and 10.3%, respectively.

 

The decrease in selling, general and administrativeexpenses of approximately $0.7 million, or 4.0%, for the three months ended October31, 2009 from the similar period in the prior year resulted primarily from a$0.7 million decrease in fees for outside services, a $411,000 decrease infacility and office expenses, a $357,000 decrease in marketing expenses, a$333,000 decrease in travel-related expenses and a $233,000 decrease instock-based compensation expense, partially offset by a $0.7 million increasein salary and payroll-related expenses, and a $0.6 million increase in legalexpenses. We anticipate that our selling, general and administrative expensesmay remain unchanged as we continue to control discretionary expenditures.

 

**InterestIncome (Expense), Net**

 

We invest our cash, cash equivalents and short-terminvestments in interest-bearing accounts consisting primarily of money marketfunds, commercial paper, certificates of deposit, high-grade corporatesecurities and government bonds. Interest income (expense), net, declined to aninterest expense, net, of approximately $244,000 for the three months ended October31, 2009 from interest income, net, of $478,000 in the prior year period. The$0.7 million decline in interest income (expense), net, resulted from a $0.8 millionreduction in interest income and a $114,000 reduction in interest expense primarilyassociated with long-term borrowings for the three months ended October 31,2009 as compared to the corresponding period in the prior year. The decline ininterest income was the result of lower interest rates on interest-bearingaccounts than in the same period in the prior year.

 

**Other Income (Expense), Net**

 

Other income (expense), net, for the three monthsended October 31, 2009 totaled $223,000. Other income (expense), net, for thethree months ended October 31, 2009 included a $317,000 gain that representedour portion of the net income recorded by ImPac Technology Co., Ltd., or ImPac,and a $245,000 gain, that represented our portion of the net income recorded byChina WLCSP Limited, or WLCSP, both of which we account for under the equitymethod of accounting, partially offset by a $235,000 loss on the interest rateswap agreements related to the mortgage on our complex of four buildingslocated in Santa Clara, California, or Santa Clara Property. Other income(expense), net, for the three months ended October 31, 2008 included a $0.6 millionloss on the interest rate swap agreements related to the mortgage on our SantaClara Property, a $0.7 million exchange loss, and a $140,000 loss thatrepresented our portion of the net loss recorded by ImPac, partially offset byour $405,000 portion of the net income recorded by WLCSP.

 

**Provisionfor Income Taxes**

 

We generated approximately $8.9 million in incomebefore income taxes and $7.1 million in loss before income taxes for the threemonths ended October 31, 2009 and 2008, respectively. We recorded a provisionfor income taxes of approximately $1.0 million and a benefit from income taxesof $1.5 million for the three months ended October 31, 2009 and 2008,respectively, resulting in effective tax rates of 10.8% and 21.1% for therespective periods.

 

Our quarterly income taxes reflect an estimate of theeffective tax rate for the fiscal year and include, when applicable, the impactof discrete tax items. We excluded from the current fiscal year’s overall estimationof the annual effective tax rate one jurisdiction with losses for which nobenefit can be realized.

 

**Net LossAttributable to Noncontrolling Interest**

 

Net loss attributable to noncontrolling interest forthe three months ended October 31, 2009 and 2008 was $166,000 and $287,000,respectively, which represents the 56.1% interest that we did not own in thenet loss of SOI.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

*Six Months Ended October 31, 2009 as Compared to Six Months Ended October31, 2008*

 

### **Revenues**

 

Revenues for the six months ended October 31, 2009decreased by 14.6% to approximately $288.9 million from $338.2 million for thesix months ended October 31, 2008. The decrease in revenues was due to adecline in our ASPs.

 

## ***Revenues from Sales to OEMs and VARs as Compared toDistributors***

 

The following table shows the percentage of revenuesfrom sales to OEMs and VARs and distributors in the six months ended October 31,2009 and 2008:

 
| ** **     | ** ** | **Six Months Ended** | ** ** |
|----------------|------------|----------------------|------------|
| ** **     | ** ** | **October 31,**      | ** ** |
| ** **     | ** ** | **2009**             | ** ** | **2008** | ** ** |
| OEMs  and VARs |       | 52.1                 | %          | 59.1 | % |
| Distributors   |       | 47.9                 |       | 40.9 |   |
| Total          |       | 100.0                | %          | 100.0 | % |

 

*OEMs and VARs.*   In the sixmonths ended October 31, 2009, one OEM customer accounted for approximately11.8% of our revenues. In the six months ended October 31, 2008, two OEMcustomers each accounted for approximately 10.7% of our revenues. For the sixmonths ended October 31, 2009 and 2008, no other OEM or VAR customer accountedfor 10% or more of our revenues.

 

*Distributors.*   In the sixmonths ended October 31, 2009, one distributor customer accounted forapproximately 27.9% of our revenues. In the six months ended October 31, 2008,one distributor customer accounted for approximately 24.1% of our revenues. Forthe six months ended October 31, 2009 and 2008, no other distributor customeraccounted for 10% or more of our revenues.

 

## ***Revenues from Domestic Sales as Compared to ForeignSales***

 

The following table shows the percentage of ourrevenues derived from sales of our image-sensor products to domestic customersas compared to foreign customers for the six months ended October 31, 2009 and2008:

 
| ** **      | ** ** | **Six Months Ended** | ** ** |
|-----------------|------------|----------------------|------------|
| ** **      | ** ** | **October 31,**      | ** ** |
| ** **      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Domestic  sales |       | 0.5                  | %          | 5.1 | % |
| Foreign  sales  |       | 99.5                 |       | 94.9 |   |
| Total           |       | 100.0                | %          | 100.0 | % |

 

We derive the majority of our foreign sales fromcustomers in Asia and, to a lesser extent, in Europe. Over time, our sales toAsia-Pacific customers have increased primarily as a result of the continuingtrend of outsourcing the production of consumer electronics products toAsia-Pacific manufacturers and facilities and to the increasing markets in Asiafor consumer products. Because of the preponderance of Asia-Pacificmanufacturers and the fact that virtually all products incorporating ourimage-sensor products are sold globally, we believe that the geographicdistribution of our sales does not accurately reflect the geographicdistribution of sales into end-user markets of products which incorporate ourimage sensors.

 

### **GrossProfit**

 

Our gross margin in the six months ended October 31,2009 was 23.4%, a decrease from 25.1% for the six months ended October 31,2008. The principal contributor to the year-over-year decrease in gross marginwas a decline in ourASPs.In the sixmonths ended October 31, 2009, we recorded approximately $1.4 million instock-based compensation expense to cost of revenues, as compared to $1.6 millionin the six months ended October 31, 2008.

 

Revenue from sales of previously written-down productsin the six months ended October 31, 2009 was $6.3 million, as compared to $3.6 millionduring the same period in the prior fiscal year. In the six months ended October31, 2009, we recorded an allowance for excess and obsolete inventory totaling$10.1 million to cost of revenues as compared to $11.6 million during the sameperiod in the prior fiscal year.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

**Research,Development and Related Expenses**

 

Research, development and related expenses for the sixmonths ended October 31, 2009 decreased to approximately $37.3 million fromapproximately $43.5 million for the six months ended October 31, 2008. As apercentage of revenues, research, development and related expenses for both thesix months ended October 31, 2009 and 2008 represented 12.9%, respectively.

 

The decrease in research, development and relatedexpenses of approximately $6.2 million, or 14.3%, for the six months ended October31, 2009 from the similar prior year period resulted primarily from a $2.9 milliondecrease in non-recurring engineering expenses related to new productdevelopment, a $1.0 million decrease in patent-related expenses, a $0.9 milliondecrease in stock-based compensation expense, a $0.7 million decrease in salaryand payroll-related expenses, a $418,000 decrease in travel-related expensesand a $399,000 decrease in office and facility expenses.

 

**Selling,General and Administrative****Expenses**

 

Selling, general and administrative expenses for thesix months ended October 31, 2009 decreased to approximately $30.4 million from$34.3 million for the six months ended October 31, 2008. As a percentage ofrevenues, selling, general and administrative expenses for the six months endedOctober 31, 2009 and 2008 represented 10.5% and 10.1%, respectively.

 

The decrease in selling, general and administrativeexpenses of approximately $3.9 million, or 11.4%, for the six months ended October31, 2009 from the similar period in the prior year resulted primarily from a$1.8 million decrease in fees for outside services, a $0.8 million decrease inoffice and facility expenses, a $0.8 million decrease in commissions paidprimarily to distributors and sales representatives, a $0.7 million decrease intravel-related expenses, a $0.6 million decrease in stock-based compensationexpense, and a $477,000 decrease in marketing expenses, partially offset by a$1.0 million increase in legal expenses related to patent defense and a $0.5 millionincrease in depreciation expenses.

 

**GoodwillImpairment**

 

During the second quarter of fiscal 2009, based on acombination of factors, including the significant decline in our marketcapitalization and the then-existing global economic downturn, we concludedthat there were sufficient factual circumstances for interim impairmentanalyses. Based on the analyses, we recorded a non-cash goodwill impairmentcharge of $7.5 million, or 2.2% of revenues, which we included in “Goodwillimpairment” for the six months ended October 31, 2008.

 

**InterestIncome (Expense), Net**

 

Interest income (expense), net, for the six monthsended October 31, 2009 declined to an interest expense, net, of approximately$448,000 from interest income, net, of $1.8 million for the six months ended October31, 2008. The reduction in interest income (expense), net, for the six monthsended October 31, 2009 as compared to the corresponding period in the prioryear was the result of a $1.8 million reduction in interest income and a$433,000 increase in interest expense associated with long-term borrowings.

 

**Other Income (Expense), Net**

 

Other income (expense), net, for the six months ended October31, 2009 totaled $0.8 million. Other income (expense), net, for the six monthsended October 31, 2009 included a $0.7 million gain, representing our portionof the net income recorded by WLCSP, a $0.6 million gain on interest rate swapagreements related to the mortgage on the Santa Clara Property, partiallyoffset by a $0.6 million loss that represented our portion of the net lossrecorded by ImPac. Other income (expense), net, for the six months ended October31, 2008 totaled $(0.8 million). Other income (expense), net, for the sixmonths ended October 31, 2008 included a $0.8 million exchange loss, a $0.5 millionloss that represented our portion of the net loss recorded by ImPac and a$165,000 loss on interest rate swap agreements related to the mortgage on theSanta Clara Property, partially offset by our $412,000 portion of the netincome recorded by WLCSP.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

**Provisionfor Income Taxes**

 

We generated $321,000 and $447,000 in income beforeincome taxes for the six months ended October 31, 2009 and 2008, respectively.We recorded a provision for income taxes of approximately $2.1 million and abenefit from income taxes of approximately $81,000 for the six months ended October31, 2009 and 2008, respectively, resulting in effective tax rates of 669.5% and(18.1)% for the respective periods.

 

Our quarterly income taxes reflect an estimate of theeffective tax rate for the fiscal year and include, when applicable, the impactof discrete tax items. We excluded from the current fiscal year’s overallestimation of the annual effective tax rate one jurisdiction with losses forwhich no benefit can be realized.

 

**Net LossAttributable to Noncontrolling Interest**

 

Net loss attributable to noncontrolling interest forthe six months ended October 31, 2009 and 2008 was $56,000 and $392,000,respectively, which represents the 56.1% interest that we did not own in thenet income (loss) of SOI.

 

**Liquidity and Capital Resources**

 

Our principal sources of liquidity at October 31, 2009consisted of cash, cash equivalents and short-term investments totaling $354.0 million.

 

## ***Liquidity***

 

Our working capital increased to $401.6 million as of October31, 2009 as compared to $380.3 million as of April 30, 2009. Our workingcapital increased as a result of: a $58.1 million increase in cash and cashequivalents primarily due to cash provided by operating activities; a $23.7 millionincrease in accounts receivable, net, resulting from a revenue increase of$94.3 million for the three months ended October 31, 2009 from the three monthsended April 30, 2009; and a $21.1 million increase in short-term investments.These increases in working capital were partially offset by: a $56.3 millionincrease in accounts payable resulting from an increase in productionactivities; a $12.8 million decrease in inventories; a $8.8 million increase inaccrued liabilities; a $2.6 million increase in income taxes payable; and a$2.2 million increase in deferred revenue, less cost of revenue.

 

In March 2007, we purchased the Santa Clara Property.In connection with the purchase, we obtained from a domestic bank a mortgageloan with a principal amount of $27.9 million, or the Mortgage Loan, and a termloan with a principal amount of $12.0 million, or the Term Loan. As of October 31,2009, the principal amounts outstanding under the Mortgage Loan and Term Loanwere $26.1 million and $8.5 million, respectively.

 

In August 2009, in order to finance costs associatedwith the construction of a research center for our wholly-owned subsidiary inShanghai, OmniVision Technologies (Shanghai) Co. Ltd., or OTC, we entered in toa fixed asset loan agreement with a bank in China. The agreement provides for afixed asset loan in the principal amount of approximately $20.5 million, or theConstruction Loan. As of October 31, 2009, we borrowed approximately $6.6 millionunder the Construction Loan.

 

SOI maintains four unsecured lines of credit withthree commercial banks, which provide a total of approximately $3.5 million inavailable credit. All borrowings under these lines of credit bear interest atthe market interest rate prevailing at the time of borrowing. There are nofinancial covenant requirements for these facilities. At October 31, 2009 and April30, 2009, there were no borrowings outstanding under these facilities.

 

## ***Cash Flows from Operating Activities***

 

For the six months ended October 31, 2009, net cashprovided by operating activities totaled approximately $75.1 million ascompared to $42.1 million for the corresponding period in the prior year. Theprincipal components of the current year amount were: a net loss ofapproximately $1.8 million for the six months ended October 31, 2009;adjustments for non-cash charges of $12.2 million in stock-based compensation,$11.7 million in depreciation and amortization, $10.1 million in write-down ofinventories, $1.4 million of gain in equity investments and $0.6 million fromgain on interest rate swaps; a $53.7 million increase in accounts payable; a$7.7 million decrease in inventories; a $4.0 million increase in income taxespayable; a $3.0 million increase in accrued expenses and other currentliabilities and a $2.2 million increase in deferred revenues, less cost ofrevenues. These increases were partially offset by: a $23.7 million increase inaccounts receivable, net; a $1.3 million increase in deferred income taxes anda $1.0 million decrease in deferred tax liabilities. The $23.7 million increasein accounts receivable, net, reflects the increased level of revenues duringthe six months ended October 31, 2009, partially offset by faster collection,as reflected in days of sales outstanding which declined to 34 days as of October31, 2009 from 44 days as of April 30, 2009. The $7.7 million decrease ininventories resulted in an increase in annualized inventory turns to 6.0 as of October31, 2009 from 2.8 as of April 30, 2009.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

For the six months ended October 31, 2008, net cashprovided by operating activities totaled approximately $42.1 million. Theprincipal components of the current year amount were: net income ofapproximately $0.5 million for the six months ended October 31, 2008;adjustments for non-cash charges of $13.9 million in stock-based compensation,$11.6 million in write-down of inventories; $9.2 million in depreciation andamortization; $7.5 million in goodwill impairment charges; $1.2 million ofgains in equity investments and a $21.3 million increase in accounts payable; a$4.9 million decrease in accounts receivable, net; a $4.5 million increase indeferred income. These increases were partially offset by: a $21.9 millionincrease in inventories; a $2.6 million increase in refundable and deferredincome taxes; a $2.3 million increase in prepaid expenses and other assets; a$1.8 million decrease in accrued expenses and other current liabilities; a $1.2million decrease in income taxes payable and a $1.0 million decrease indeferred tax liabilities. The $4.9 million decrease in accounts receivable,net, reflects the lower level of revenues during the six months ended October 31,2008, with the days of sales outstanding remaining unchanged at 56 days as of October31, 2008 and April 30, 2008. The $21.9 million increase in inventories resultedin a decrease in annualized inventory turns to 3.9 as of October 31, 2008 from4.3 as of April 30, 2008.

 

## ***Cash Flows From Investing Activities***

 

For the six months ended October 31, 2009, our cashused in investing activities totaled $25.5 million as compared to approximately$14.9 million for the corresponding period in the prior year, due to $21.2 millionin net purchases of short-term investments and $4.3 million in purchases ofproperty, plant and equipment. For the six months ended October 31, 2008, ourcash used in investing activities totaled $14.9 million, due primarily to:$21.3 million in purchases of property, plant and equipment and $1.4 million ina long-term investment in ImPac, partially offset by $7.8 million in net salesof short-term investments.

 

## ***Cash Flows From Financing Activities***

 

For the six months ended October 31, 2009, net cashprovided by financing activities totaled approximately $8.4 million as comparedto net cash used by financing activities of $5.6 million during thecorresponding period in the prior year. This change was due to $6.6 million inborrowings and $3.6 million in proceeds from the exercise of stock options andemployee purchases through our employee stock purchase plan, partially offsetby $1.8 million used to repay long-term borrowings. For the six months ended October31, 2008, net cash used in financing activities totaled approximately $5.6 million.This was primarily due to $12.9 million in repurchases of our common stock,partially offset by $4.8 million in proceeds from net long-term borrowings and$2.7 million in proceeds from the exercise of stock options and employeepurchases through our employee stock purchase plan.

 

## ***Capital Commitments and Resources***

## *** ***

Over the next two years, we expect to invest a totalof approximately $33.7 million in OTC, of which we have already contributed$15.6 million. The funding requirement arises from our execution of aLand-Use-Right Purchase Agreement with the Construction and TransportationCommission of the Pudong New District, Shanghai with a concomitant commitmentto spend approximately $33.7 million to develop the land. The remainder of ourcapital commitments to OTC will be financed via the Construction Loan. See Note16*— “Commitments and Contingencies”*toour condensed consolidated financial statements.

 

We currently expect ouravailable cash, cash equivalents and short-term investments, together with cashthat we anticipate generating from operating activities, will be sufficient tosatisfy our capital requirements over approximately the next twelve months.Other than normal working capital requirements and capital investment at OTC,we expect our capital requirements totaling approximately $10.0 million overapproximately the next twelve months will consist primarily of funding capitalinvestments in our wholly-owned subsidiaries, OmniVision Semiconductor(Shanghai) Co. Ltd., or OSC, and Shanghai OmniVision Semiconductor Technology,Co. Ltd, or OST. We formed OST during the three months ended October 31, 2008,for the purpose of expanding our testing capabilities in Shanghai, China.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

Our ability to generate cash from operations issubject to substantial risks described below under the caption Part II Item 1A,*“Risk Factors.”*We encourage youto review these risks carefully.

 

**ContractualObligations and Commercial Commitments**

 

The following table summarizes our contractualobligations and commercial commitments as of October 31, 2009 and the effectsuch obligations and commitments are expected to have on our liquidity and cashflows in future periods (in thousands):

 
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                | ** ** | ** **                 | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                                | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **5 Years** | ** ** |
| Contractual  Obligations:                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Operating  leases                                         |       | $                          | 11,182     |   | $ | 5,121 |   | $ | 5,330 |   | $ | 731 |   | $ | — |   |
| Debt  obligations                                         |       | 41,235                     | (1)        | 3,554 |   | 8,072 |   | 5,501 |   | 24,108 |   |
| Noncancelable  orders                                     |       | 83,521                     |       | 83,521 |   | — |   | — |   | — |   |
| Total  contractual obligations                            |       | 135,938                    |       | 92,196 |   | 13,402 |   | 6,232 |   | 24,108 |   |
|                                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Other  Commercial Commitments:                            |       |                       |       |   |   |   |   |   |   |   |   |
| OST                                                       |       | 8,500                      | (2)        | 8,500 |   | — |   | — |   | — |   |
| Total  commercial commitments                             |       | 8,500                      |       | 8,500 |   | — |   | — |   | — |   |
| Total  contractual obligations and commercial commitments |       | $                          | 144,438    |   | $ | 100,696 |   | $ | 13,402 |   | $ | 6,232 |   | $ | 24,108 |   |

 

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(1)   In March 2007, we entered into the Mortgage Loan witha domestic bank in the amount of $27.9million. In March 2008, we borrowed $6.0 million under the Term Loan forbuilding improvement of the Santa Clara Property. We drew down the remaining$6.0 million under the Term Loan in July 2008. In August 2009, we entered intothe Construction Loan with a bank in China to finance costs associated with theconstruction of a research center for OTC. As of October 31, 2009, we borrowedapproximately $6.6 million under the Construction Loan. See Note 8 —“*Borrowing Arrangements”* to our condensed consolidatedfinancial statements.

 

(2)   During the three months ended October 31, 2008, weformed OST, a new wholly-owned subsidiary in Shanghai, China, for the purposeof expanding our testing capabilities. We contributed $1.5 million in January 2009,as required under the terms of our capital commitment. We are required tocontribute the remaining $8.5 million of a $10.0 million commitment by October 2010.See Note 16 — “*Commitments and Contingencies”* toour condensed consolidated financial statements.

 

As of October 31, 2009, the long-term income taxespayable was $82.7 million. We are unable to make a reasonably reliable estimateof the timing of payments in individual years beyond twelve months due touncertainties in the timing of tax audit, if any, or their outcomes.Accordingly, we have excluded this obligation from the schedule summarizing oursignificant obligations to make future payments under contractual obligationsas of October 31, 2009 presented above.

 

### **Off-Balance Sheet Arrangements**

 

We did not have any off-balance sheet arrangementsduring the period covered by this Quarterly Report on Form 10-Q.

 

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| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —  (Continued)** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

### **Recent AccountingPronouncements**

 

In August 2009, the Financial Accounting StandardsBoard, or FASB, updated the authoritative guidance for fair value measurementsas it pertains to liabilities. The update clarifies what valuation technique acompany should use when quoted prices in an active market for an identicalliability is not available. We are required to adopt the guidance in our thirdquarter of fiscal 2010. We do not expect the adoption of this guidance to haveany material impact on our financial position, results of operations or cashflows.

 

In October 2009, the FASB revised the authoritativeguidance for revenue recognition for arrangements with multiple deliverables.The new guidance modifies the requirements for determining whether adeliverable can be treated as a separate unit of accounting by removing thecriteria that verifiable and objective evidence of fair value exists for theundelivered elements. In allocating transaction consideration among thedeliverables, the guidance also introduced the concept of using management’sbest estimate of a standalone selling price as an alternate basis forallocation. The guidance is effective in fiscal years beginning on or after June15, 2010, and we are required to adopt this guidance in our first quarter offiscal 2012. We are currently evaluating the impact this guidance may have onour financial position, results of operations and cash flows.

 

In October 2009, the FASB issued authoritativeguidance addressing certain revenue arrangements that include softwareelements. This guidance states that tangible products with hardware andsoftware components that work together to deliver the product functionality areconsidered non-software products, and the accounting guidance under the revenuearrangements with multiple deliverables is to be followed. The guidance iseffective in fiscal years beginning on or after June 15, 2010, and we arerequired to adopt this guidance in our first quarter of fiscal 2012. We arecurrently evaluating the impact this guidance may have on our financialposition, results of operations and cash flows.

 

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**ITEM3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

## ***Foreign Currency Exchange Risk***

 

We sell our products globally, in particular tobranded customers, contract manufacturers, VARs and distributors in China,Japan, Korea and Taiwan.

 

The great majority of our transactions with ourcustomers and vendors are denominated in U.S. dollars. The expenses we incur incurrencies other than U.S. dollars affect gross profit, selling, general andadministrative expenses, research, development and related expenses and incometaxes, and are primarily incurred in China, where the Chinese Yuan, or CNY, isthe local currency and in Taiwan, where the New Taiwan dollar is the localcurrency.

 

As of October 31,2009, the functional currency of our wholly-owned subsidiaries located in HongKong, OmniVision Technologies (Hong Kong) Company Limited, OmniVision Trading(Hong Kong) Company Ltd., and OmniVision Holding (Hong Kong) Co., Ltd.; in theCayman Islands, OmniVision International Holding, Ltd. and OmniVisionTechnology International Ltd. (formerly HuaWei Technology International, Ltd.);in China, OSC and OTC and OST, and in Taiwan, Taiwan OmniVision TechnologiesCo., Ltd., Taiwan OmniVision International Technologies Co., Ltd., and TaiwanOmniVision Investment Holding Co., Ltd., is the U.S. dollar. Our otherwholly-owned subsidiaries have their respective local currencies as theirfunctional currencies. The functional currency of our consolidated affiliate,SOI, is the New Taiwan dollar. Transaction gains and losses resulting fromtransactions denominated in currencies other than the respective functionalcurrencies are included in “Other income (expense), net” for the periodspresented. The amounts of transaction gains and losses for the three and sixmonths ended October 31, 2009 and 2008 were not material.

 

Given that the expenses that we incur in currenciesother than U.S. dollars have not been a significant percentage of our revenues,we do not believe that our foreign currency exchange rate fluctuation risk issignificant. Consequently, we do not believe that a 10% change in foreigncurrency exchange rates would have a significant effect on our future netincome or cash flows.

 

Because we do not believe that we currently have anysignificant direct foreign currency exchange rate risk, we have not hedgedexposures denominated in foreign currencies or used any other derivativefinancial instruments. Although we transact the overwhelming majority of ourbusiness in U.S. dollars, future fluctuations in the value of the U.S. dollarmay affect the competitiveness of our products and thus may impact our resultsof operations.

 

## ***Market Interest Rate Risk***

 

Our cash equivalents and short-term investments areexposed to financial market risk due to fluctuation in interest rates, whichmay affect our interest income and, from time to time, the fair market value ofour investments. We manage our exposure to financial market risk by performingongoing evaluations of our investment portfolio. We presently invest in moneymarket funds, certificates of deposit issued by banks, commercial paper,certificates of deposit, high-grade corporate securities and government bondsmaturing approximately 18 months or less from the date of purchase. In thepast, we also invested in auction rate securities and in variable rate demandnotes, which have a final maturity date of up to 39 years but whose interestrate is reset at varying intervals typically between seven and 35 days. Asof October 31, 2009, we did not hold any auction rate securities orvariable rate demand notes.

 

Due to the short maturities of our investments, thecarrying value should approximate the fair market value. In addition, we do notuse our investments for trading or other speculative purposes. Due to the shortduration of our investment portfolio, we do not expect that an immediate 10%change in interest rates would have a material effect on the fair market valueof our portfolio. Therefore, we would not expect our operating results or cashflows to be affected to any significant degree by the effect of a sudden changein market interest rates. We do not believe that the recent instability inglobal financial markets has significantly affected the value of our cash andshort-term investments.

 

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During fiscal 2007, we financed the purchase ofthe Santa Clara Property with a $27.9 million mortgage loan. The mortgageloan is a variable rate loan which bears interest at LIBOR plus 90 basis pointsand changes in the interest rate affect our interest payments. However,concurrent with the mortgage loan, we also entered into an interest rate swapwith a notional amount that approximates the principal outstanding under themortgage loan. We are the fixed rate payer under the swap with a fixed rate of5.3%. By July 2008, we drew down $12.0 million under a related termloan. Concurrent with the term loan, we also entered into an interest rate swapwith a notional amount that approximates the principal outstanding under theterm loan. We are the fixed rate payer under the swap with a fixed rate of 4.3%.Consequently, although we are required to mark the value of the swaps to marketat each balance sheet date and record the associated non-cash cost or benefitas part of “Other income (expense), net,” a hypothetical 10% change in LIBORwould not have a material effect on our interest expense for the three and sixmonths ended October 31, 2009.

 

InAugust 2009, in order to finance costs associated with the construction ofa research center for OTC, we entered into a fixed asset loan agreement with abank in China. The agreement provides for a fixed asset loan in the principalamount of approximately $20.5 million, or the Construction Loan. Duringthe three months ended October 31, 2009, we borrowed approximately$6.6 million under the Construction Loan. Interest rate under theConstruction Loan is based on an indicative rate as published by the Chinesegovernment, and will be adjusted every September to the then currentpublished rate. Interest rate under the Construction Loan was 5.3% at October 31,2009. We do not hedge against the risk of interest rate changes for theConstruction Loan. However, since the current interest rate is published by theChinese government and will not be adjusted until September 2010, anyhypothetical 10% shifts in yield will not cause a significant adverse impact toour results of operations, cash flows or to our financial position for thethree and six months ended October 31, 2009.

 

**ITEM4.   CONTROLS AND PROCEDURES**

 

**(a)  ****Evaluation of Disclosure Controls and Procedures****.**

 

Under the supervision and with the participation ofour chief executive officer and our chief financial officer, our managementconducted an evaluation of the effectiveness of our disclosure controls andprocedures, as defined in the Securities Exchange Act of 1934, as of the end ofthe period covered by this Quarterly Report on Form 10-Q. Based on thisevaluation, our chief executive officer and chief financial officer haveconcluded that, at the level of reasonable assurance, our disclosure controlsand procedures are effective to ensure that the information we are required todisclose in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms and that such information is accumulated and communicated to ourmanagement including our principal executive and principal financial officers,as appropriate, to allow timely decisions regarding required disclosure.

 

**(b)  Changes in Internal Controls.**

 

There have been no changes in our internal controlover financial reporting during the three-month period ended October 31,2009, as covered by this Quarterly Report on Form 10-Q, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II — OTHERINFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

From time to time, we have been subject to legalproceedings and claims with respect to such matters as patents, productliabilities and other actions arising out of the normal course of business.

 

On November 29, 2001, a complaint captioned *McKee v. OmniVision Technologies, Inc., et. al., Civil Action No. 01CV 10775*, was filed in the United States District Court for theSouthern District of New York against us, some of our directors and officers,and various underwriters for our initial public offering. Plaintiffs generallyallege that the named defendants violated federal securities laws because theprospectus related to our offering failed to disclose, and contained false andmisleading statements regarding, certain commissions purported to have beenreceived by the underwriters, and other purported underwriter practices inconnection with their allocation of shares in our offering. The complaint seeksunspecified damages on behalf of a purported class of purchasers of our commonstock between July 14, 2000 and December 6, 2000. Substantiallysimilar actions have been filed concerning the initial public offerings formore than 300 different issuers, and the cases have been coordinated as *In re Initial Public Offering Securities Litigation, 21 MC 92*.Claims against our directors and officers have been dismissed without prejudicepursuant to a stipulation. On February 19, 2003, the Court issued an orderdismissing all claims against us except for a claim brought under Section 11of the Securities Act of 1933.

 

In 2007, a settlement that had been pending with theCourt since 2004, was terminated by stipulation of the parties to thesettlement, after a ruling by the Second Circuit Court of Appeals in six “focus”cases in the coordinated proceeding (the action involving OmniVision is not oneof the six focus cases) made it unlikely that the settlement would receivefinal court approval. Plaintiffs filed amended master allegations and amendedcomplaints in the six focus cases. In 2008, the Court largely denied the focuscase defendants’ motion to dismiss the amended complaints.

 

The parties have reached a global settlement of thecoordinated litigation.  Under the settlement, the insurers will paythe full amount of settlement share allocated to us, and we will bear nofinancial liability. Our company, as well as our company’s officer anddirector defendants who were previously dismissed from the action pursuant totolling agreements, will receive complete dismissals from thecase. On October 5, 2009, the Court entered an order granting finalapproval of the settlement. Certain objectors are seeking to appeal.  Iffor any reason the settlement does not become effective, and litigationagainst us proceeds, we believe that we have meritorious defenses to plaintiffs’claims and intend to defend the action vigorously.

 

On October 12, 2007, a purported OmniVisionstockholder filed a complaint against certain of the Company’s underwriters forits initial public offering. The complaint, *Vanessa Simmonds v. Bankof America Corporation, et al.*, Case No. C07-1668, filed inDistrict Court for the Western District of Washington, makes similarallegations to those made in *In re Initial PublicOffering Securities Litigation* and seeks the recovery of short-swingtrading profits under Section 16(b) of the Securities Exchange Act of1934. The Company is named as a nominal defendant, and no  recovery was sought from it. The plaintifffiled an amended complaint in February 2008. On March 12, 2009, theCourt granted the motion to dismiss without prejudice, filed by 30 of theissuer defendants, including the Company, and the motion to dismiss withprejudice, filed by all of the underwriter defendants. The plaintiff timelyappealed the Court’s Order to the United States Court of Appeals for the NinthCircuit, which remains pending. In accordance with the briefing schedule set bythe Ninth Circuit on August 18, 2009, plaintiff filed her opening brief onAugust 26, 2009.  On October 2,2009, the underwriter defendants/appellees/cross-appellants filed their answeringbrief, and the moving issuers/appellees filed their principal brief aswell.  Plaintiff/appellant/cross-appelleefiled her response and reply briefs on November 2, 2009.  The Ninth Circuit Court of Appeals has notset a hearing date. No discovery has taken place.

 

At the end of May 2009, plaintiff sent a Demandfor Inspection of Books and Records to certain of the nominal defendants namedin the Section 16(b) litigation seeking the companies to produce anytolling agreements entered into with the companies’ respective underwriters.Plaintiff’s counsel has agreed to an open-ended extension for certain nominaldefendants who received such a demand. As of the date of this filing, we havenot received a demand for inspection of books and records from the plaintiff.

 

On March 6, 2009, Panavision Imaging, LLC, orPanavision, filed a complaint against us alleging patent infringement in theDistrict Court for the Central District of California. The case is entitledPanavision Imaging, LLC v. OmniVision Technologies, Inc., Canon U.S.A., Inc.,Micron Technology, Inc. and Aptina Imaging Corporation, Case No. CV09-1577.In its complaint, Panavision asserts that we make, have made, use, sell and/orimport products that infringe U.S. Patent Nos. 6,818,877 (“Pre-charginga Wide Analog Bus for CMOS Image Sensors”), 6,663,029 (“Video Bus for HighSpeed Multi-resolution Imagers and Method Thereof”) and 7,057,150 (“Solid StateImager with Reduced Number of Transistors per Pixel”). The complaint seeksunspecified monetary damages, fees and expenses and injunctive relief againstus. We expect to vigorously defend ourselves against Panavision’s allegations. At this time, we cannot estimate any possible loss or predict whetherthis matter will result in any material expense to us.

 

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**ITEM 1A.   RISKFACTORS**

 

*This Quarterly Report on Form 10-Q,including Management’s Discussion and Analysis of Financial Condition andResults of Operations, contains forward-looking statements. Theseforward-looking statements are subject to substantial risks and uncertaintiesthat could cause our future business, financial condition or results ofoperations to differ materially from our historical results or currentlyanticipated results, including those set forth below.*

 

*The following description of theserisk factors includes any material changes to and supersedes the description ofthe risk factors associated with our business previously disclosed inItem 1A of our 2009 Annual Report on Form 10-K filed with the SEC on July 1,2009. As a result of the following risk factors, as well as of other variablesaffecting our operating results, past financial performance may not be areliable indicator of future performance, and historical trends should not beused to anticipate results or trends in future periods.*

 

***Risks Related toOur Business***

 

***Recent domestic andworldwide economic conditions have adversely affected and may further adverselyaffect our business, results of operations, and financial condition.***

 

Recently, generaldomestic and global economic conditions have been negatively impacted byseveral factors, including, among others, the subprime-mortgage crisis in thehousing market, going concern threats to investment and commercial banks, otherfinancial institutions and major automobile companies, reduced corporate andconsumer spending, and decreased consumer confidence. These economic conditionshave resulted in our facing one of the most challenging periods in our history.The image-sensor market has been negatively impacted by the current globaleconomic environment. In particular, we believe the current economic conditionshave reduced spending by consumers and businesses in markets into which we sellour products in response to tighter credit, negative financial news and thecontinued uncertainty of the global economy. End customer demand has decreasedsignificantly throughout the industry, affecting all consumer electronicproducts, security products and products for the automotive industry.Consequently, the overall demand for image sensors has also decreased. Thisdecrease in demand has had a significant impact on our revenues, results ofoperations and overall business. For example, our revenues for the six-monthperiod ended October 31, 2009 were lower than similar historical periods.

 

These conditions couldalso have a number of additional effects on our business, including insolvencyof key suppliers or manufacturers resulting in product delays, inability ofcustomers to obtain credit to finance purchases of our products, customerinsolvencies, increased pricing pressures, restructuring expenses andassociated diversion of management’s attention, excess inventory and increaseddifficulty in accurately forecasting product demand and planning futurebusiness activities. It is uncertain how long the current economic conditionswill last or how quickly any subsequent economic recovery will occur. If the economyor markets into which we sell our products continue to slow or any subsequenteconomic recovery is slow to occur, our business, financial condition, resultsof operations and cash flows could be materially and adversely affected.

 

## ***We face intense competition in our markets from CMOSand CCD image-sensor manufacturers, and if we are unable to competesuccessfully we may not be able to maintain or grow our business.***

 

The image-sensor market is intensely competitive, andwe expect competition in this industry to continue to increase. Thiscompetition has resulted in rapid technological change, evolving standards,reductions in product selling prices and rapid product obsolescence. If we areunable to successfully meet these competitive challenges, we may be unable tomaintain and grow our business. Any inability on our part to competesuccessfully would also adversely affect our results of operations and impairour financial condition.

 

Our image-sensor productsface competition from other companies that sell CMOS image sensors and fromcompanies that sell CCD image sensors. Many of our competitors have longeroperating histories, greater presence in key markets, greater name recognition,larger customer bases, more established strategic and financial relationshipsand significantly greater financial, sales and marketing, distribution,technical and other resources than we do. Many of them also have their ownmanufacturing facilities, which may give them a competitive advantage. As aresult, they may be able to adapt more quickly to new or emerging technologiesand customer requirements or devote greater resources to the promotion and saleof their products. Our competitors include established CMOS image-sensormanufacturers such asAptina Imaging, Samsung, Sharp, Sony, STMicroelectronics and Toshiba as well as CCD image-sensor 

 

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manufacturerssuch as Fuji, Kodak, NEC, Panasonic, Sanyo, Sharp, Sony and Toshiba. Many of thesecompetitors own and operate their own fabrication facilities, which in certaincircumstances may give them the ability to price their products moreaggressively than we can, respond more rapidly than we can to changing marketopportunities or more easily meet increased demands for their products. Inaddition, we compete with a large number of smaller CMOS manufacturersincluding Foveon, PixArt,Pixelplus, Pixim, SETi and SiliconFile. Competition with these and other companies has required, and in thefuture may require, us to reduce our prices. For instance, we have seenincreased competition in the markets for VGA image-sensor products withresulting pressures on product pricing. Downward pressure on pricing couldresult both in decreased revenues and lower gross margins, which wouldadversely affect our profitability. From time to time, other companiesenter the CMOS image-sensor market by using obsolete and availablemanufacturing equipment. These new entrants gain market share in the short termby pricing their products significantly below current market levels, which putsadditional downward pressure on the prices we can obtain for our products.

 

Our competitors may acquire or enter into strategic orcommercial agreements or arrangements with foundries or providers of colorfilter processing, assembly or packaging services. These strategic arrangementsbetween our competitors and third party service providers could involvepreferential or exclusive arrangements for our competitors. Such strategicalliances could impair our ability to secure sufficient capacity from foundriesand service providers to meet our demand for wafer manufacturing, color filterprocessing, assembly or packaging services, adversely affecting our ability tomeet customer demand for our products. In addition, competitors may enter intoexclusive relationships with distributors, which could reduce availabledistribution channels for our products and impair our ability to sell ourproducts and grow our business. Further, some of our customers could alsobecome developers of image sensors, and this could potentially adversely affectour results of operations, business and prospects.

 

## ***Reductions in our average selling prices may lower ourrevenues and, as a result, may reduce our gross margins.***

 

We have experienced andexpect to continue to experience pressure to reduce the selling prices of ourproducts, and our average selling prices have declined as a result. Competitionin our product markets is intense and as this competition continues tointensify, we anticipate that these pricing pressures will increase. We expectthat the average selling prices for many of our products will continue todecline over time. Unless we can increase unit sales sufficiently to offsetthese declines in our average selling prices, our revenues will decline.Reductions in our average selling prices have adversely affected our grossmargins, and unless we can reduce manufacturing costs to compensate, additionalreductions in our average selling prices will continue to adversely affect ourgross margins and could materially and adversely affect our operating resultsand impair our financial condition. Although we may decrease our research,development and related expenses in the short-term as we implement certain costreduction measures, historically we have increased and may continue to increaseour research, development and related expenses in the long-term to continue thedevelopment of new image-sensor products that can be sold at higher sellingprices and/or manufactured at lower cost. If we are unable to timely introducenew products that incorporate more advanced technology and include moreadvanced features that can be sold at higher average selling prices, or if weare unable to successfully develop more cost-effective technologies, ourfinancial results could be adversely affected.

 

## ***Sales of our image-sensor products for mobile phonesaccount for a large portion of our revenues, and any decline in sales to themobile phone market or failure of this market and other emerging markets tocontinue to grow as expected could adversely affect our results of operations.***

 

Sales to the mobile phone market account for a largeportion of our revenues. Although we can only estimate the percentages of ourproducts that are used in the mobile phone market due to the significant numberof our image-sensor products that are sold to module makers or throughdistributors and VARs, we believe that the mobile phone market accounted forapproximately 65% and 60% of our revenues in fiscal 2009 and the sixmonths ended October 31, 2009, respectively. We expect that revenues fromsales of our image-sensor products to the mobile phone market will continue toaccount for a significant portion of our revenues during fiscal 2010 andbeyond. Any factors adversely affecting the demand for our image sensors inthis market could cause our business to suffer and adversely affect ourfinancial condition, operating results and cash flows. The digital image-sensormarket for mobile phones is extremely competitive, and we expect to faceincreased competition in this market in the future. In addition, we believe themarket for mobile phones is also relatively concentrated and the top five producersaccount for more than 80% of the annual sales of these products. If we do notcontinue to achieve design wins with key mobile phone manufacturers, our marketshare or revenues could decrease. The mobile phone image-sensor market is alsosubject to rapid technological change. In order to compete successfully in thismarket, we will have to correctly forecast customer demand for technologicalimprovements and be able to deliver such products on a timely basis atcompetitive prices. If we fail to do this, our results of operations, businessand prospects would be materially and adversely affected. In the past, we haveexperienced problems accurately forecasting customer demand in other markets.In addition, current domestic and global economic conditions could negativelyaffect the mobile phone market if consumers and/or businesses defer purchasesin this market in response to tighter credit, negative financial news, and/ordecreased corporate or consumer spending.

 

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We also expect that image sensors will become ofgreater importance in the security, medical and automotive industries. As imagesensors begin to fill a greater role in these other markets, the challenges andrisks that we face in these other markets could increase and could be similarto some of the challenges and risks that we face in the mobile phone market. Ifour sales to the mobile phone market and other emerging markets do not increaseand/or the mobile phone market and other emerging markets do not grow asexpected, our results of operations, business and prospects would be materiallyadversely affected.

 

## ***Our future success depends on the timely development,introduction, marketing and selling of new products, which we might not be ableto achieve.***

 

Our failure to successfully develop new products thatachieve market acceptance in a timely fashion would adversely affect ourability to grow our business and our operating results. The development,introduction and market acceptance of new products is critical to our abilityto sustain and grow our business. Any failure to successfully develop,introduce, market and sell new products could materially adversely affect ourbusiness and operating results. The development of new products is highlycomplex, and we have in the past experienced delays in completing thedevelopment and introduction of new products. From time to time, we have alsoencountered unexpected manufacturing problems as we increase the production ofnew products. Consumers continue to expect the sophistication of image sensorsin consumer products to increase, and the number of consumer products that useimage sensors has continued to grow. This results in a requirement for us tocontinue to build and develop image sensors with advanced technologies that canbe used in a variety of consumer products. As our products integrate new andmore advanced technologies and functions, they become more complex andincreasingly difficult to design, debug and produce. Successful productdevelopment and introduction depends on a number of factors, including:

 

·                  accurate prediction of marketrequirements and evolving standards, including pixel resolution, outputinterface standards, power requirements, optical lens size, input standards andoperating systems for webcams and other platforms;

·                  development of advanced technologies andcapabilities, including our new CameraCube and OmniBSI technology;

·                  definition, timely completion andintroduction of new CMOS image sensors that satisfy customer requirements;

·                  development of products that maintain atechnological advantage over the products of our competitors, including ouradvantages with respect to the functionality and pixel capability of ourimage-sensor products and our proprietary testing processes; and

·                  market acceptance of the new products.

 

Accomplishing all of thesesteps is difficult, time consuming and expensive. We may be unable to developnew products or product enhancements in time to capture market opportunities orachieve significant or sustainable acceptance in new and existing markets. Inaddition, our products could become obsolete sooner than anticipated because ofa rapid change in one or more of the technologies related to our products orthe reduced life cycles of consumer products.

 

## ***Design wins are a key determinant of future revenues,and failure to obtain design wins adversely affects our revenues and impairsour ability to grow our business.***

 

Our past success has been,and our future success is, dependent upon manufacturers designing ourimage-sensor products into their products. To achieve design wins, which aredecisions by manufacturers to design our products into their systems, we mustdefine and deliver cost effective and innovative image-sensor solutions on atimely basis that satisfy the manufacturers’ requirements. Our ability toachieve design wins is subject to numerous risks including competitivepressures as well as technological risks. If we do not achieve a design winwith a prospective customer, it may be difficult to sell our image-sensorproducts to such prospective customer in the future because once a manufacturerhas designed a supplier’s products into its systems, the manufacturer may bereluctant to change its source of components due to the significant costs,time, effort and risk associated with qualifying a new supplier and modifyingits design platforms. Accordingly, if we fail to achieve design wins with key devicemanufacturers that embed image sensors in their products, our market share orrevenues could decrease. Furthermore, to the extent that our competitors securedesign wins, our ability to expand our business in the future will be impaired.

 

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## ***We depend on a limited number of third party waferfoundries, which reduces our ability to control our manufacturing process.***

 

Unlike some of our largercompetitors, we do not own or operate a semiconductor fabrication facility.Instead, we rely on TSMC, PSC and other subcontract foundries to produce all ofour wafers. Historically, we have relied on TSMC to provide us with asubstantial majority of our wafers. As a part of our joint venture agreementwith TSMC, TSMC has agreed to commit substantial wafer manufacturing capacityto us in exchange for our commitment to purchase a substantial portion of ourwafers from TSMC, subject to pricing and technology requirements.

 

In addition, we have enteredinto a foundry manufacturing agreement with PSC pursuant to which we and PSChave agreed to jointly develop certain pixel-related process technology and forPSC to process certain of our CMOS image sensors at PSC’s facilities inaccordance with the scheduled development approved by both parties.

 

Under the terms of thesesupply agreements, we secure manufacturing capacity in any particular period ona purchase order basis. The foundries have no obligation to supply products tous for any specific period, in any specific quantity or at any specific price,except as set forth in a particular purchase order. In general, our reliance onthird party foundries involves a number of significant risks, including:

 

·                  reduced control over delivery schedules,quality assurance, manufacturing yields and production costs;

·                  lack of guaranteed production capacity orproduct supply;

·                  unavailability of, or delayed access to,next generation or key process technologies; and

·                  financial difficulties or disruptions inthe operations of third party foundries due to causes beyond our control.

 

Because our foundriesprovide services to a number of companies, in the event they receive increasedorders from us or one or more of the other companies that they service, theymay be unable to provide us with the requested quantity of products or maysubordinate our request to the requests of other larger companies. If for anyreason the foundries are unable to provide a sufficient number of products tous on a timely basis, we may be unable to meet the demands of our customers,which could have a material adverse affect on our revenues and other financialresults.

 

The current global economicconditions could materially affect our foundries and cause them to be unable toprovide necessary services to us. If TSMC, PSC, or any of our other foundrieswere unable to continue manufacturing our wafers in the required quantities, atacceptable quality, yields and costs, or in a timely manner, we would have toidentify and qualify substitute foundries, which would be time consuming anddifficult, and could increase our costs or result in unforeseen manufacturingproblems. In addition, if competition for foundry capacity increases we may berequired to pay increased amounts for manufacturing services. We are alsoexposed to additional risks if we transfer our production of semiconductorsfrom one foundry to another, as such transfer could interrupt our manufacturingprocess. Further, some of our foundries may also develop their own image-sensorproducts and if one or more of our other foundries were to decide not tofabricate our companion DSP chips for competitive or other reasons, we wouldhave to identify and qualify other sources for these products.

 

## ***We rely on a joint venture company for color filterapplication and on third party service providers for packaging and otherback-end services, which reduces our control over delivery schedules, productquality and cost, and could adversely affect our ability to deliver products tocustomers.***

 

We rely on VisEra, our jointventure with TSMC, for the color filter processing of our completed wafers andthe assembly of our CameraCube imaging devices. In addition, we rely onAdvanced Semiconductor Engineering, Inc. and on ImPac, our equityinvestee, for substantially all of our ceramic chip packages. We rely on XinTecand WLCSP, two investee companies, for chip scale packages, which are generallyused in our products designed for the smallest form factor applications. Werely on several specialized service providers, one of which is ImPac, toperform the necessary wafer probe tests and prepare good die for use in a formcalled chip-on-board, a process called reconstructing wafers. The currentglobal economic conditions could adversely affect these service providers’ability to continue to fulfill our packaging, color filter processing andrelated requirements. If for any reason one or more of these service providerswere to become unable or unwilling to continue to provide services ofacceptable quality, at acceptable costs or in a timely manner, our ability todeliver our products to our customers could be severely impaired. We would haveto identify and qualify substitute service providers, which could be timeconsuming and difficult and could result in unforeseen operational problems.Substitute service providers might not be available or, if available, might beunwilling or unable to offer services on acceptable terms.

 

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In addition, if competitionfor color filter processing, packaging, capacity or other back-end servicesincreases, we may be required to pay or invest significant amounts to secureaccess to these services, which could adversely impact our operating results.The number of companies that provide these services is limited and some of themhave limited operating histories and financial resources. In the event ourcurrent providers refuse or are unable to continue to provide these services tous, we may be unable to procure services from alternate service providers.Furthermore, if customer demand for our products increases, we may be unable tosecure sufficient additional capacity from our current service providers oncommercially reasonable terms, if at all. These factors may cause unforeseenproduct shortages or may increase our costs of manufacturing, assembling ortesting of our products, which would adversely affect our operating results.

 

## ***Fluctuations in our quarterly operating results havecaused volatility in the market price of our common stock and also make itdifficult to predict our future operating results.***

 

Our quarterly operatingresults have varied significantly from quarter to quarter in the past and arelikely to vary significantly in the future based on a number of factors, manyof which are beyond our control. These factors and other industry risks, manyof which are more fully discussed in our other risk factors, include, but arenot limited to:

 

·                  adverse changes in domestic or globaleconomic conditions, including the current economic crisis;

·                  the volume and mix of our product sales;

·                  competitive pricing pressures;

·                  our ability to accurately forecast demandfor our products;

·                  our ability to achieve acceptable wafermanufacturing or back-end processing yields;

·                  our gain or loss of a large customer;

·                  our ability to manage our producttransitions;

·                  the availability of production capacityat the suppliers that manufacture our products or process our products;

·                  the growth of the market for products andapplications using CMOS image sensors;

·                  the timing and size of orders from ourcustomers;

·                  the volume of our product returns;

·                  the seasonal nature of customer demandfor our products;

·                  the deferral of customer orders inanticipation of new products, product designs or enhancements;

·                  the announcement and introduction ofproducts and technologies by our competitors;

·                  the fair value of our interest rateswaps;

·                  the impairment of our intangible assetsor other long-lived assets;

·                  the level of our operating expenses; and

·                  fluctuations in our effective tax ratefrom quarter to quarter.

 

Our introduction of newproducts and our product mix have affected and may continue to affect ourquarterly operating results. Changes in our product mix could adversely affectour operating results, because some products provide higher margins thanothers. We typically experience lower yields when manufacturing new productsthrough the initial production phase, and consequently our gross margins on newproducts have historically been lower than our gross margins on our moreestablished products. We also anticipate that the rate of orders from ourcustomers may vary significantly from quarter to quarter. Our operatingexpenses are relatively fixed in the short-term, and our inventory levels arebased on our expectations of future revenues. Consequently, if we do notachieve the revenues we expect in any quarter, expenses and inventory levelscould be disproportionately high, adversely impacting our operating results forthat quarter, and potentially in future quarters.

 

All of these factors aredifficult to forecast and could result in fluctuations in our quarterlyoperating results. Our operating results in a given quarter could besubstantially less than anticipated, and, if we fail to meet market analysts’expectations, a substantial decline in our stock price could result.Fluctuations in our quarterly operating results could adversely affect theprice of our common stock in a manner unrelated to our long-term operatingperformance.

 

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***Our use of derivativefinancial instruments to reduce interest rate risk may result in addedvolatility in our quarterly operating results***

 

Wedo not hold or issue derivative financial instruments for trading purposes.However, we do utilize derivative financial instruments to reduce interest raterisk. We have a variable rate mortgage loan that totaled $34.6 million asof October 31, 2009. To manage the related interest rate risk, we enteredinto two interest rate swap agreements, effectively converting our mortgageloan into a fixed rate loan. Under generally accepted accounting principles,the fair values of the swap contracts, which will either be amounts receivablefrom or payable to counterparties, are reflected as either assets orliabilities on our consolidated balance sheets. Also, we have to record theirfair value changes in our consolidated statements of operations, in “Otherincome (expense), net.” The associated impact on our quarterly operatingresults is directly related to changes in prevailing interest rates. Ifinterest rates increase, we would have a non-cash gain on the swap, and viceversa. Consequently, these swap contracts will introduce volatility to ouroperating results.

 

Weare also exposed to credit loss in the event of non-performance by thecounterparties to the interest rate swap agreements. However, we do notanticipate non-performance by the counterparties.

 

## ***Our business is subject to seasonal fluctuations whichmay in turn cause fluctuations in our results of operations from period toperiod.***

 

Many of the products usingour image sensors, such as mobile phones, notebooks, netbooks and webcams, DSCs and cameras for entertainmentapplications, are consumer electronics goods. These mass-market camera devicesgenerally have seasonal cycles which historically have caused the sales of ourcustomers to fluctuate quarter-to-quarter. Historically, demand from OEMs anddistributors that serve such consumer product markets has been stronger in thesecond and third quarters of our fiscal year and weaker in the first and fourthquarters of our fiscal year. In addition, our gross revenues in our second andthird fiscal quarters have typically been comparable. Recently, however, anincrease in end-customer demand in North America related to the holiday seasonaccelerated the timing of our customers’ purchases from our third fiscalquarter to our second fiscal quarter. If this trend continues in future years,it could result in the quarter-to-quarter fluctuation of our revenues differingfrom our historical seasonal cycles.

 

In addition, since a verylarge number of the manufacturers who use our products are located in China andTaiwan, the pattern of demand for our image sensors has been influenced by thetiming of the extended lunar or Chinese New Year holiday, a period in which thefactories which use our image sensors generally close. For example, we believethat the decline in revenues that we experienced in the fourth quarters offiscal 2007 and 2008 is partly attributable to the fact that in 2007 and 2008Chinese New Year occurred in mid-February, and manufacturing did not resume infull for several weeks.

 

## ***Problems with wafer manufacturing and/or back-endprocessing yields could result in higher product costs and could impair ourability to meet customer demand for our products.***

 

If the foundriesmanufacturing the wafers used in our products cannot achieve the yields weexpect, we will incur higher unit costs and reduced product availability.Foundries that supply our wafers have experienced problems in the past achievingacceptable wafer manufacturing yields. Wafer yields are a function both of ourdesign technology and the particular foundry’s manufacturing processtechnology. Certain risks are inherent in the introduction of new products andtechnology. Low yields may result from design errors or manufacturing failuresin new or existing products. During the early stages of production, productionyields for new products are typically lower than those of established products.Unlike many other semiconductor products, optical products can be effectivelytested only when they are complete. Accordingly, we perform final testing ofour products only after they are assembled. As a result, yield problems may notbe identified until our products are well into the production process. Therisks associated with low yields could be increased because we rely on thirdparty offshore foundries for our wafers, which can increase the effort and timerequired to identify, communicate and resolve manufacturing yield problems. Inaddition to wafer manufacturing yields, our products are subject to yield lossin subsequent manufacturing steps, often referred to as back-end processing,such as the application of color filters and micro-lenses, dicing (cutting thewafer into individual devices, or die) and packaging. Any of these potentialproblems with wafer manufacturing and/or back-end processing yields couldresult in a reduction in our gross margins and/or our ability to timely deliverproducts to customers, which could adversely affect our customer relations andmake it more difficult to sustain and grow our business.

 

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## ***If we do not forecast customer demand correctly, ourbusiness could be impaired and our stock price may decline.***

 

Our sales aregenerally made on the basis of purchase orders rather than long-term purchasecommitments; however, we manufacture products and build inventory based on ourestimates of customer demand. Accordingly, we must rely on multiple assumptionsto forecast customer demand. We are continually working to improve our salesforecasting procedures. The current domestic and global economic conditionshave made it extremely challenging to accurately predict customer demandbecause recent demand has decreased and historical models for predictingcustomer demand may no longer be reliable. If we overestimate customer demand,we may manufacture products that we may be unable to sell, or we may have tosell at lower prices. This could materially and adversely affect our results ofoperations and financial condition. In addition, our customers may cancel ordefer orders at any time by mutual written consent. We have experiencedproblems with accurately forecasting customer demand in the past. For example,there was a significant decline in product demand in the third quarter offiscal 2009, and as a result our inventories at the end of the thirdquarter of fiscal 2009 were higher than we intended them to be. We need toaccurately predict customer demand because we must often make commitments tohave products manufactured before we receive firm purchase orders from ourcustomers. Conversely, if we underestimate customer demand, we may be unable tomanufacture sufficient products quickly enough to meet actual demand, causingus to lose customers and impairing our ability to grow our business. Inpreparation for new product introductions, we gradually ramp down production ofestablished products. With our 12-14 week production cycle, it is extremelydifficult to predict precisely how many units of established products we willneed. It is also difficult to accurately predict the speed of the ramp of ournew products and the impact on inventory levels presented by the shorter lifecycles of end-user products. The shorter product life cycle is a result of anincrease in competition and the growth of various consumer-product applicationsfor image sensors. Under these circumstances, it is possible that we couldsuffer from shortages for certain products and, if we underestimate marketdemand, we face the risk of being unable to fulfill customer orders. We alsoface the risk of excess inventory and product obsolescence if we overestimatemarket demand for our products and build inventories in excess of demand. Ourability to accurately forecast sales is also a critical factor in our abilityto meet analyst expectations for our quarterly and annual operating results.Any failure to meet these expectations would likely lead to a substantialdecline in our stock price.

 

## ***We depend on the increased acceptance of mass-marketimage-sensor applications to grow our business and increase our revenues.***

## *** ***

Our business strategy depends in large part on the continued growth ofvarious markets into which we sell our image-sensor products, including themarkets for mobile phones, notebook and webcams, digitalstill and video cameras, commercial and security and surveillance applications,entertainment devices, automotive and medical applications. If these markets donot grow and develop as we anticipate, we may be unable to sustain or grow thesales of our products. Each of these markets has already been, and may continueto be, adversely impacted by current global economic conditions whereconsumers and businesses have deferred purchases of products in these marketsas a result of tighter credit, negative financial news, and decreased corporateor consumer spending. Such conditionshave negatively affected, and may continue to negatively affect, our business.

 

In addition, the market price of our common stock may be adverselyaffected if certain of these new markets do not emerge or develop as expected.Securities analysts may already factor revenue from such new markets into theirfuture estimates of our financial performance and should such markets notdevelop as expected by such securities analysts the trading price of our commonstock could be adversely affected.

 

## ***Our lengthy manufacturing, packaging and assemblycycle, in addition to our customers’ design cycle, may result in uncertaintyand delays in generating revenues.***

## *** ***

The production of our image sensors requires a lengthy manufacturing,packaging and assembly process, typically lasting approximately 12-14 weeks.Additional time may pass before a customer commences taking volume shipments ofproducts that incorporate our image sensors. Even when a manufacturer decidesto design our image sensors into its products, the manufacturer may never shipfinal products incorporating our image sensors. Given this lengthy cycle, weexperience a delay between the time we incur expenditures for research anddevelopment and sales and marketing efforts and the time we generate revenue,if any, from these expenditures. This delay makes it more difficult to forecastcustomer demand, which adds uncertainty to the manufacturing planning processand could adversely affect our operating results. In addition, the product lifecycle for certain of our image-sensor products designed for use in certainapplications can be relatively short. If we fail to appropriately manage themanufacturing, packaging and assembly process, our products may become obsoletebefore they can be incorporated into our customers’ products and we may neverrealize a return on investment for the expenditures we incur in developing andproducing these products.

 

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## ***Our ability to deliver products that meet customerdemand is dependent upon our ability to meet new and changing requirements forcolor filter application and image-sensor packaging.***

## *** ***

We expect that as we develop new products to meet technological advancesand new and changing industry and customer demands, our color filterapplication and ceramic, plastic and chip scale packaging requirements willalso evolve. Our ability to continue to profitably deliver products that meetcustomer demand is dependent upon our ability to obtain third party servicesthat meet these new requirements on a cost-effective basis. There can be noassurances that any of these parties will be able to develop enhancements tothe services they provide to us to meet these new and changing industry andcustomer requirements. Furthermore, even if these service providers are able todevelop their services to meet new and evolving requirements, these servicesmay not be available at a cost that enables us to sustain our profitability.

 

## ***The high level of complexity and integration of ourproducts increases the risk of latent defects, which could damage customerrelationships and increase our costs.***

## *** ***

Our products are based upon evolving technology, and because we integratemany functions on a single chip, are highly complex. The integration ofadditional functions into already complex products could result in a greaterrisk that customers or end users could discover latent defects or subtle faultsafter we have already shipped significant quantities of a product. Although wetest our products, we have in the past and may in the future encounter defectsor errors. For example, in the third quarter of fiscal 2005, we recorded aprovision of $2.7 million related to the possible replacement of productsthat did not meet a particular customer’s standards. Delivery of products withdefects or reliability, quality or compatibility problems may damage ourreputation and ability to retain existing customers and attract new customers.In addition, product defects and errors could result in additional developmentcosts, diversion of technical resources, delayed product shipments, increased productreturns, product warranty costs for recall and replacement and productliability claims against us which may not be fully covered by insurance.

 

## ***We depend for the majority of our revenues on a fewkey customers and, the loss of one or more of our key customers couldsignificantly reduce our revenues.***

## *** ***

A relatively smallnumber of OEMs, VARs and distributors account for a significant portion of ourrevenues. Any material delay, cancellation or reduction of purchase orders fromone or more of our major customers or distributors could result in our failureto achieve anticipated revenue for a particular period. Such a delay,cancellation or reduction could be caused by, among other things, suchcustomers or distributors being materially and adversely affected by thecurrent domestic and global economic conditions. In addition, if we are unableto retain one or more of our largest OEM, distributor or VAR customers, or ifwe are unable to maintain our current level of revenues from one or more ofthese significant customers, our business and results of operation would beimpaired and our stock price could decrease, potentially significantly. Infiscal 2009, approximately 59.5% of our revenues came from sales to ourtop five customers. In addition, in the six months ended October 31, 2009,one OEM customer accounted for approximately 11.8% of our revenues, and onedistributor customer accounted for approximately 27.9% of our revenues. Ourbusiness, financial condition, results of operations and cash flows will continueto depend significantly on our ability to retain our current key customers andto attract new customers, as well as on the financial condition and success ofour OEMs, VARs and distributors.

 

## ***We may be required to record a significant charge toearnings if our intangible assets or long-term investments become impaired.***

## *** ***

Under generally accepted accounting principles, we are required toreview our intangible assets for impairment when events or changes incircumstances indicate the carrying value may not be recoverable. Factors thatmay be considered a change in circumstances indicating that the carrying valueof our intangible assets may not be recoverable include a decline in stockprice and market capitalization, and slower growth rates in our industry.

 

We may be requiredto record a significant charge to earnings in our financial statements duringthe period in which we determine that our intangible assets or long-terminvestments have been impaired. Any such charge would adversely impact our resultsof operations. As of October 31, 2009, our intangible assets totaledapproximately $4.1 million and our long-term investments totaledapproximately $87.2 million.

 

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## ***We maintain a backlog of customer orders that issubject to cancellation or delay in delivery schedules, and any cancellation ordelay may result in lower than anticipated revenues.***

## *** ***

Our sales are generallymade pursuant to standard purchase orders. We include in our backlog only thosecustomer orders for which we have accepted purchase orders and assignedshipment dates within the upcoming 12 months. Orders constituting ourcurrent backlog are subject to cancellation or changes in delivery schedules,and backlog may not necessarily be an indication of future revenue. Anycancellation or delay in orders which constitute our current or future backlogmay result in lower than expected revenues.

 

## ***If we are unable to maintain processes and proceduresto sustain effective internal control over our financial reporting, our abilityto provide reliable and timely financial reports could be harmed and this couldhave a material adverse effect on our stock price.***

## *** ***

We are required tocomply with the rules promulgated under Section 404 of theSarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Section 404 requiresthat we prepare an annual management report assessing the effectiveness of ourinternal control over financial reporting, and requires a report by ourindependent registered public accounting firm addressing the effectiveness ofour internal control over financial reporting.

 

We have in thepast discovered, and may in the future discover, areas of our internal controlthat need improvement. For example, we restated our financial statements forthe first, second and third quarters of fiscal 2004. If these or similar typesof issues were to arise with respect to our internal controls in futureperiods, they could impair our ability to produce accurate and timely financialreports.

 

As our businesschanges, ongoing compliance with the provisions of Section 404 of theSarbanes-Oxley Act andmaintenance of effective internal control over financial reporting will requirethat we hire additional qualified finance and accounting personnel. Becauseother businesses face similar challenges, there is significant competition forsuch personnel, and there can be no assurance that we will be able to attractand/or retain suitably qualified employees.

 

## ***Corporate governance regulations have increased ourcompliance costs and could further increase our expenses if changes occurwithin our business.***

## *** ***

We are subject tocorporate governance laws and regulations affecting public companies, includingthe provisions of the Sarbanes-Oxley Act, that impose certain requirements onus and on our officers, directors, attorneys and independent registered publicaccounting firm. In order to comply with these rules, we added internal resourcesand have utilized additional outside legal, accounting and advisory services,which increased our operating expenses. We expect to incur ongoing operatingexpenses as we maintain compliance with Section 404. In addition, if weundergo significant modifications to our structure through personnel or systemchanges, acquisitions, or otherwise, it may be increasingly difficult tomaintain compliance with the existing and evolving corporate governanceregulations.

 

## ***We hold a significant amount of marketable securitieswhich are subject to general market risks over which we have no control.***

## *** ***

As of October 31,2009, we held cash and cash equivalents totaling $315.9 million, andshort-term investments totaling $38.1 million. These assets are managed onour behalf by unrelated third parties in accordance with a cash managementpolicy that has been approved by our board of directors and restricts ourinvestments to a maximum maturity of 18 months and to investment-gradeinstruments. As of October 31, 2009, we did not hold any illiquidinvestments and we have not realized any losses. However, recent uncertaintiesin global capital markets associated with a repricing of risk have causeddisruptions in the orderly function of markets where ordinarily there isvirtually unlimited liquidity. If we were to make a future investment incertain illiquid securities that are dependent on the orderly functioning ofthe capital markets, and if we were required to liquidate this type ofsecurities at short notice, such liquidation could result in losses ofprincipal.

 

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## ***There are risks associated with our operations inChina.***

## *** ***

In December 2000,we established OmniVision Semiconductor (Shanghai) Co. Ltd., or OSC, as part ofour efforts to streamline our manufacturing process and reduce the costs andworking capital associated with the testing of our image-sensor products, andrelocated our automated image testing equipment from the United States toChina. We are currently expanding our testing capabilities with additionalautomated testing equipment, which will also be located in China. Through ourwholly-owned subsidiary, OmniVision Technologies (Shanghai) Co. Ltd., or OTC,we are also developing land and constructing research facilities in Shanghai.There are certain administrative, legal and governmental risks to operating inChina that could result in increased operating expenses or could hamper us inthe development of our operations in China. More recently we invested in acompany in China that is providing a portion of our chip scale packagepackaging requirements. The risks from operating in China that could increaseour operating expenses and adversely affect our operating results, financialcondition and ability to deliver our products and grow our business include,without limitation:

 

·                  difficulties in staffing and managing foreignoperations, particularly in attracting and retaining personnel qualified todesign, sell, test and support CMOS image sensors;

·                  difficulties in managing employee relations;

·                  increases in the value of the Chinese Yuan, or CNY;

·                  difficulties in coordinating our operations in Chinawith those in California;

·                  difficulties in enforcing contracts in China;

·                  difficulties in protecting intellectual property;

·                  diversion of management attention;

·                  imposition of burdensome governmental regulations;

·                  difficulties in maintaining uniform standards,controls, procedures and policies across our global operations, includinginventory management and financial consolidation;

·                  political and economic instability, which could havean adverse impact on foreign exchange rates in Asia and could impair ourability to conduct our business in China; and

·                  inadequacy of the local infrastructure to support ouroperations.

 

## ***We may experience integration or other problems withpotential future acquisitions, which could have an adverse effect on ourbusiness or results of operations. New acquisitions could dilute the interestsof existing stockholders, and the announcement of new acquisitions could resultin a decline in the price of our common stock.***

## *** ***

We may in thefuture make acquisitions of, or investments in, businesses that offer products,services and technologies that we believe would complement our products,including CMOS image-sensor manufacturers. We may also make acquisitions of orinvestments in, businesses that we believe could expand our distributionchannels. Even if we were to announce an acquisition, we may not be able tocomplete it. In addition, any future acquisition or substantial investmentcould present numerous risks, including:

 

·                  difficulty in realizing the potential technologicalbenefits of the transaction;

·                  difficulty in integrating the technology, operationsor work force of the acquired business with our existing business;

·                  unanticipated expenses related to technology integration;

·                  disruption of our ongoing business;

·                  difficulty in realizing the potential financial orstrategic benefits of the transaction;

·                  difficulty in maintaining uniform standards, controls,procedures and policies;

·                  possible impairment of relationships with employees,customers, suppliers and strategic partners as a result of integration of newbusinesses and management personnel;

·                  reductions in our future operating results fromamortization of intangible assets;

·                  impairment of resulting goodwill; and

·                  potential unknown or unexpected liabilities associatedwith acquired businesses.

 

We expect that anyfuture acquisitions could include consideration to be paid in cash, shares ofour common stock or a combination of cash and our common stock. If and whenconsideration for a transaction is paid in common stock, it will result indilution to our existing stockholders.

 

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## ***We may not achieve continued benefits from our jointventure with TSMC.***

## *** ***

In October 2003,we entered into an agreement with TSMC to form VisEra, a joint venture inTaiwan, for the purposes of providing manufacturing services. In August 2005and again in January 2007, we entered into amendments to the agreementwith TSMC to expand the scope of VisEra’s activities and provide additionalfunding for the expansion of VisEra.

 

In January 2006,VisEra acquired certain color filter processing equipment from TSMC and assumeddirect responsibility for providing the color filter processing services thathad previously been provided to us by TSMC. We expect that VisEra will be ableto provide us with a committed supply of high quality manufacturing services atcompetitive prices. However, there are significant legal, governmental andrelationship risks to developing VisEra, and we cannot ensure that we willcontinue to receive the expected benefits from the joint venture. For example,VisEra may not be able to provide manufacturing services that have competitivetechnology or prices, which could adversely affect our product offerings andour ability to meet customer requirements for our products. In addition, theexistence of VisEra may also make it more difficult for us to secure dependableservices from competing merchant vendors who provide similar manufacturingservices.

 

## ***We may not achieve all of the anticipated benefits ofour alliances with, and strategic investments in, third parties.***

## *** ***

We expect todevelop our business partly through forming alliances or joint ventures withand making strategic investments in other companies, some of which may becompanies at a relatively early stage of development. For example, in April 2003,we made an investment in XinTec, a company that provides chip scale packagingservices, and in June 2003 we made an investment in ImPac, a packagingservice company. In December 2005, VisEra, our joint venture with TSMC,completed the acquisition of additional shares of XinTec. In May 2007, weacquired a portion of the registered capital of WLCSP, a company that alsoprovides chip scale packaging services.

 

In addition, in May 2004,we entered into an agreement with PSC under which we established SOI, a jointventure as a company incorporated under the laws of Taiwan. The purpose of thejoint venture is to conduct the business of manufacturing, marketing andselling of certain of our legacy products. In March 2005, we assumedcontrol of the board of directors of SOI and we have consolidated SOI since April 30,2005.

 

Our investments inthese and other companies may negatively impact our operating results, because,under certain circumstances, we are required to recognize our portion of anyloss recorded by each of these companies or to consolidate them into ouroperating results. We expect to continue to utilize partnerships, strategicalliances and investments, particularly those that enhance our manufacturingcapacity and those that provide manufacturing services and testing capability.These investments and partnering arrangements are crucial to our ability togrow our business and meet the increasing demands of our customers. However, wecannot ensure that we will achieve the benefits we expect from these alliances.For example, we may not be able to obtain acceptable quality and/or wafermanufacturing yields from these companies, which could result in higheroperating costs and could impair our ability to meet customer demand for ourproducts. In addition, certain of these investments or partnering relationshipsmay place restrictions on the scope of our business, the geographic areas inwhich we can sell our products and the types of products that we canmanufacture and sell. For example, our agreement with TSMC provides that we maynot engage in business that will directly compete with the business of VisEra.This type of non-competition provision may impact our ability to grow ourbusiness and to meet the demands of our customers.

 

## ***Changes in our relationships with our joint ventures and/orcompanies in which we hold less than a majority interest could change the waywe account for such interests in the future.***

## *** ***

As part of ourstrategy, we have formed joint ventures with two of our foundry partners, andwe hold a noncontrolling interest in three companies from which we purchasecertain manufacturing services. Under the applicable provisions of generallyaccepted accounting principles in the United States of America, we currentlyconsolidate one of these joint ventures into our consolidated financialstatements and results of operations, and record the equity interests that wedo not own as noncontrolling interests. For the investments that we account forunder the equity method, we record as part of other income or expense our shareof the increase or decrease in the equity of the companies in which we haveinvested. It is possible that, in the future, our relationships and/or ourinterests in or with these joint ventures or other investees could change. Suchchanges have in the past, and could in the future result in deconsolidation orconsolidation of such entities, as the case may be, which could result inchanges in our reported results.

 

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## ***We may be unable to adequately protect ourintellectual property, and therefore we may lose some of our competitiveadvantage.***

## *** ***

We rely on acombination of patent, copyright, trademark and trade secret laws as well asnondisclosure agreements and other methods to protect our proprietarytechnologies. We have been issued patents and have a number of pending UnitedStates and foreign patent applications. However, we cannot provide assurancethat any patent will be issued as a result of any applications or, if issued,that any claims allowed will be sufficiently broad to protect our technology.It is possible that existing or future patents may be challenged, invalidatedor circumvented. For example, in August 2002, we initiated a patentinfringement action in Taiwan, Republic of China against IC MediaCorporation of San Jose, California for infringement of a Taiwanese patent thathad been issued to us. In response to our patent infringement action, in October 2002,IC Media Corporation initiated a cancellation proceeding in the TaiwanIntellectual Property Office with respect to our patent. In July 2003, theTaiwan Intellectual Property Office made an initial determination to grant thecancellation of the subject patent, which decision was upheld by the TaiwanMinistry of Economic Affairs and the High Administrative Court. We decided notto appeal such decision by the May 31, 2005 deadline. Although we do notbelieve the cancellation of the Taiwanese patent at issue in the disputedescribed above has had a material adverse effect on our business or prospects,there may be other situations where our inability to adequately protect ourintellectual property rights could materially and adversely affect ourcompetitive position and operating results. If a third party can copy orotherwise obtain and use our products or technology without authorization,develop corresponding technology independently or design around our patents,this could materially adversely affect our business and prospects. Effectivepatent, copyright, trademark and trade secret protection may be unavailable orlimited in foreign countries. Any disputes over our intellectual propertyrights, whatever the ultimate resolution of such disputes, may result in costlyand time-consuming litigation or require the license of additional elements ofintellectual property for a fee.

 

## ***Litigation regarding intellectual property coulddivert management attention, be costly to defend and prevent us from using orselling the challenged technology.***

## *** ***

In recent years,there has been significant litigation in the United States involvingintellectual property rights, including in the semiconductor industry. We havein the past been, currently are and may in the future be, subject to legalproceedings and claims with respect to our intellectual property, includingsuch matters as trade secrets, patents, product liabilities and other actionsarising out of the normal course of business. These claims may increase as ourintellectual property portfolio becomes larger or more valuable. Intellectualproperty claims against us, and any resulting lawsuit, may cause us to incursignificant expenses, subject us to liability for damages and invalidate ourproprietary rights. Any potential intellectual property litigation against uswould likely be time-consuming and expensive to resolve and would divertmanagement’s time and attention and could also force us to take actions suchas:

 

·                  ceasing the sale or use of products or services thatincorporate the infringed intellectual property;

·                  obtaining from the holder of the infringedintellectual property a license to sell or use the relevant technology, whichlicense may not be available on acceptable terms, if at all; or

·                  redesigning those products or services thatincorporate the disputed intellectual property, which could result insubstantial unanticipated development expenses and delay and prevent us fromselling the products until the redesign is completed, if at all.

 

If we are subjectto a successful claim of infringement and we fail to develop non-infringingintellectual property or license the infringed intellectual property onacceptable terms and on a timely basis, we may be unable to sell some or all ofour products, and our operating results could be adversely affected. We may inthe future initiate claims or litigation against third parties for infringementof our intellectual property rights or to determine the scope and validity ofour proprietary rights or the proprietary rights of competitors. These claimscould also result in significant expense and the diversion of technical andmanagement attention.

 

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## ***The use of our image sensors in end user products inthe medical and automotive industries could result in us being named as adefendant in product liability claims, which could adversely affect ourbusiness and reputation.***

## *** ***

Ourimage sensors have been incorporated into certain end user products in themedical and automotive industries, and we expect that they will continue toincrease as a percentage of our overall business.  The use of the medical and automotiveindustry products into which our image sensors are designed could result in anunsafe condition, injury, or even death as a result of, among other factors,component failures, manufacturing flaws, design defects or inadequatedisclosure of product-related risks or product-related information.  These factors could result in productliability claims seeking damages for personal injury, and we could be named asa defendant in such claims.  Because theoutcome of product liability claims is not predictable and is difficult toassess or quantify, we cannot provide assurance that such claims will notmaterially adversely affect our business or damage the reputation of ourproducts or our company.

 

## ***If we do not effectively manage our growth, ourability to increase our revenues and improve our earnings could be adverselyaffected.***

## *** ***

Our growth hasplaced, and will continue to place, a significant strain on our management andother resources. To manage our growth effectively, we must, among other things:

 

·                  continuously improve our operational, financial andaccounting systems;

·                  train, manage and maintain good relations with ourexisting employee base in both our U.S. and international locations;

·                  attract and retain qualified personnel with relevantexperience; and

·                  effectively manage accounts receivable and inventory.

 

For example, ourfailure to effectively manage our inventory levels could result either inexcess inventories, which could adversely affect our gross margins andoperating results, or lead to an inability to fill customer orders, which wouldresult in lower sales and could harm our relationships with existing andpotential customers.

 

We must alsomanage multiple relationships with customers, business partners and other thirdparties, such as our foundries and process and assembly vendors. Moreover,future growth could significantly overburden our management and financialsystems and other resources. We may not make adequate allowances for the costsand risks associated with our expansion. In addition, our systems, proceduresor controls may not be adequate to support our operations, and we may not be able to expand quickly enough tocapitalize on potential market opportunities. Our future operatingresults will also depend, in part, on our ability to expand sales andmarketing, research and development, accounting, finance and administrativesupport.

 

## ***Our future tax rates and tax payments could be higherthan we anticipate and may harm our results of operations.***

## *** ***

As a multinationalcorporation, we conduct our business in many countries and are subject totaxation in many jurisdictions. The taxation of our business is subject to theapplication of multiple and sometimes conflicting tax laws and regulations aswell as multinational tax conventions. The application of tax law is subject tolegal and factual interpretation, judgment and uncertainty, and tax lawsthemselves are subject to change. Consequently, taxing authorities may imposetax assessments or judgments against us that could result in a significantcharge to our earnings.

 

A number of otherfactors will also affect our future tax rate, and certain of these factorscould increase our effective tax rate in future periods, which could adverselyimpact our operating results. These factors include changes in non-deductibleshare-based compensation, changes in tax laws or the interpretation of taxlaws, changes in the proportion and geographic mix of our revenue or earnings,changes in the valuation of our deferred tax assets and liabilities, changes inavailable tax credits and the repatriation of non-U.S. earnings for which wehave not previously provided for U.S. taxes.

 

## ***Our sales through distributors increase the complexityof our business and may reduce our ability to forecast revenues.***

## *** ***

Duringfiscal 2009 and the six months ended October 31, 2009, approximately42.0% and 47.9%, respectively, of our revenues came from sales throughdistributors. We expect that revenues from sales through distributors willcontinue to represent a significant proportion of our total revenues. Sellingthrough distributors reduces our ability to accurately forecast sales andincreases the complexity of our business, requiring us to, among other matters:

 

·                  manage a more complex supply chain;

·                  manage the level of inventory at each distributor;

 

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·                  provide for credits, return rights and priceprotection;

·                  estimate the impact of credits, return rights, priceprotection and unsold inventory at distributors; and

·                  monitor the financial condition and creditworthinessof our distributors.

 

Any failure tomanage these challenges could cause us to inaccurately forecast sales and carryexcess or insufficient inventory, thereby adversely affecting our operatingresults.

 

## ***We face foreign business, political and economicrisks, because a majority of our products and those of our customers aremanufactured and sold outside of the United States.***

## *** ***

We facedifficulties in managing our third party foundries, color filter applicationservice providers, packaging and other manufacturing service providers and ourforeign distributors, most of whom are located in Asia. In addition, ourpresence in Asia presents the challenge of managing foreign operations andmaintaining good relations with our employees located there. Any political andeconomic instability in Asia might have an adverse impact on foreign exchangerates and could cause service disruptions for our vendors and distributors andadversely affect our customers.

 

Sales outside ofthe United States accounted for substantially all of our revenues forfiscal 2009 and the six-month period ended October 31, 2009. Weanticipate that sales outside of the United States will continue to account fora substantial portion of our revenues in future periods. Dependence on sales toforeign customers involves certain risks, including:

 

·                  longer payment cycles;

·                  the adverse effects of tariffs, duties, price controlsor other restrictions that impair trade;

·                  decreased visibility as to future demand;

·                  difficulties in accounts receivable collections; and

·                  burdens of complying with a wide variety of foreignlaws and labor practices.

 

Sales of ourproducts have to date been denominated principally in U.S. dollars. Over thelast several years, the U.S. dollar has weakened against most other currencies.Future increases in the value of the U.S. dollar, if any, would increase theprice of our products in the currency of the countries in which our customersare located. This may result in our customers seeking lower-priced suppliers,which could adversely impact our operating results. If a larger portion of ourinternational revenues were to be denominated in foreign currencies in thefuture, we would be subject to increased risks associated with fluctuations inforeign currency exchange rates.

 

## ***Our business could be harmed if we lose the servicesof one or more members of our senior management team, or if we are unable toattract and retain qualified personnel.***

## *** ***

The loss of theservices of one or more of our executive officers or key employees, which hasoccurred from time to time, or the decision of one or more of these individualsto join a competitor, could adversely affect our business and harm ouroperating results and financial condition. Our success depends to a significantextent on the continued service of our senior management and certain other keytechnical personnel. None of our senior management is bound by an employment ornon-competition agreement. We do not maintain key man life insurance on any ofour employees.

 

Our success alsodepends on our ability to identify, attract and retain qualified sales,marketing, finance, management and technical personnel. We have experienced,and may continue to experience, difficulty in hiring and retaining candidateswith appropriate qualifications. If we do not succeed in hiring and retainingcandidates with appropriate qualifications, our revenues, operations andproduct development efforts could be harmed.

 

## ***We substantially completed the implementation of thefirst phase of a new enterprise resource planning system, a process whichpresents a number of significant operational risks.***

## *** ***

Asour business grows and becomes more complex, it is necessary that we expand andupgrade our enterprise resource planning system, or ERP, and other managementinformation systems which are critical to the operational, accounting andfinancial functions of our company. We evaluated alternative solutions, bothshort-term and long-term, to meet the operating, administrative and financialreporting requirements of our business. During the three months ended July 31,2008, we substantially completed the implementation of the first phase of a newERP based on a suite of application software developed by Oracle Corporation.We will continue to make further enhancements and upgrades to the ERP, asnecessary. Significant management attention and resources have been used andextensive planning has occurred to support effective implementation of the newERP system, however, such implementation carries certain risks, including therisk of significant design errors that could materially and adversely affectour operating results and impact our ability to manage our business. As aresult, there is a risk that deficiencies may exist in the future and that theycould constitute significant deficiencies, or, in the aggregate, a materialweakness in internal control over financial reporting.

 

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## ***Our operations may be impaired as a result ofdisasters, business interruptions or similar events.***

## *** ***

Disasters andbusiness interruptions such as earthquakes, water, fire, electrical failure,accidents and epidemics affecting our operating activities, major facilities,and employees’ and customers’ health could materially and adversely affect ouroperating results and financial condition. In particular, our Asian operationsand most of our third party service providers involved in the manufacturing ofour products are located within relative close proximity. Therefore, anydisaster that strikes within or close to that geographic area, such as theearthquake and flooding that occurred in China, could be extremely disruptiveto our business and could materially and adversely affect our operating resultsand financial condition. We are currently developing and implementing a disasterrecovery plan.

 

## ***Acts of war and terrorist acts may seriously harm ourbusiness and revenue, costs and expenses and financial condition.***

## *** ***

Acts of war orterrorist acts, wherever they occur around the world, may cause damage ordisruption to our business, employees, facilities, suppliers, distributors orcustomers, which could significantly impact our revenue, costs, expenses andfinancial condition. In addition, as a company with significant operations andmajor distributors and customers located in Asia, we may be adversely impactedby heightened tensions and acts of war that occur in locations such as theKorean Peninsula, Taiwan and China. The potential for future terrorist attacks,the national and international responses to terrorist attacks or perceivedthreats to national security, and other acts of war or hostility have createdmany economic and political uncertainties that could adversely affect ourbusiness and results of operations in ways that cannot presently be predicted.We are uninsured for losses and interruptions caused by terrorist acts and actsof war.

 

***Risks Related to the Securities Markets and Ownership of OurCommon Stock***

 

## ***Provisions in our charter documents and Delaware law,as well as our stockholders’ rights plan, could prevent or delay a change incontrol of our company and may reduce the market price of our common stock.***

## *** ***

Provisions of ourcertificate of incorporation and bylaws may discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable. Theseprovisions include:

 

·                  adjusting the price, rights, preferences, privilegesand restrictions of preferred stock without stockholder approval;

·                  providing for a classified board of directors withstaggered, three-year terms;

·                  requiring supermajority voting to amend some provisionsin our certificate of incorporation and bylaws;

·                  limiting the persons who may call special meetings ofstockholders; and

·                  prohibiting stockholder actions by written consent.

 

Provisions ofDelaware law also may discourage, delay or prevent another company fromacquiring or merging with us. Our board of directors adopted a preferred stockrights agreement in August 2001. Pursuant to the rights agreement, ourboard of directors declared a dividend of one right to purchase oneone-thousandth share of our Series A Participating Preferred Stock foreach outstanding share of our common stock. The dividend was paid on September 28,2001 to stockholders of record as of the close of business on that date. Eachright entitles the registered holder to purchase from us one one-thousandth ofa share of Series A Preferred at an exercise price of $176.00, subject toadjustment. The exercise of the rights could have the effect of delaying,deferring or preventing a change of control of our company, including, without limitation,discouraging a proxy contest ormaking more difficult the acquisition of a substantial block of our commonstock. The rights agreement could also limit the price that investors might bewilling to pay in the future for our common stock.

 

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## ***Our stock has been and will likely continue to besubject to substantial price and volume fluctuations due to a number offactors, many of which are beyond our control that may prevent our stockholdersfrom selling our common stock at a profit.***

## *** ***

The market priceof our common stock has fluctuated substantially, and there can be no assurancethat such volatility will not continue. Since the beginning of fiscal 2002through October 31, 2009, the closing sales price of our common stock hasranged from a high of $33.90 per share to a low of $1.26 per share.The closing sales price of our common stock on December 4, 2009 was$12.48 per share. The securities markets have experienced significantprice and volume fluctuations in the past, and the market prices of thesecurities of semiconductor companies have been especially volatile. Thismarket volatility, as well as general economic, market or political conditions,including the current global economic situation, could reduce the market priceof our common stock in spite of our operating performance. The market price ofour common stock may fluctuate significantly in response to a number offactors, including:

 

·                  actual or anticipated fluctuations in our operatingresults;

·                  changes in expectations as to our future financialperformance;

·                  changes in financial estimates of securities analysts;

·                  release of lock-up or other transfer restrictions onour outstanding shares of common stock or sales of additional shares of commonstock;

·                  sales or the perception in the market of possiblesales of shares of our common stock by our directors, officers, employees orprincipal stockholders;

·                  changes in market valuations of other technologycompanies; and

·                  announcements by us or our competitors of significanttechnical innovations, design wins, contracts, standards or acquisitions.

 

Due to thesefactors, the price of our stock may decline and investors may be unable to reselltheir shares of our stock for a profit. In addition, the stock marketexperiences extreme volatility that often is unrelated to the performance ofparticular companies. These market fluctuations may cause our stock price todecline regardless of our performance.

 

**ITEM 2.   UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS**

 

We didnot repurchase any shares of our common stock in the second quarter offiscal 2010.

 

**ITEM 4.   ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Ourannual meeting of stockholders was held at our corporate headquarters at 4275Burton Drive, Santa Clara, California on September 24, 2009 at 10:00 a.m.local time. The results of the matters voted upon were as follows:

 

1.               To elect two Class III directors to serve untilthe expiration of their respective three-year term or until their successorsare duly elected and qualified.

 

| ** **        | ** ** | **Vote**   | ** ** |
|-------------------|------------|------------|------------|
| ** **        | ** ** | **For**    | ** ** | **Withheld** | ** ** |
| Joseph Jeng       |       | 40,519,231 |       | 3,927,415 |   |
| Dwight Steffensen |       | 41,460,490 |       | 2,986,156 |   |

 

The term of office of directors Xinping (James) He,Shaw Hong and Andrew Wang continued after the annual meeting.

 

2.               To ratify the appointment of PricewaterhouseCoopersLLP as our independent registered public accounting firm for the fiscal yearending April 30, 2010.

 

| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** | **No Vote** | ** ** |
|------------|------------|-------------|------------|---------------|------------|-------------|------------|
| 45,507,506 |       | 575,223     |       | 363,917       |       | —      |       |

 

3.               To approve the 2009 Employee Stock Purchase Plan andreserve 2,500,000 shares for purchase by our eligible employees.

 

| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** | **No Vote** | ** ** |
|------------|------------|-------------|------------|---------------|------------|-------------|------------|
| 31,156,167 |       | 407,103     |       | 2,636,387     |       | —      |       |

 

4.               To approve the stock option exchange program foremployees and to make certain changes to the Company’s 2007 Equity IncentivePlan.

 

| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** | **No Vote** | ** ** |
|------------|------------|-------------|------------|---------------|------------|-------------|------------|
| 25,971,999 |       | 5,756,161   |       | 2,471,497     |       | —      |       |

 

5.               To approve the stock option exchange program for namedexecutive officers.

 

| **For**   | ** ** | **Against** | ** ** | **Abstained** | ** ** | **No Vote** | ** ** |
|-----------|------------|-------------|------------|---------------|------------|-------------|------------|
| 5,720,485 |       | 26,013,251  |       | 2,465,921     |       | —      |       |

 

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**ITEM 6.   EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                        |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26                     |       | 2007 Equity Incentive Plan (as amended July 30, 2009).                                                                                                                            |
| 10.34                     |       | 2009 Employee Stock Purchase Plan.                                                                                                                                                     |
| 31.1                      |       | Certification of Chief Executive Officer pursuant to Section 302  of Sarbanes-Oxley Act of 2002.                                                                                  |
| 31.2                      |       | Certification of Chief Financial Officer pursuant to Section 302  of Sarbanes-Oxley Act of 2002.                                                                                  |
| 32                        |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                          | **OMNIVISION TECHNOLOGIES, INC**. |
|-------------------------------|-----------------------------------|
|                          | *(Registrant)*                    |
|                          |                              |   |
|                          |                              |   |
| Dated: December 10, 2009 |                              |   |
|                          |                              |   |
|                          | By:                               | **/s/ SHAW HONG** |
|                          |                              | **Shaw Hong** |
|                          |                              | *Chief Executive Officer, President and Director* |
| ** **                    | ** **                        | *(Principal Executive Officer)* |
| ** **                    | ** **                        | ** ** |
| ** **                    | ** **                        | ** ** |
| Dated: December 10, 2009 |                              |   |
|                          |                              |   |
|                          | By:                               | **/s/ ANSON CHAN** |
|                          |                              | **Anson Chan** |
|                          |                              | *Chief Financial Officer* |
|                          |                              | *(Principal  Financial and Accounting Officer)* |

 

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**Exhibit Index**

 

| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                        |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26               |       | 2007 Equity Incentive Plan (as amended July 30, 2009).                                                                                                                            |
| 10.34               |       | 2009 Employee Stock Purchase Plan.                                                                                                                                                     |
| 31.1                |       | Certification of Chief Executive Officer pursuant to Section 302  of Sarbanes-Oxley Act of 2002.                                                                                  |
| 31.2                |       | Certification of Chief Financial Officer pursuant to Section 302  of Sarbanes-Oxley Act of 2002.                                                                                  |
| 32                  |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of Sarbanes-Oxley Act of 2002. |

 

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